As you will be aware, bank term deposits are at all-time lows. My bank, Westpac, are offering 2.70% for 12 months. If you take off residential withholding tax of 33% you are left with 1.81%, and if you take off inflation of 1.5% you are left with 0.31%, hardly a great return, I think.
With Auckland residential property growth flat at best, where should you invest your funds?
Property remains a sound long-term investment and my view is that Auckland will continue to grow, putting pressure on land prices, particularly close to the city.
That said, most people in my view have too much of their investments in residential property and bank term deposits.
Other options include managed funds which can invest in global infrastructure, listed property securities and bonds. All of these assets have comfortably overperformed term deposits over the last 1, 3 and 5 years. Of course, these assets are riskier than term deposits, however, are less risky than share funds that invest in listed companies. Listed property and infrastructure assets perform better with low interest rates, and interest rates are expected to ease further, putting further downwards pressure on term deposit rates.
Global listed property and infrastructure also provide a level of diversification as the NZ economy slows down. These assets include exposure to other economies that are more resilient in the face of slowdowns, such as the US, Japan, Canada and France. Investing offshore can also provide a hedge against a falling NZ dollar, which will continue to be under pressure due to further OCR (Official Cash Rate) cuts.
Paying down debt is always a safe and prudent option for surplus income. Currently most 1- and 2-year fixed term mortgage rates are around 4% so you need to achieve a gross return of 6% to do better than this. Paying off debt also provides peace of mind, that should an emergency happen your outgoings are somewhat less, and you won’t get into default with your lender.