NZ Herald 25 May 2019

ATrying to time any market — picking when it’s a good time to buy or sell — can be a fool’s game. But still, only a different fool would deny that the Auckland market has slowed.

For those who don’t know what negative equity is — after all it’s a term we haven’t heard much in recent years — it’s when your mortgage is higher than the value of your house, because house prices have dropped.

It’s probably less likely to happen these days, because mortgage lenders tend to ask for bigger deposits. But if you do find yourself with negative equity, it’s not comfortable. If you were forced to sell, you would have no house and a debt to the bank.

However, while forced sales are not uncommon for landlords who find they can’t meet mortgage payments, they’re fairly rare for homeowners. They usually ride out the storm until prices rise again, which always happens in the long run.

Anyone who’s ready to buy their first home should think hard about what would happen if you lost your job or another source of income. But if you’re confident you could make your mortgage payments, I wouldn’t wait around.

I’m not saying house prices won’t fall further. They very well might. But they might stay at much the same level for a short or long period before perhaps climbing again. Who knows?

And buying a home isn’t just about investing. It’s also about having your own base and being able to do what you want with your accommodation.

If your first home does turn out to be a poor investment, chances are you’ll make other buys later on that turn out to be good. Nobody who owns several houses in their lifetime always gets it right, and nobody always gets it wrong. It’s luck.

Oh, and by the way: home buyers are now in a position to bargain hard.

AI like your positive attitude after our previous correspondent! Who knows what the housing market will be like when you are ready to buy? But it’s great to grab the chance to save for a home deposit while it’s easy.

Should you save in your KiwiSaver account? At least to the extent you are now. By already contributing 3 per cent of your pay, you’re setting yourself up to perhaps get a KiwiSaver HomeStart grant of up to $5000, or $10,000 if you buy a newly built home. Keep an eye on the rules here.

Even if you’re not eligible for the grant — perhaps because you earn too much or you want to buy a more expensive home — you can still withdraw all your KiwiSaver money except $1000 to buy a new home.

The only downside to putting all your savings in KiwiSaver is that you might change your mind and want to use the money for something else, such as setting yourself up in business. You can’t withdraw KiwiSaver money for that.

If that might be you, I suggest you do your extra saving in a non-KiwiSaver fund, maybe offered by your KiwiSaver provider, although it could be any other provider.

Within KiwiSaver, the easy way to increase your savings is to raise your contribution rate to 4, 6, 8 or 10 percent of your pay. Outside KiwiSaver, you could set up automatic transfers from your bank account into the fund, perhaps the day after each payday.

What’s a realistic goal? I don’t know enough about your pay and expenses to say. But it’s good to start with a fairly modest goal and gradually increase your contributions every few months and whenever you get a pay rise. If you’re in KiwiSaver and want smaller jumps than, say, 4 to 6 per cent, just send extra amounts directly to your provider.

On your last question, it depends on when you hope to buy the house. If it’s ten years or more away, I would choose a growth account, but be prepared for volatility and promise you won’t ever panic and move your money to a lower-risk fund after a big drop in your balance. Stick around and it will come right.

Gradually reduce the risk as you get closer to purchase time. By the time you’re planning to buy within three years, it’s best to be in a lower-risk conservative fund.

P.S. Message to other readers: When you read this letter, did you picture a young man? I did at first — probably because our correspondent is an engineer. But her name is feminine. We leap to conclusions far too quickly!

AIt’s great that KiwiSaver funds are now telling investors the total dollars they pay in fees.

Milford says its fees for your fund include a 1.05 per cent management fee, a performance fee if the fund performs particularly well, and a $36 annual membership fee. In the year to March 2019 the fees totalled:

• On $10,000, $142 or 1.42 per cent.
• On $50,000, $566 or 1.13 per cent.
• On $200,000, $2156 or 1.08 per cent.

However, “If the Fund had earned a performance fee those amounts would be higher, with our clients benefiting from higher net returns,” says Murray Harris, head of KiwiSaver and distribution.

It’s complicated comparing these fees with other KiwiSaver funds, most of which don’t charge performance fees. Let’s just say it would be great to see Milford and many other providers reduce their fees.

It can be done. BNZ recently dropped its membership fee and reduced its management fee on all funds to a maximum of 0.58 per cent. Previously that fee was up to 1.1 per cent. And ANZ has dropped its membership fee for under 18s, and reduced that fee from $24 to $18 a year for adults.

BNZ’s move is big. For people with lower balances, it brings it into line with low-fee providers Simplicity and Juno. Here’s how the three line up on their growth funds:

• On $10,000: BNZ $58, Juno $60, Simplicity $61
• On $50,000: BNZ $290, Juno $300, Simplicity $185
• On $200,000: BNZ $1160, Juno $600, Simplicity $650

These are way lower than Milford’s fees even before Milford adds performance fees. Milford says its returns are higher. But, as explained in recent columns, you don’t necessarily get better returns over the years with higher fees.

Does Harris plan to cut Milford’s fees? His reply is vague. “We regularly review the level and appropriateness of fees across all of our products and take into account a number of factors including required ongoing investment back into the business to continue to deliver strong client outcomes (risk adjusted returns, advice, client portal and service) and also the scale benefits from the growth of our funds.”

What about lowering fees for under 18s? “Our current ongoing review is considering a number of options on fees and not just for U18’s. For example with new KiwiSaver regulation changes coming in July the over 65’s will be an increasing client group.”

AYou’re quite right to compare your returns with the market as a whole. Too many people think their fund manager — in KiwiSaver or elsewhere — has done really well in recent years, when only an appalling manager would have done badly.

And I like your idea of moving to an index fund. As I said last week, it may or may not get better returns than your actively managed fund, but over the long term it’s likely to do better after fees because its fees are lower.

Often, when someone plans to switch investments, I suggest they do it in steps over a few months. That means they don’t move all the money from a low-risk investment into a share fund right before the share market drops. Or move the lot out of a share fund into lower risk right before the market rises.

However, you’re talking about moving from one share investment into another, so you don’t need to worry about what’s happening in the share market. You might as well move all the money now.