Mortgage News August 17, 2022
Reserve Bank Pushes Diversification

As property prices keep rising and interest rates start their upwards creep, Reserve Bank Governor Adrian Orr has reminded Kiwi households about the importance of diversification. A total focus on housing may have served people well over recent years, but according to the RBNZ, the tide is about to turn. In a speech titled 'Housing Matters', Mr Orr went back to basics on portfolio management, pleading with Kiwis to diversify their assets and avoid the trap of stacking their investments.

While the RBNZ will not be using interest rates to target house prices, changes in monetary policy will affect interest rates and prices over time. According to Mr Orr, "This is not in our mandate - nor does it make sense. Monetary policy is best used to manage overall consumer price inflation stability i.e., an aggregate consumption price index, rather than being used to target a specific asset price. Likewise, trying to target both consumer prices and house prices with monetary policy will quickly lead to confusion and suboptimal outcomes."

Mr Orr reminded Kiwis that an investment portfolio is an aggregation of assets. While it provides an expected return over time, it also comes with certain risk over a specific time horizon. In order to truly diversify your portfolio, its important to stagger your expected return, risk, and time horizons over a number of assets and asset classes. "Investors need to be asking themselves the right questions to manage the risks." said Mr Orr. 

"When investing in an asset (a nest egg), or building an investment portfolio (a basket of nest eggs), having a view on your investment horizon, and your ability to identify and manage the risks that come with each investment, is necessary... On horizon, am I considering my needs in two years or 20 years? What happens if my needs change and I need cash? What happens if my circumstances change, and I can’t cash-flow my investment? What if the asset value is highly volatile, and unfavourable when I most need to sell it?" said Mr Orr, adding "Identifying and managing these risks can be life-changing."

In October, house prices in New Zealand rose above $1 million for the first time ever. There was more than 5% growth recorded over the last quarter, and some regions moved at twice this speed. Much of this growth has been driven by low interest rates, low supply, and pure momentum, with the global pandemic adding to the underlying complexity. The cash rate has just risen for the first time since 2014, however, which highlights the extended nature of the current growth cycle.

In this environment, Kiwis are being advised to think about what the next cycle may bring. According to Mr Orr, "New Zealand households continue to hold uncompensated risk and are overly exposed to mortgage debt. This investment preference has worked well over time for many. However, this is not the case all of the time, for all people, and compared to all of the benefits that a more diversified portfolio will provide for the same or less risk... While all houses are not the same... simply ‘doubling down’ on the same set of risks (i.e., similar assets) is not diversification."

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