- Is share buying just for the elite?
- KiwiSaver first home buyer strikes a hitch — but all is well
- 60-ish couple could get into rental property
- Did our couple blow too much on holidays?
QI have previously dabbled in share trading and operated an online account through one of the now defunct traders. I have always been sceptical of the share market and the speculative (as opposed to basic fundamentals) nature of the industry, but after selling a business thought it might be time to re-enter the trade.
I made online contact with one brokering house with a view to setting up an account and taking some shares in Trade Me. After a week or so I had an email back indicating the offer was fully subscribed and no public pool shares were available.
That’s why the share market is so unattractive for NZ investors. I have upwards of $1,000,000 to invest but because I was not part of the “inner sanctum” missed out.
The unfortunate perception of the NZ market is of a small club run for the benefit of a few. Economists are highly critical of New Zealand’s love affair with property, but can you really blame us? There is a lot to be said for the reality of bricks and mortar as opposed to the irrationality and elitism of the equities market.
AIt sounds as if the broker blew it, not because of the Trade Me shares but because they should have invited you to discuss other possible share purchases.
But first, let’s look at the Trade Me initial public offering, or IPO. The company is selling about 34 per cent of its shares, with the rest still held by Fairfax.
Priority has been given to top-selling Trade Me members, employees of Trade Me and Fairfax, and Fairfax shareholders. “So there were a lot in this case that would have been snapped up under these offers,” says NZX chief executive Mark Weldon.
“It’s not unusual for companies to offer shares to their employees on IPO, or later, as part of employee share schemes — the principle being that employees who own a stake in the company they work for are going to care a lot more about contributing to a company’s success.”
Some Trade Me shares were also available through brokers. But with interest so strong, long-standing clients who asked early for allocations have tended to be the lucky ones, says Weldon.
“So it’s not a matter of having ‘connections’ — in fact quite the opposite. It’s a matter of being an existing customer…. It would be counterintuitive for NZX Participants (brokers) to bypass their long-standing customers and give ‘hot’ product to those who don’t have existing relationships.”
The message, then, is to climb aboard — by visiting a broker rather than emailing. “Getting professional advice — so he can establish a risk profile, decide whether he’s after growth or yield, and identify the stocks, or sectors, he wants to be part of — is an essential step to take,” says Weldon. An adviser will also help you keep abreast of new developments — including other IPOs.
Note, though, that IPOs aren’t always good investments. Sometimes the share price falls after listing. So I hope you weren’t planning to put too much into Trade Me anyway. It’s far smarter to diversify across many shares. You reduce your risk — because not all shares fall at once — without reducing your expected return.
Diversification has been called the only free lunch in investing. And there are other ways, beyond IPOs, to buy a range of shares. One way — which works well for investors who have smaller sums or who want to drip feed money into shares — is to invest in a diversified share fund. But with your million dollars you can create your own spread by buying directly in the market. You’ll have to keep track of dividends and so on, but you avoid share fund fees.
Weldon suggests reading widely about our listed companies, “even just so he knows the right questions to ask of his adviser. This is also a good way to find out about other news such as dividend policies or reinvestment plans, secondary rights issues and the like.”
If that doesn’t appeal, I suggest you ask a broker to help you select 20 wide-ranging companies, put $50,000 into each and just leave it there — except for rebalancing every now and then to keep your holdings roughly even. People who invest “passively” can do better than active traders, partly because trading costs are lower.
Weldon goes on to say, “I won’t respond directly to your reader’s adjectives. However, given the cycle of property booms and busts, the same descriptions could be applied to property. It’s also worth noting that a land tax or a tax on capital gains from non-residential property were part of the recommendations of the Tax Working Group in 2010.”
I would add that while some people speculate in shares — as they do in property — the share market is indeed built on “basic fundamentals”. Through IPOs, companies raise money to employ people and to grow — producing all sorts of goods and services including bricks and mortar. And through owning shares, shareholders participate in that growth.
Mark Weldon’s final comment: “I wish your reader the very best for his investment decisions.”
QI think there have been some unclear points in regards to the accessibility of KiwiSaver for first home buyers.
