Today's market panic doesn't have to mean saying goodbye to home ownership. Photo / 123RF
COMMENT:
Q: My husband and I were planning to buy our first home in Auckland this year before plans to have a baby.
We are using a broker, have pre-approval from two banks and a 20 per cent deposit made up of savings, KiwiSaver and a little help from Mum and Dad.
However, the situation with Covid-19 has given me the jitters. Is now the best time to be making a big financial decision? I work full-time as a registered nurse so job security isn't an issue, presuming I don't get taken out on the front line!
A: Sigh. I was hoping to move the column away from Covid-19 and wobbly sharemarket issues for a change. Then I checked my inbox. Not a chance! The confusion, cries for reassurance and "brilliant" timing ideas keep coming.
Please note, everyone, that I can't predict the future. Last week I said, "share prices could rise from here", and then look what happened! In my defence, elsewhere I suggested a reader be prepared to see share prices fall further.
Meantime, you're more interested in the housing market. And maybe I should say, "Don't buy", to be on the safe side. But I reckon you should go ahead. Your job security has got to be as good as anyone's. And surely, if you do become ill, you'll still be paid. It would be outrageous for health workers not to be.
Presumably your husband is also earning an income, but hopefully you'd cope if that dried up for a while. And your parents might help you through a short-term cash shortage. Perhaps check that with them now.
There's another issue here, though: what will happen to house prices? Normally, the Reserve Bank's big cut in the official cash rate last Monday would reduce mortgage rates and therefore boost house prices. But these are strange times.
Economists' house price forecasts are mixed — so what's new? But it seems they all expect prices to at least flatten, if not fall. And the very fact that I've had several people asking about this suggests some would-be buyers will delay purchasing, softening the market. So perhaps you should wait for lower prices.
On the other hand, in these circumstances I wouldn't be surprised if some sellers will accept a fairly low offer from you. Keep looking, but bargain hard.
Q: Is now the right time to buy a house? I've already sold, and have temporary accommodation.
I fear Covid-19 may cause wide-ranging job losses resulting in mortgagee sales. I don't want to put myself in that situation by ploughing ahead not considering the present uncertainty, only to lose my job.
A: I don't think we should start predicting lots of mortgagee sales. It wouldn't be a good look for the banks in this environment.
If people who are struggling to make mortgage payments discuss this with their lenders — rather than just not paying — the lenders will often accept smaller payments for a while. They might extend the term of the loan or make it interest-only for a while, or even suspend payments for a period.
Still, especially if your job security isn't great, it's wise to think about how you would manage mortgage payments with no job. There's improved Government support, but maybe not enough if you've taken on a big home loan.
Do you have rainy-day money — ideally three months' income perhaps invested in one-month term deposits? Or would your extended family help out with an emergency loan? Or are there expenses — eating out, entertainment, booze, clothes — you could cut heavily for a while? Travel might be an easy one to curb!
If you're answering "yes" to these questions, ploughing ahead seems fair enough. If not, perhaps sit tight for a while — at least until you have a better feel for your job tenure.
And while you're waiting on the sidelines, how about building up that rainy-day fund — or buying a cheaper house to allow for it?
Q: There is something that puzzles me about what you wrote last week about drip-feeding.
I would think if you are planning to take a regular income from your savings, just leave it all in the higher-risk funds and take the ups and downs. Over the next 20 or 30 years you will on average have done better than in the low-risk funds.
This seems the equivalent of drip-feeding money in — drip-feeding it out! However, if I was thinking of spending a large lump sum (maybe to buy a campervan) I would gradually move it to a lower-risk fund over several years.
If I am mistaken about this can you please explain?
A: There's an important difference between drip-feeding money into an investment and drip-feeding it out again to spend it.
All of this applies only to investments whose values rise and fall, such as shares, property and, to a lesser extent, bonds, as well as balanced, growth and aggressive KiwiSaver and other funds.
Let's say you're investing $100 a month into one of these volatile investments:
• When the markets are down, units might be worth $4, so you buy 25 units.
• When the markets are up, units might be worth $10, so you buy 10 units.
The average market price is $7 — halfway between $4 and $10. But you've bought more in the down markets, so the average price for you is only $5.71 ($200 divided by 35 units) in this oversimplified example. Great!
But what if you were selling instead of buying? You'll be disposing of more when the prices are below average. Not so great.
You're quite right that over 20 or 30 years a higher-risk fund will grow more. But drip-feeding out of it could more than offset that advantage.
