I have an old house by the coast. The upside is the view of the bay and beyond to Rangitoto. The downside is the never-ending battle against the elements. Constant protection is required. A new marine-grade roof. Regular house washes and paint. Particularly the window frames, ever prone to rot once exposed.

Living at Sea
Photo: Simon Angelo

The costs of building materials, paint and labour have been increasing. So have rates and insurance. Last year, home insurance premiums increased 17.9% in New Zealand. Median hourly earnings from wages and salaries only 2.9%.

In a service-based, competitive economy, real wages struggle to keep up. We don’t produce enough high-value goods to boost them in global terms. Our primary exports are dairy (26.5%), meat (13.5%) and wood (9.4%). That’s 50% of GDP on lower margin products.

The Fonterra Co-operative [NZX:FCG] shows an operating margin of only 1.3% last financial year.

Contrast this with Anglo-Australian mining giant Rio Tinto [ASX:RIO], weighing in with an operating margin of 43.4%.

Sure, we have some premium businesses like The a2 Milk Company [NZX:ATM] that has achieved operating margins as high as 30.7%, but we need more.

Beware of illusory wealth

But New Zealand has been a ‘rock-star economy’ over the past decade. Growth has been ahead of the OECD.

Hold on. We need to look at where a lot of the money has come from:

  • Much higher per capita rates of immigration than Australia.
  • Foreign capital, hitherto stoking the Auckland housing market to a pressurised bubble.
  • A shot of foreign insurance money to rebuild post-quake Christchurch.
  • Burgeoning levels of household debt, especially mortgage debt.

So we migrated in, borrowed up and sold our young first homebuyers down the river to keep the wheel spinning. It’s like those leaky home developments they sold in the ‘90s. The plaster looks avant-garde and sparkling new. Until the leaks and rot get exposed.

There is evidence that high rates of migration dampen wage growth. Makes logical sense. More workers available to do a job increases labour competition and lowers its price.

In Brexit-beleaguered Britain, where net migration is slowing, real wages are now increasing at the fastest rate in a decade. Unemployment is at its lowest level since the ‘70s.

How do we stack up in terms of purchasing power on our annual average wages?

In 1990, we were in 13th place amongst 23 comparative OECD countries. In the middle. By 2017, we had fallen to the 5th lowest.

Worse, during this time, the wage gap with Australia has risen from 20% behind in 1990 to 25% behind in 2017.

Previous governments came to power promising to close that gap and end football stadiums of Kiwis leaving for Australia. They’ve actually increased the gap. People have been fooled by illusory wealth. They’re not richer in real income terms. And if the housing bubble bursts, the fallout could really hurt. [openx slug=inpost]

How do you beat low Kiwi wages?

There are a few ways.

You could become a CEO. There remains a disproportionate gap between CEO pay against other workers. Yet, as with many human endeavours, only a tiny percentage can and will reach the top of the pyramid.

You could retrain into an area with higher and more rapid wage growth that exceeds the average. Air traffic control? IT? Engineering?

You could cut your rent costs. Auckland rents have been rising faster than wages. By moving out, downsizing or buying your own home when the market bottoms, you could capture more of a ‘real-income’ difference.

There’s an even stronger way. Save whatever you can. Build a dividend-rich investment portfolio.

Dividends are rising much faster than wages, especially in global stocks

I spend a lot of time analysing British shares. Thanks to Brexit, we’ve bought some great shares at good value. What a lot of people don’t realise is the level of dividends many of these companies pay. Some now sit on dividend yields of 6%, 7%, even 10% per annum.

Hence it was no surprise when the dividend report across my desk the other week showed that holders of UK shares have enjoyed a 15.7% rise in payments in just the last quarter, comprising regular and special dividends.

Comparing wage growth in that quarter of around 0.75% (averaged) — had you invested in UK dividend paying shares, income growth from those would have been more than 20 times as fast.

Of course, levels of dividend cover and dividend policies can change. There’s an element of risk. You need to do your homework around company dividends. But investment into rental property is also risky.

For years, people have been telling me they want to invest their savings in leveraged rental properties. That shares are too high. That you don’t know what large companies are doing. That shares are risky.

In actual fact, had they done their homework and invested in good companies in strong sectors, they might have enjoyed some real income growth along with some real capital growth.

Of course, being able to grow your income is not easy. To get out of the real wage rat race, you need to somehow generate surplus and save.

And like maintaining an old house, that is war. War against the elements.

At my place, I’m researching paint colours. And good dividend stocks.

Regards,

Simon Angelo

Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in Rio Tinto [LSE:RIO] via wealth manager Vistafolio.