No one can tell when bubble will burst

By MARY HOLM

Q: When in your opinion will the housing bubble burst? Should I buy now or invest in other options?

I'm possibly going to work in the United Kingdom to increase my financial standing. I have just sold my home for a net profit of 16 per cent in 12 months, and am unsure whether to get back into the market now.

A: If I could predict when the housing market is going to change - or the share market, foreign exchange or interest rates - I'd be too rich to be bothered writing this column, much and all as I love it.

But you'll find plenty of other people who will offer you their opinions on housing.

Firstly, real estate agents. The trouble with them is that their forecasts tend to vary, depending on who they are talking to.

To those considering selling, it's, "List with me now. Prices won't keep going up."

To those considering buying, it's, "Get into the market now. Prices will keep going up."

BNZ chief economist Tony Alexander at least says the same thing to everyone. In his last newsletter last year, he noted that house turnover hit a record high for the year ended October, up a huge 35 per cent on the previous year.

A slowdown in growth appeared to start in June, but growth remained very strong, with listing shortages, said Alexander.

And there's nothing like a shortage to push prices up.

He also noted that, with mortgage rates not expected to rise for a while, prospects looked good.

Then again, as Alexander is the first to admit, his forecasts aren't always right. That's probably why he, too, is still working!

So who else will we turn to? I suggest nobody. I think your decision depends more on your plans than on housing market forecasts.

Regardless of whether you go to the UK, do you expect to be living in your own home in New Zealand in five or 10 years?

If so, I suggest you buy another house soon. Then, if the boom continues, you don't find yourself priced out of the market later on. If prices flatten or fall, it won't matter much. You'll still have your home.

If you're going to be overseas for a while, perhaps you should buy an inner-city property that would be easy to rent out, and plan to hire a good property management firm to run things.

On your return to New Zealand, you don't have to live in the same place. You could switch to a house you like then.

There's still a risk that things could go wrong, with tenant problems and you on the other side of the globe. But you can't have everything your way.

If there's a good chance you will stay overseas for many years, you're probably best to take your housing dollars and buy over there, even though your money might not go far in the UK.

In that scenario - assuming you'll take off in the next few years - you're best to put the money into term deposits or other conservative fixed interest investments in the meantime.

That way you won't find it has dropped in value when you leave, which is quite possible if you go back into property or into shares or a share fund for just a few years.

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Q: We have four little grandchildren and would like to invest $50 for each of them each birthday and Christmas (or more as funds allow).

As it isn't a big sum each time, could you give us your thoughts on how we could invest to hopefully return them a small nest-egg when they grow up?

Given all the advice one reads, it becomes confusing when one column in the Herald a while back suggested shares for this type of situation, then recently, over the page from your column, the suggestion was shares will not be the investment they have been.

We look forward to your advice.

A: There are two issues here. One is whether shares are a good long-term investment. The other is whether a share investment would be suitable in your situation.

On the first issue, it seems that every time there's a major sharemarket downturn, the doom and gloomers get more attention than usual.

They haven't been proven right in the past. I doubt they will be this time.

That's not to say shares will go back to the 20-plus per cent annual returns many produced in the mid-to-late 90s. The experts I respect predict long-term average returns of, perhaps, 5 to 9 per cent a year - before tax, inflation, brokerage and so on.

The point is, though, that nobody convincing is coming up with better alternatives. I still back a diversified portfolio of shares, or a share fund, for the long term.

Are they, though, suitable for you, who will be investing a total of about $400 a year?

The only good way I know to invest small amounts in shares, with good diversification, is via sharebroker ABN Amro Craig's Start programme. If there are other ways, let's hear about them.

Start is set up specifically for small savers. In fact, the firm is in the process of changing from a minimum investment of $100 a month to $50, which can be invested irregularly. That would suit you well.

Each grandchild could have an account, with six-monthly statements, says Roger McDowell, who runs Start.

Until recently, Start investors had to choose from a range of share funds to invest in. A new option is a portfolio of 20 funds. About 70 per cent of the investors' money is in global shares, 25 per cent in Australasian shares and 5 per cent in property, giving great diversification.