Sometimes you have no choice. See the next Q&A. But it's better to move your money into a low-risk defensive fund several years in advance of spending it. Good thinking on the campervan.
By all means, though, keep the 10-year-plus money in riskier investments, as explained last week.
Q: What is your advice in relation to the coronavirus hit to markets for young savers hoping to use their KiwiSaver to put a deposit on a house in the near future?
A: Following on from what I've just said, if you plan to spend your KiwiSaver money within a few years, it's best to be in a low-risk defensive or perhaps slightly riskier conservative fund. Then your balance won't drop lots right before you buy.
What about people planning to buy soon but caught in higher-risk funds? Oops! You haven't been reading this column over the years! But what do you do now?
The above Q&A advises against drip-feeding out of a higher-risk fund. But it could be even worse to move all your money to low risk in one hit — at what might turn out to be the bottom of the downturn.
I suggest you reduce your risk in three or four steps, maybe a month apart if you plan to buy a home soon, but three months apart if you've got a year or two to play with.
Q: Help! I turned 65 in November last year and was planning to move a large part of my bank KiwiSaver (40 per cent in a conservative fund and 60 per cent in a balanced fund) into a conservative fund with a private investment company, where I already have a modest amount that has been earning very good interest.
However, I have been watching in horror over the past few weeks as my KiwiSaver has lost $15,000. I feel like a possum caught in the headlights as I have no idea what to do. I had planned to retire in less than two years.
Should I move most of what's left of my KiwiSaver ($232,000) into the private investment company fund, as I had planned, or just move it all into a conservative fund with my bank?
All the advice I hear from the experts advising KiwiSavers to stay put and see it out is for younger people. But what about people like me who are almost at retirement?
A: Relax. You're okay. That "stay put" advice applies to most people of all ages — at least for the next couple of months, although there might be some wise moves to make after that.
This is a good chance to check:
• Whether your KiwiSaver or other fund is the right risk level — low-risk if you plan to spend the money soon, but higher risk for later spending. See last week's column for more detail.
• Whether you can tolerate the volatility of your fund.
You seem pretty good on the first count. Your conservative fund money can finance the early years of your retirement, and the balanced fund money can be for spending later — right on into your 90s, perhaps.
But if you're a horrified possum (sorry, but I couldn't resist!), perhaps you just can't cope with volatility.
The trouble is that we haven't seen significant market falls for years, and people aren't used to it. The markets will rise again. They always do, usually within a year although it can take longer. So I urge you to ignore what's happening.
But if you must do something, consider gradually moving your conservative fund money into your provider's lowest-risk defensive KiwiSaver fund, which will hold mainly cash and pretty much never lose value — and if so, only a tiny bit.
If your provider doesn't have such a fund, move to a provider that does. The KiwiSaver Fund Finder on sorted.org.nz lists defensive funds — sometimes called cash funds.
With your other money, in the balanced fund, try to be brave and leave it where it is. It will recover in time, and grow more than in a lower-risk fund.
Nor would I rush into the other company's fund. Its future returns won't necessarily be any higher than where you are, and it might charge higher fees, which eat into returns.
For info on fund fees, see the Smart Investor tool on sorted.org.nz. Click Compare KiwiSaver and Managed Funds (which are non-KiwiSaver funds), choose from those two types, and then click the risk level. Then — importantly — scroll down and sort by "Fees (lowest first)".
Just to put things in perspective, your $15,000 loss is about 6 per cent. Over the past few years you will have gained considerably more than that.
Q: I may be able to help with the "blood in the streets" quote. The full quote — somewhat paraphrased — was "sell when the violins are playing, buy when the streets run with blood". The violins referred to the garden parties in the affluent inner-city London suburbs, so popular in times of prosperity. In the 19th century the saying changed to "sell when the cabbie tells you what he's buying."
Baron Rothschild made his fortune, or part of it, because he and his two brothers had "divided" Europe among the three of them and owned the only reliable, and fastest, source of information. When Napoleon was defeated, the UK stock market surged, but as Rothschild learnt this days before anyone else, he could exploit the situation.
A: Thank goodness for the news media then the internet, so the privileged no longer get the news first.
The cabbie saying reminds me of the story of President John Kennedy's father Joseph, who decided to get out of shares just before the 1929 Crash because a shoeshine boy was giving him stock buying tips. If even the shoeshine boy is buying, he thought, the market is overly exuberant.
- Mary Holm 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 mary@maryholm.com. 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.
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