Q: I thought a letter from the National Bank in 1985 advising that our interest rate was going to increase from 11 per cent to 18 per cent might interest you and your readers. How times change. A good example of rampant inflation!
We bought our house in Sandringham in September 1980 for $47,500 with a $20,000 deposit.
We are still in this house and the latest CV is $3.55 million. We took out subsequent smaller loans in 1985 and 1987, at an interest rate of 25 per cent! All with the National Bank. Amazing really.
A: Let's not scare the horses! No expert is predicting mortgage interest rates will rise to 18 per cent again, let alone 25 per cent.
Your letter does, however, warn people that they could see further sharp rate rises. That 11 per cent to 18 per cent jump must have been a shock for you.
A smart move for those with mortgages would be to imagine your interest rate has risen, say, three or four percentage points — over and above recent rises. For example, it might rise from 5 per cent to 8 or 9 per cent.
There are many online mortgage calculators, including a good one on sorted.org.nz, that will tell you how much more your payments would be. Start putting aside the difference between the current and higher payments, in a savings account, so you get used to that payment level and have a buffer to help you with the transition.
Lots of people are doing this already. "Around 44 per cent of people with a home loan are ahead on their repayments," says the NZ Bankers' Association. "That's likely because, as interest rates have declined over the last few years, they may have retained their repayments at the same level.
"Depending on their loan, others may have increased their repayments further to get ahead and repay their loan more quickly." I'm not saying rates will rise to 9 per cent. But they might — or even more. Our graph shows mortgage rates were up around 10 per cent not so long ago.
Speaking of calculators, a lump sum calculator shows your house price has grown by a bit over 10 per cent a year. That's extraordinary over a long period.
Q: I am so confused. I retire in two years and currently have a small amount in KiwiSaver — less than $18,000.
I cannot bear watching my money disappear at the moment. I don't wish to have a knee-jerk reaction and stop contributing, but can you tell me why it is a good idea to keep throwing money at something that is losing money?
A: When you contribute to KiwiSaver, you buy units in your fund. The price of the units falls when the fund's investments lose value — as has been happening lately.
This actually means it's better to contribute at times like these. You are buying bargains! Some clever people will be making extra contributions now.
At some point the share and bond markets will recover. It might be next month, or in a year — or possibly two or three years, although that's rare. But when it happens, the value of your units will rise. So don't stop contributing.
I should add, though, that if you plan to spend some of your KiwiSaver money within the next two or three years, it's wise to place that amount in a lowest-risk cash fund, where the units shouldn't ever lose value. If your provider doesn't have a cash fund, move to one that does.
P.S. Another reason to keep contributing at least $1042 a year is to get the government's annual $521 contribution. And if you are an employee, you want the maximum 3 per cent employer contribution too.
$200,000 and falling
Q: I have $200,000 in my KiwiSaver fund and am 63 years old. I'm alarmed at the rate of my balance decrease while in a moderate fund.
If I switch it all to a cash fund in the meantime, I am thinking I will at least maintain my balance without it decreasing any further. Is that correct?
A: Yes. But you'll miss out on the recovery in the moderate fund.
As I said above, cash funds are good for short-term money. For longer-term spending, be brave and leave some money where it is. You're highly likely to be glad later.
Shares v property
Q: Letter from Andrew King, president of the NZ Property Investors' Federation: Talking to rental property-owning friends, they have said that your column is firmly in the "shares good, property bad" camp and it isn't worth arguing any more. That's a shame, but here goes.
Rental properties tend to have more people living in them than owner-occupiers, while at the same time having fewer bedrooms. So, if a rental with, say, five people living in it is sold to a previously renting family of three, it is not an even swap of one less family renting and one less rental.
The Government has a policy of dissuading rental property investment to help reduce demand for property, stabilise prices and help first home buyers. Admirable goals, but it has led to a shortage of rental properties, higher rental prices, the state house waiting list ballooning to over 25,000, and $1 million per day being spent on emergency housing.
Unfortunately, house prices still rose at record rates until constrictions on borrowing and higher interest rates slowed the market.
I suspect many people agree with you, saying people don't want rental property providers to "hang in there", but thankfully for tenants most are. We actually need more rental providers, not fewer.
P.S. You are right when you say removing interest deductibility for rental property is unfair and economically distorting. Thanks.
A: That's interesting about rental properties having more occupants. That means that if a greater proportion of houses become owner-occupied because landlords have sold them, that may exacerbate the housing shortage.
But as you say — and as economist Tony Alexander said in last week's column — most landlords are not selling.