And from next April, there will be four watered down versions of that portfolio, ranging from one with 25 per cent of the money in cash and fixed interest and the rest in the shares and property, to one with 80 per cent in cash and fixed interest, says McDowell.

You'll be able to select the level of risk that you are comfortable with.

None of the share funds within Start pays tax on capital gains, because they are all index funds, UK investment trusts or similar. This gives them a sizable advantage over many other share funds.

There are two drawbacks, compared with term deposits.

You have to pay an entry fee of 2.5 per cent, which would take $1.25 off every $50 you invest. There's also an ongoing annual fee of 0.5 per cent of the value of your investment. And there's an exit fee of a maximum of 2.5 per cent, scaled down for larger investments.

It's highly likely though, especially over 10 years or more, that the higher returns your grandkids would make would more than offset those fees.

The other drawback is that - unless you choose a low-risk portfolio - you can be sure there will be years when the grandchildren's money will lose value.

If that would really bother you, you're better off with bank term deposits.

For all their lack of glamour, they still pay considerably more than inflation, which hasn't always been true.

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Q: We are writing to you hoping you will give your opinion on a subject that is of great concern to us.

In June 2001, we invested a reasonably large sum of money with a financial advisory firm. Our one main request was for a safe, low-risk investment, and we also needed income to live on.

We feel strongly that because of the bad advice given at the time we finished up losing quite a sizable sum or money.

Enclosed is a letter we wrote to the firm, which briefly outlined our position. Together with this is a summary written by our new adviser and a reply from the first firm.

Our new adviser is quite adamant that the first firm's portfolio was too top-heavy in high-risk shares and reliant on the market increasing, thus trying to generate income this way. He also feels that we have good grounds to take the first firm to court for investing the money in this manner.

If we go ahead with this action, we realise it will be stressful to say the least, as well as costly, so we need to be on the right track from the start.

We would value your candid opinion whether you feel we have a case and whether we should proceed further.

A: Sorry, but I'm not a lawyer. And I want to say, upfront, that I don't want others sending me similar letters, accompanied by heaps of documentation. I'm not qualified to pass judgment on legal issues.

I can say, though, that you and others with grievances against financial advisers may benefit from the complaints and disciplinary process of the Financial Planners and Insurance Advisers Association (FPIA).

To use the process, which deals with breaches of the FPIA code of ethics, the adviser must be a member of the association. That's a good reason to use FPIA members, I guess. Fortunately, your former adviser is a member.

Your first step is to ring the FPIA, on 0800-404-422, or write to PO Box 5513, Wellington, and ask for information.

You then present your complaint in writing, which the FPIA sends to the member for his or her response.

If the complaint is not deemed frivolous, it is heard by the Complaints Committee, which is chaired by a non-member. The present chairman was formerly in a similar role for the accountants society, says FPIA chief executive Phillip Matthews.

That committee may deal with the complaint but, if it is more serious, they send it on to the disciplinary committee, currently chaired by a former district court judge, who sits with a lawyer and an FPIA member.

They can fine, censure or expel a member.

"Quite often it becomes apparent that problems have arisen from a breakdown in communication," says Matthews. "Then we recommend mediation, to get the two parties talking to each other."

The process is not designed to compensate the client, says Matthews. "Only the judiciary can do that. What we can do is assess the facts on a trial-by-your-peers basis."

Still, he adds, a decision against a member would be a fairly definitive piece of evidence if you want to take it to civil proceedings.

What's more, he says, there would be a huge encouragement for a member to settle before the proceedings. Also, the member's PI (professional indemnity) insurer will have an interest in this. They will try to head things off before court as well.

Going through the complaints process will cost you nothing - unlike court proceedings.

How long it takes depends on how fast you and the adviser respond to requests for information. But the FPIA would not let the adviser drag the chain for long, says Matthews.

As you say, suing can be terribly stressful as well as expensive. I've known people to have won in court, but lost in terms of happiness.

So this would be a good step to take first.

If the FPIA decision goes against you, it might be best to drop the whole thing and get on with your lives.

But if it goes in your favour, and you then go to a lawyer, you might get an out-of-court settlement. That would be easier on your emotions and your pocket.

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