Mary Holm: Would-be house buyer's lament

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I wrote some time ago to you with a large sum of savings. You suggested I go ahead and buy a house. However, I have not been able to purchase still, and even now the worst parts of Auckland are priced beyond belief. I have been told I am stupid not buying ages ago as house prices NEVER go down.

I now see that this is true. Have you not read the recent council valuations?

The new rateable values of Auckland properties are, indeed, 46 per cent higher on average — but that's compared with 2014. More recently, there have been several reports of Auckland prices falling.

Last week, for example, the Real Estate Institute said the median Auckland price is 3.2 per cent below a year ago. The institute partly put this down to more sales of apartments. But it also reported the number of Auckland sales had fallen a considerable 21 per cent over the past year. And declining sales tend to lead to flat or declining prices.

So much for your friends' claims that house prices never go down! The people who say that are the stupid ones, not you.

In our graph, when the line goes up, prices are growing at an increasing pace. When the line goes down, they are growing but at a decreasing pace. And when the line goes below zero, prices are falling.

From the mid 1960s to the late 1980s, house prices never fell, because inflation was so high. But since then they have fallen several times.

What's more, national average prices mask a wide range of experiences. The price fall around 1991 looks quite mild. But — as regulars may recall reading before in this column — I lost a full 30 per cent on a house in that year.

We had bought in upmarket St Heliers before the 1987 share crash. In the aftermath of the crash, many St Heliers residents must have had to sell their homes in a hurry. The resulting property crash was worse for many than the share crash.

Nobody is predicting another 30 per cent price plunge, but who knows? One thing is certain: house prices will continue to fall sometimes. Given the recent trends, you might want to sit on the sidelines a while longer and see what happens.

By the way, there are two points about the new rateable values that many people don't seem to realise:

• An increase in your rateable value doesn't necessarily mean your rates will rise. The valuations tell the council which areas' prices have risen more, and which have risen less. If the increase on your house is below the 46 per cent average, your rates might even decrease.

To calculate the percentage increase on your property, find the difference between the old and new numbers. Then divide that into the old number. Let's say the old value was $600,000 and the new value is $800,000, so the difference is $200,000. Divide that into $600,000, and you get 33 per cent. That's less than 46 per cent, so your rates might decrease.

• If your rates become unaffordable, look into getting a rates rebates or rates postponement.

Rebates are for people on lower incomes. Your rates can be cut by up to $620 a year. See tinyurl.com/nzRatesRebate. For Aucklanders there's more info at tinyurl.com/AuckRatesRebate.

There's no maximum income for rates postponement. You put off paying part or all of your rates until you sell the property or die. Basically, the council lends you the money in the meantime. You pay upfront costs as well as interest, which is at a reasonable rate, but will still compound over the years. Nevertheless, this is a way to get some use out of the value in your house.

Click here for more info on Auckland Council's rates postponement. Some other councils also offer similar schemes.

Tiny houses

There is a bit of a buzz about tiny houses, but there are a couple of things people should be clear about when deciding their directions.

Every house has certain unavoidable high-value things, only some of which can be trimmed: power supply, water supply, sewerage connections (stormwater and household waste), kitchen, bathroom, driveway access and laundry facility.

The cost of a few extra square metres of space can be quite small in comparison — those extra square metres of foundation/floor/ceiling/roof plus one or two square metres of wall. Priced correctly, they are cheaper per square metre because the trucks are already at the gate, the builders are already on site, the fiddly corner bits are already done, the paint can is open.

Thanks. What you say makes a lot of sense.

Mobile homes

Anyone looking into getting a mobile home has to be very careful as to the claims of the provider as to how the different territorial local authorities (that is, councils) regard them. Two things to note:

• To hook into the sewerage generally requires a Safe and Sanitary report.
• Most councils would consider that if there is infrastructure (such as decks and water collection) built around the mobile home, it becomes permanent and requires a resource consent and/or building permit. For example, as a rule of thumb, once it is there six weeks or more it is considered "permanent".

It is hard though to get a definitive ruling from councils on this. It would be nice to see a comparison of the rules by various councils, as it could help alleviate the shortage of dwellings.

