QMy partner and I own a family home worth about $1 million, with $550,000 remaining on our mortgage. We are also fortunate enough to have a good chunk of surplus income each week.
We’d like to own a bigger family home (more bedrooms/bathrooms/better location) within four years, before our daughter starts school.
Given that house prices have fallen, is it the right time to sell our home and purchase a bigger and more expensive one, so that the cost of the new home upgrade is (in terms of purchase price), as low as it can be?
While we would be buying and selling in the same market, we assume that the prices — both what we will sell for and what we will pay — will be lower, meaning the cash difference between the two figures would be less than when the market is at its peak.
Or do the higher interest rates negate any benefit from doing so? We can’t seem to work out how to figure this out.
AIf houses in all price categories had fallen by the same percentage, your thinking would be spot on.
Let’s say that before prices fell you would have sold your current house for $1 million and bought a new place for $2 million — to keep the maths simple. You would have to boost your mortgage by $1 million.
But if all prices had fallen 10 per cent, you would sell for $900,000 and buy for $1.8 million. Your mortgage grows by “only” $900,000.
However, the prices of more expensive homes have not fallen as much as cheaper homes.
The lastest numbers from QV show the prices of houses in the lowest quartile — the bottom 25 per cent — fell an average of 7.1 per cent from the start of January to the end of November. In the top quartile, they fell by only 3.7 per cent.
In Auckland, bottom quartile prices fell 14.9 per cent, while in the top quartile it was 10.6 per cent.
There are similar patterns in Wellington, Hamilton and Tauranga. Bottom quartile falls were all bigger, percentagewise, than top quartile falls.
“The primary reason for this is people who own larger, more expensive homes are likely to be less affected by credit constraints and are more likely to be in a better position to be able to handle rising interest rates,” says Simon Petersen, QV communications manager.
Makes sense. And it suggests that now isn’t necessarily a better or worse time for trading up, as far as prices are concerned. But if it suits your family circumstances to move now I would go ahead with it.
Petersen adds that your home, “without knowing where or what it is, has probably gone down a fair bit over the last year, but should still be well above what it was before the pandemic.”
He lists the pros of moving to a bigger home now:
- “Much more room to negotiate prices currently.
- “Likely they still have a fair amount of capital gains, assuming they’ve owned their home since at least before the pandemic.
- “Plenty of choice — lots for sale right now.
- “Not as much competition — not a lot of buyers active right now.”
- “Could be difficult to sell their existing home.
- “Prices are going down and are likely to go down further next year (but of course that means what they’ll sell their existing house for could be less in the future too).
- “Interest rates are likely to go higher still (the Reserve Bank has been very clear on this).
- “The economy could be set to take a bit of a battering next year, with recession looking likely. Hopefully their jobs are secure and they’re financial stable.”
I would add this: Please, please sell before you buy. In this market it might take many weeks for you to sell, and you don’t want to be stuck paying for two houses for a long period. That’s when people end up selling for a really low price, out of desperation.
Selling first also means you know exactly how much money you have to play with. And once you’ve sold, there should be a wide choice of homes to buy, in this slow market.
Can I also suggest that you don’t take on too much more mortgage. The half million dollars you already owe feels like plenty to me. I appreciate that you have spare income at the moment, but you never know what the future holds. My example above, where you move from a million-dollar house to a two-million-dollar one, was just to keep the maths easy!
QIt’s more than 15 years since KiwiSaver was started! A group of children received the $1,000 kickstart and nothing else. If that $1,000 was in growth funds only, what would the value be now?
And assume the government just put $1,000 in everyone’s growth account when they were born, and could only withdraw at the age of 65. What would the total be?
AThe after-tax and after-fees annual returns on KiwiSaver growth funds vary widely — by provider and period. But let’s start by assuming a 6 per cent average return.
After 15 years, $1,000 would grow to about $2,450. And over 65 years, $1,000 would grow to nearly $49,000. That’s not nothing.
What if we assume a higher average annual return of 8 per cent — which is quite possible?
After 15 years, you would have about $3,300. And after 65 years, it would be more than $178,000. Note the huge difference a higher return makes over a long period.
Of course, almost all KiwiSaver members will make further contributions, pushing the totals much higher.
The $1,000 kickstart no longer exists, of course. I would love to see it brought back for all newborns — to get them on the KiwiSaver track.
QI notice you haven’t spoken much recently about passive vs active funds.
I have had my KiwiSaver funds in a passive growth scheme for three years, and I do understand that the losses all this year are due to the downturn in the stock market, and it’s the nature of index funds.
However, what I am considering now is moving to an active fund manager because logic would suggest the skills of a reputable effective manager investor should be just as effective in a bear market as a bull market. Am I wrong in my thinking?
