For changing circumstances how can you make qualitative better decisions to raise your success rate? How can you minimise the loss of money you carry because of an over-priced property, interest rates and how do interest rates affect inflation?
Money, Interest Rates and Inflation
The beauty of Pukerua Bay are stunning views and spectacular sunsets - why would you not enjoy owning a home in this small seaside community at the southern end of the Kapiti Coast? Well—it depends on.
Buying a home is often settling with emotions
When grown up in a dense populated urbanisation and you remember places you have been on holidays with scenic views, lovely beaches and warm weather—that might shape your desire for the rest of your life. Especially being on house hunting such memories can trigger emotions influencing very costly decisions.
Would you not listen to your emotions?
Coming over from Europe to Wellington you can imagine how it feels being able to afford a home with ocean views. Most people never get tired being close to the sea with the sound of waves and feeling like being on holiday.
Here is the story of a family of four, purchased in 2011 a lovely home in Pukerua Bay with a mortgage of 400k and started a new life. To admit as investor I would consider the distance to work and infrastructure, the time available to enjoy a remote place and 3 costs and benefits before settling and that irrespective of renting or home ownership.
My point here is circumstances change fast. The days of finding a job for lifetime are over. Even kids grow up too fast, watch their needs. That is why people prefer to move closer to cities with career opportunities and infrastructure like schooling, public transport and so on. The impact of urbanized concentration can be seen in Auckland with property prices are going through the roof.
To cut this family story short commuting long distances to work wasn’t family friendly, depending on multiple cars became a cost factor and the limitation of job opportunities reduced the income. Imagine, these obstacles have divided this family. And rising interest rates have stretched their lives to a breaking point. Well, it is still the same beautiful place to live in but the emotions and enjoyment have changed.
Circumstances change—What can we learn from this little story?
Most of the time humans are being influenced by emotions. That is part of being a thinking and feeling individual. But we can control our decisions by taking more time to eliminate temporary emotions. As the story shows letting emotions drive a financial decision like taking a huge mortgage that is a sure-fire way to disaster. If you treat any major decision like an investment, you will make qualitative better decisions and raise you success rate.
Taking on a home loan for instance can easily become a nightmare with no escape when losing the ability the pay for it. That easily happens out of the blue by loss of income or huge expenses for repairs (e.g. damaged leaking home). Also a jump in interest rates affects and increases most likely living costs as well and could make life more difficult. As illustrated here, politicians try to regulate the housing market as investment vehicle by interest rates. But in fact for the majority of property owners real estate is not an investment vehicle, because it is their home and their castle.
Money, interest rates and inflation
Money is not anymore something you could trust in early days when currencies were backed by gold. As you know in these days governments don’t go broke, they print money, called inflation. Inflation simply means that the money people borrow now will be worth less when they come to pay it back. That is actually good when paying off a mortgage, thought—but people often don’t understand the losses they have to carry because of an over-priced property and the interests to be paid for a loan that is sometime higher than the property value.
Often misunderstood—there is not such a consistent housing market. You need to see the differences between local markets and cities, which have their own property cycle and behave differently to the rest of the country. Same areas are booming, others have not even recovered from the financial crisis—causing lots of conflicting information from many markets within the housing market . Auckland is a good example.
The interest rates affect inflation - lower rates put more borrowing power in the hands of consumers and more spending result in economy grows pushing up inflation (as by-product of growth). Raising interest rates reduce the amount of spending (cash entering the economy) that affects businesses and service providers.
How can you minimise the loss of money?
The brief answer is by investing in assets which grow with inflation and by minimising interest payments. In this context I consider renting for sorting financial needs is the more suitable way than having everything at once—big house, huge mortgage and expenses for maintenance/repair and not being able to pursue a career with better income.
One tip more—building up equity in an investment property would be a great way for offsetting or hedging against inflation. Consider inflation also results in wages increase which eventually pushes up the price potential or market values. As you know, market prices are set by buyers who are willing to pay.
Don’t bank on reducing your tax but if you have a good income, being able to use tax benefits is a bonus. I like to quote a certain Jack Handy who wrote: "It is better that I drink this beer and let their dreams come true than be selfish and worry about my liver."
So don’t worry so much and make decisions with less emotions. Good luck
Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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