Thanks to you, too. I love the collective wisdom of readers. If anyone knows of such a comparison, it would be good to hear about it.

Passive funds

I enjoy your columns and have followed your advice that fees are important and that passive funds have low fees. However, I read in the Whakatane Beacon recently that there are apparently some disadvantages to passive funds.

In their column, local financial advisers warned that passive funds will always underperform the index because of their fees. They went on to say that actively managed funds "invest in carefully chosen companies" whereas passive funds just buy everything.

The advisers concluded that investors should not concentrate on fees but returns after fees and that passive funds "have little or no chance of outperforming, which can amount to several per cent per year". All this sounds a bit strange to me and I wondered if you had any comments?

Firstly, a couple of definitions. Passive funds — or index funds — hold all the investments in a market index. Most invest in shares, but sometimes they invest in bonds or other investments.

For example, a passive fund might hold all the shares in the NZX 50 index — basically the biggest 50 companies on the New Zealand stock exchange.

In contrast, managers of active funds choose which investments to buy and sell. The managers' salaries and frequent trading cost more, so active funds charge higher fees than passive funds.

Active fund managers justify their higher fees by saying they perform better. But research in different countries shows most active funds don't keep doing better than passive funds year after year. Sometimes a few continue to outperform, but there's no reliable way to tell in advance which ones.

I've long concluded that it's a better bet to go with passive funds. On average, after fees, they do better over time.

Next definition: ETFs, or exchange-traded funds. These are pretty much always passive funds. But unlike many other funds, they are listed on the stock exchange. The only New Zealand-run ETFs are Smartshares, run by NZX — the stock exchange company
.
Okay, now let's take the financial adviser's comments in order:

• "Passive funds will always underperform the index because of their fees."
Correct. They perform the same as their index, but then fees will reduce their performance a bit.

• "Actively managed funds 'invest in carefully chosen companies' whereas passive funds just buy everything."
Also correct. But do active managers' careful choices end up doing better than randomly chosen shares would? Often they don't.
That's because if a company's prospects improve, market watchers will know that and quickly buy the shares, pushing up their price until they are no longer a particularly good investment. If an active manager always got in first, they would do brilliantly, but nobody is always — or even often — first. So all that choosing frequently doesn't result in superior performance.

• "Investors should not concentrate on fees but returns after fees, and passive funds 'have little or no chance of outperforming, which can amount to several per cent per year'."

I agree that it's returns after fees that matter, and, as stated above, passive funds don't outperform their index. Meanwhile, every year quite a few active funds do outperform.

But, first, active managers sometimes compare their fund's performance with an inappropriate index — one that measures a different portion of the market from where the fund invests. When you use a fairer index, active funds can be much less impressive.

We had an example of that in this column last November.

Second — and most important — active funds that outperform one year often underperform later, sometimes by a lot. Investments in share funds should be long-term, so this matters hugely.

S&P Dow Jones recently looked at the performance of Australian actively managed funds.

Of all the active funds in the top quartile (the best 25 per cent) in 2012, only a tiny 2.2 per cent stayed in the top quartile in 2013 through 2016. The performance of all the rest was mediocre to bad. And investors paid relatively high fees for that.

Want some New Zealand evidence?

The Financial Markets Authority has just released its KiwiSaver Tracker, at tinyurl.com/KSTracker. It shows, among other things, how fees affect returns in each KiwiSaver fund. And if you click on "I want to dig into the data", up will come graphs showing the relationship between KiwiSaver funds' fees and after-fee returns over the last five years.

By clicking on the different fund types, you'll see no tendency for high-fee funds to bring higher five-year returns — except perhaps in balanced funds. But in aggressive funds it's the opposite, with the highest performers charging low fees.

The results are similar for one-year returns, but skip those. Single-year returns tell you nothing about how a fund is likely to perform in the future. For that matter, it's not much better for five-year returns.

That's one thing that worries me about this new tool. People may switch to a fund that has performed well in the past, and it may very well perform poorly in the future.

But the graphs do show that fees and returns weren't linked over the past five years, and there's no reason to expect that to change.

I'm sticking with my advice: given that we don't know what future returns will be, go with low fees.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. 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 or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.