My provider, Fisher Funds, has an application that I can fill in to get my KiwiSaver money (excluding government contributions), but they made it really clear that it is not intended as a deposit. Rather, it is to be used to pay off the principal.
Myself and many others were thinking that we would use this money as the deposit, and so it’s a bit scary after three years to find out that the only true deposit is our private savings and the possible Housing New Zealand boost of $3000.
I thought it was easier than this. Why is it not okay to have access to my KiwiSaver money as a deposit? That’s what we were led to believe it was.
AAll is not lost. It all hangs on how you define a first home deposit.
Fisher Funds boss Carmel Fisher confirms that the provider’s first home withdrawal form “does indeed state that it is for a purchase of a first home and not a deposit on a first home. We believe that is the correct position under the legislation.”
The catch here is that there are two things that are sometimes called a deposit on a home:
- The property transaction deposit, which you pay — often to the real estate agent — before the deal has finally gone through. This money is returned to you if the sale doesn’t happen. You can’t use KiwiSaver money — either the withdrawal from your provider or the first home subsidy from Housing New Zealand — for this. But keep reading!
- The deposit you need to give a mortgage lender, when they give you a loan. You can use KiwiSaver money — both withdrawal and subsidy — for this.
The property transaction deposit is generally 5 to 10 percent of the price, says Peter Thompson, managing director of Barfoot & Thompson. “For auctions a 10 per cent deposit is required on the fall of the hammer.” The money “normally is held in a trust account until solicitors declare the agreement is unconditional and the agent can disburse it,” he says.
If you haven’t got enough ready funds to cover the property transaction deposit, your bank may provide you with a short-term loan, particularly if you already have pre-approved KiwiSaver money available for the other deposit, says Mike Davy, ASB’s general manager lending. “Ideally you should always discuss temporary deposit solutions with your lender before you make an offer on a property,” he says.
When the sale goes through, the property transaction deposit becomes part of the deposit you give the mortgage lender. All of that money is your equity in the property.
What this all means is that if you don’t have much in non-KiwiSaver savings, you can still make the whole thing work. Talk to Housing NZ, your KiwiSaver provider and mortgage lender early on. Housing NZ and some of the providers offer a pre-approval service, which tells you in advance if you are eligible for the first home withdrawal and subsidy.
Then, once you’ve agreed to buy a house, get back to Housing NZ and your provider promptly.
“Generally, Housing NZ requires client’s applications to be submitted four weeks before settlement date. Therefore, as soon as you have a signed sale and purchase agreement, send it to Housing NZ along with the other supporting documents immediately,” says a spokesperson. “The subsidy will only be paid out on settlement day, as part of the overall deposit required. Retrospective payments will not be considered.”
QThe situation described recently in your column by the 60-ish couple is fairly common; after a lifetime of working for others they are jobless and don’t know what to do.
I know you dislike property investment and regularly rubbish the idea, but for fit oldies with some capital and experience in admin or trades, property rentals can be the answer.
While still employed, we started buying scruffy houses, renovating them, and renting them through a property manager. The collection has grown through leverage and watching for bargains while using the tax breaks, and when we want to slow down a couple of houses could be sold to reduce debt and start taking income. Maintaining rentals can be a varied part-time job to keep active.
Not suited to everyone, but there are opportunities for people who keep their eyes open!
AI’m not — repeat not — against property investment. It often works well. I just want people to be aware of the risks, particularly when borrowing to invest.
But thanks for writing, and your idea is good. Our couple could use some of their $200,000-plus in savings as a deposit on a low-priced house, do it up and either rent it out or sell it. With luck, they might even do a couple of properties. But I wouldn’t like to see too much in the way of mortgages, given their situation.
QAsk the couple how much they’ve spent during their working life on overseas holidays! That’s why people who should be able to look after themselves at 60 can’t.
AIf the couple had little in the way of assets, your point would be fair enough. But they have a $650,000 mortgage-free house as well as savings, and no debt. With NZ Super, they won’t starve in retirement. It’s just that they want to work — for satisfaction as well as a more comfortable retirement.
There’s such a thing as over-saving, depriving yourself of treats like travel while you are healthy enough to make the most of them.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding 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.