Well, this is one of those times where fuel prices become a conversation starter... wasn't quite on the bingo card this year.
But here we are. With global events flowing through to New Zealand, it feels like a good time to look at what it means for your investments.
I touched on some of this in a recent webinar (you can watch it here), but let's go a bit further.
First things first - let's start with what you're invested in.
Your On-Call account
Your money here is held across two AA- rated NZ banks and covered under the Depositor Compensation Scheme.
These banks are well capitalised, profitable and, importantly, boring in a great way.
Term investments and Monthly Income Fund
This is where your money is put to work – lent to NZ borrowers and secured by first mortgages on residential property in New Zealand.
That includes owner-occupiers, investors and property developers.
Four layers of 'sleep at night' risk management
Here's our approach:
- Application process - Bank-like checks, with our (very good) credit team making the calls and leveraging their experience.
- Security – First mortgages and sensible LVRs based on risk.
- Reserve Funds – Built up over time to support losses if things go wrong. Not guaranteed, but they’ve done their job for 10 years. Check the reserve fund balances.
- Diversification - 500+ active loans across different borrowers and purposes.
So, how often do things actually go wrong?
Short answer: not often.
Over seven years of mortgage-backed lending:
- Home loans: 0 defaults (250+ loans)
- Construction loans: 3 defaults (1,300+ loans)
Those three construction defaults resulted in losses totaling $585,000, absorbed by the Reserve Fund and ~$180,000 is expected to be recovered later and returned to the Reserve Fund. That puts us at a net default rate of 0.05%, with a 0.75% reserve levy on construction lending. We’d rather be conservative here - plan for the worst.
What's going on out there (and why it matters)
When it comes to your investments, the big thing to watch is the housing market.
Here's what's in play:
- Interest rates - Currently low, but all eyes on the RBNZ’s next Monetary Policy Statement on 8 April. The market is currently pricing OCR increases from July – September this year.
- Demand – NZ still looks like a relatively safe place to live, helping support housing demand. House sales are sitting around ~80,000 p.a. (similar to 2017 – 2019).
- Jobs and confidence - Employment growth is soft, unemployment is higher than the government would like. That affects buyer confidence.
- Credit conditions – No signs of tightening yet. If anything, banks are likely to be encouraged to keep lending. We’ve seen this story before.
So overall, it's a mixed picture.
House prices are already down ~20% from their 2021 peak, so further significant falls seem less likely - unless credit conditions tighten significantly (like during the GFC) or demand weakens substantially.
Where we land on risk
Only you can decide what feels right for your investments. From our side we view Squirrel investments as conservative to moderate risk, and we're focused on protecting your capital while delivering reasonable returns for the risk.
If you want to unpick things further around credit risk, check out my webinar on understanding credit risk - It gives practical examples and explains how things work.
A quick one on wait times
They’re coming down. At the time of writing, Home Loans are about 2 weeks (was ~5) and Construction Loans are about 5 weeks (was ~9). A nice step in the right direction.
Missed the webinar?
We covered where the housing market might head, a look back at our Personal Loan portfolio, Monthly Income Fund vs Term Investments, what’s next for Squirrel (10 years in 🎉), plus plenty of great questions.
We had our biggest audience yet – thanks to everyone who joined and the questions you asked. If you missed it (or want another watch), watch the full recording.
Questions, comments, ideas?
If you've got any feedback, I'd love to hear it—what we're doing well or where we could be doing better - flick me an email at dave@squirrel.co.nz.
