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11 Aug 2022 11:54
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  •   Home > News > Business > Features

    Government Super Plan Shortsighted

    Memo to the National Government: Time to learn some investment basics. Here’s an example: You have to invest money to make money. Another is: The price paid for assets dictates the return you get from it in perpetuity. And a third: Borrowing to invest is okay if your returns are higher than your costs.

    Investment Research Group
    Investment Research Group
    The recent budget was efficient but unadventurous and even can be accused of being a little dull. A couple of things stood out for me that I believe will have significant repercussions in years to come. One was the suspension of government contributions to the Superannuation fund.

    Citing falling revenues and rising government spending, the government plans to suspend about $2b a year in contributions to the fund for at least 10 years.

    This is a classic investment mistake. Having put money into assets when the markets were going up, the government now wants to avoid buying assets when they are considerably cheaper. Doing the opposite is how the serious money is made.

    Prime Minister John Key said it didn't make sense to keep paying into the fund once the government's accounts moved from surplus into deficit. It would have meant borrowing to invest.

    "That is like a household borrowing money to invest in the share market, on top of having a big mortgage, a car loan and a whopping credit card bill. "Or, perhaps more relevantly, it is like saving for your retirement using your credit card," he was quoted as saying.

    However, a government is not a household. It has a much longer time frame and I find it hard to believe that assets purchased today won't be worth considerably more in 20, 30 or 50 years' time.

    Many assets are trading at multiyear lows relative to their earnings, so it is likely many investments made today could deliver double-digit returns for a long, long time.

    Since the government is borrowing money at 3% - 6%, depending on the duration of its bonds, the investment case is compelling.

    Another item in the budget also drew my attention. That was the forecast that average property prices in New Zealand will fall by around 8% in the year to March 2010 and 4% in the following year.

    Add to that the 9% fall last year and New Zealanders are facing a 23% decline in the value of their properties. This an average figure and there will be many properties showing much sharper declines.

    This raises questions about the impact on the banks, which routinely lend at 80% of property values even now and went to 95% during the peak. Writing down properties by 20% will make a big dent on shareholders' funds that are typically 8% of total assets.

    Then there is the problem of people in a 'negative equity' situation. In other words, their mortgage is bigger than the value of their property. When it becomes difficult to service that mortgage, for example by losing a job (the budget forecasts unemployment will peak at 8% in December next year) then people may just walk away from their properties.

    Of course, it is not that easy to escape your obligations but a fresh wave of mortgagee options could further depress property prices, putting banks under further pressure.

    Banks that are under pressure will have to lend less, which could also result in falling property prices. There may be 'green shoots' appearing in the markets and economy but it is hard to believe these will grow into money trees in the near future.

    © 2022 David McEwen, NZCity

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