AFirstly, some definitions for other readers. The managers of active funds, both in and out of KiwiSaver, select their investments, and when to get in and out of them. The managers of passive funds simply buy all the shares — or sometimes bonds — in a market index and stick with them through thick and thin. Passive funds are often called index funds. And most exchange traded funds (ETFs) are passive.
There’s much less work and lower transaction costs in passive funds, so their fees are almost always considerably lower — which is one of their advantages.
At first glance, though, you would think active funds — with all the managers’ work — would be better. But they can’t all be.
Why? Well, the market is basically made up of active and passive funds. And passive funds, which invest in a large chunk of the market, perform about as well as the market as a whole. So logic tells us that for every active fund that performs better than the market, there must be one that performs worse. And research bears that out.
Okay, you might say, I will invest in an active fund that beats the market. The trouble is the funds that outperform in one period often underperform in the next period. All managers make some good calls and some bad ones.
There are usually a small number of active funds that continue to do well in the longer term, but how do you know which in advance? Even the star performers over a whole decade often do poorly in the following decade.
What about in the current down market? It seems you have heard a common saying, that active managers do relatively better when the markets are falling, as they can take action to reduce their losses — such as selling shares.
But knowing when to sell, before prices fall, is easier said than done. And if a manager is suddenly selling a significant holding, that in itself will push the price down. And what happens when the price rises fast again, as it often does?
In past market downturns, New Zealand passive managers, such as Smartshares and Kernel, have reported better results than the vast majority of active managers. And I’ve written that up in this column.
This time? Well, for a start, Smartshares was recently named Fund Manager of the Year by Research IP, with that award “based on one-year returns and several additional factors to ensure the winners and funds shortlisted in each category were not ‘one-hit wonders’.”
What about the longer term? Among other awards, the Smartshares US 500 fund won the Longevity Award. “We feel it is also important to recognise the managers that consistently deliver strong risk adjusted returns over the longer term,” says Research IP.
Meanwhile, Dean Anderson from Kernel has looked at the recent performance of New Zealand active share funds — which total only nine. He comments that many fund managers compare their performance with the S&P/NZX50 Gross Index when they should use the S&P/NZX 20 index, which more closely represents the funds’ holdings.
His conclusion: “It looks like 3 of 9 (33 per cent) of funds beat the benchmark over one year. Over three years, 3 of 8 funds. Over five years — none.”
What about international funds? SPIVA, the research arm of big US firm S&P Dow Jones Indices, looks at the performance of active funds in several countries and regions.
It found that in the US over the last year, 45 per cent of active funds beat their index — fewer than half. And over 15 years it was only 11 per cent. In Australia, 52 per cent beat their index over one year, and only 17 per cent over 15 years.
It’s the same pattern in different places and over different periods, whether they include bull markets — in which shares rise fast — or bear markets.
Over the longer term — and you should be investing long term if you are in shares — active funds are not a good bet. And moving in and out of them depending on market conditions is a fool’s game.
I’ve invested in low-fee passive funds since the 1970s, and never regretted my choice.
QA lot of misinformation out there!
Both I and my wife have a couple of times withdrawn (and added to) just one of our two KiwiSaver funds with ANZs OneAnswer! Suspect staff lack of knowledge is the problem?
AYou’re referring to a Q&A last week about people over 65 who are in more than one KiwiSaver fund, and whether their provider permits withdrawals from just one fund.
As I said then, I think this should be permitted. It lets people take their shorter-term spending money from a lower-risk fund while keeping their longer-term savings in higher-risk funds. I think this is the best way to invest retirement money.
I asked the larger KiwiSaver providers and listed the ones that permitted withdrawals from one fund, the ones that say you have to withdraw from all your funds, and the ones who didn’t reply.
ANZ was among those who said they didn’t permit withdrawals from just one fund. But your letter suggests the opposite, so I asked ANZ what was going on.
“We have made exceptions to our usual process on enquiry and are considering whether our current process can be updated,” says a spokesperson.
Does that mean ANZ is considering changing its policy?, I asked. The reply: “We’re looking into it, and will confirm any changes to our policy if/when they happen.”
BNZ and Fisher Funds have also been in touch this past week to say they permit withdrawal from just one fund, as have two smaller KiwiSaver providers — Kernel and Select (which is run my Smartshares).
Fisher added that if its members “were in a Balanced Strategy and withdrew from one of the funds, they would no longer be a Balanced Strategy investor and would no longer be automatically rebalanced each year.”
So the list of providers who permit these withdrawals is now: ASB, BNZ, Booster, Fisher, Generate, Kernel, Milford, Select, SuperLife and Westpac. It’s good to see the list growing. And here’s hoping ANZ — the biggest KiwiSaver provider — joins the list soon.
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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.