On whether this column is in the "shares good, property bad" camp, your friends might be confusing comments from correspondents, who say all kinds of nice and nasty things, with comments from me.
I do say that investing in shares takes much less time and effort. The one thing that can go wrong with diversified shares is that their value falls — which does happen quite often, and I write about it quite often. But there's a long list of things that can go wrong with rental property, and I want readers to go in with their eyes open.
Then there's politics. Rental property is a far more political issue than shares, because it's about housing lower-income people. I tend to support moves to make life better for tenants. But I would hope good landlords would support those too. Laws to increase insulation and the like prevent you from being undercut by unscrupulous landlords who cut corners.
I also frequently acknowledge that tenants can be problematical.
On taxing capital gains, I always say gains on shares as well as property should be taxed.
And, as you kindly note, I recently criticised the loss of interest deductions for landlords. Anyone who has an example of a Q&A in which I — as opposed to a correspondent — have been unfair to landlords, please send me the date.
Landlords are OK!
Q: I'd imagine landlords haven't responded to your recent Q&As simply because we're tired of being portrayed as the enemy.
How about this for some context: In the last year the value of my share-based investments has dropped over $70,000. The losses have been fairly consistent in both active and passive funds, thanks for asking. That's $70,000 less from which to derive a retirement income. Fortunately I have decided to continue working.
The income from my rental has remained fairly even, not being bounced around by changes in its underlying capital value.
That is why we invest in property — because it provides stability and a counter to the international share market.
The decent landlords among us keep these houses to a good standard, a standard not required of social housing or privately owned houses that become someone else's first home.
The point your other reader was making is that residential landlords have been targeted for special tax treatment that doesn't apply to other income-producing asset owners.
There has never been a loophole, there has never been a special advantage available only to residential landlords. We've been paying tax under the same rules as any other investor. Pity you don't acknowledge that.
A: Please don't shoot. I'm only the messenger! As I said above, readers are sometimes anti-landlord. And some refer to special tax treatment. But I don't.
On your shares recently doing worse than your property, of course that sometimes happens. Shares are basically a higher-risk investment than residential property. But because people often borrow to invest in property but rarely do so for shares — and borrowing boosts risk — the two are at a similar risk level, on average.
Over time, both have their ups and downs, but both are usually solid long-term investments. You've wisely invested in the two asset types, to benefit from diversification.
It's good to know that you take care of your rental properties — as do many landlords. Read on.
Thanks to the Govt
Q: I'm a landlord. Can I please point out to the other landlord who was complaining about "this government" that both Labour and National have a track record of being very pro landlord?
Labour has given many of our customers pay rises (increases to the minimum wage and benefits/supplements). These are directly flowing through into enormous rent increases. And the blue team want to cut your tax costs.
More generally, if you can afford the deposit on an investment property in New Zealand, you're probably in the wealthiest 10 per cent of households worldwide.
If the government asks, "please insulate your underfloor", just do it without lodging your displeasure on your favourite landlord Facebook group. What else can you do to improve your product offering? It will likely work out for both you and your customers.
Finally: you and I didn't get into this business to "provide affordable housing". We did it to make money. Either earn it or sell up.
A: Thanks for your honesty. And your positivity.
Q: The history of share clubs is interesting. I have been associated with EPIC Investment Group Partnership (Club) since 1976. I attended its first meeting, with a financial adviser watching the market and suggesting companies for our consideration.
We still employ an adviser. We look for well-run companies having a low market quote but likely to rise and produce capital gain.
To be a club member requires a regular auto payment deposit on your payday. Hence the name EPIC (Every Pay Investment Club). We have done well over the years, even through ups and downs.
We have a partnership deed governing our activities, meeting four-weekly. Members receive units, accumulating in their name proportionate to cash input.
Getting new membership is by word of mouth, as adverting has many legal difficulties relating to financial offerings.
Our present minimum is $75 per fortnight, larger amounts are acceptable and one-off cash deposits help to increase individual capital investments.
Suggesting share investment to a prospective member usually gets a reaction that shares only result in loss. To offset that, Epic Club invests in a portfolio — 21 companies at present.
A: Since 1976. Wow! Your club has indeed been through ups and downs, including the '87 crash that killed many share clubs.
Thanks for this useful information. Readers wanting to know more can read Diana Clement's 2014 article about your club and others, at tinyurl.com/NZShareClubs. Those interested in joining can contact you at email@example.com
- 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 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 firstname.lastname@example.org. 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.