Our son and daughter-in-law are actively searching for a larger home to accommodate their growing family.
If a suitable one comes up in their area they are hoping to buy it (probably at an auction as that seems to be how 95 per cent of houses are sold in Auckland) before selling their existing house. It appears they do not want the hassle and expense of renting while they wait to buy again.
This seems to me a high-risk strategy and contrary to our experiences of buying and selling over the years, where we were always advised to sell before buying again.
We then had certainty of how much we had to put towards the next property, and avoided the pitfalls and risk of having to sell under pressure. Does this advice still hold or do you agree with the young couple that I am being overly cautious. I would really appreciate your comments.
A: I'm on your side.
A basic financial rule is to never get yourself into a position in which you might be forced to sell something. You'll usually get way less than it's worth.
Examples include someone who's bought an expensive car and then can't meet the payments on it. Or a landlord whose rental income doesn't cover mortgage payments and they lose their job. Or the scenario that worries you - someone who buys a new home and then can't sell their old place quickly for anywhere near what they expected.
Often the person has to take out a high-interest short-term loan or bridging finance. Costs can soar.
If you're stuck with two homes, you might have to rent out the old place on a short-term basis. And then the tenants won't tidy up when would-be buyers come around. And the real estate agent says that makes it harder to sell. And meanwhile you discover the house needs expensive maintenance. And... In the end, you're so stressed you sell the place for a song, just so you can get on with your life. Believe me, I've been there.
The problem often arises because you're a fussy buyer. You don't want to be pressured into purchasing any old place because you've sold your home and need somewhere to live. So you do the buying first, at your leisure - not thinking about where that might lead you.
The choice is basically this:
• Buy first, and you might end up selling in desperation.
• Sell first, and you might end up renting or staying with friends for a while until you find the right house to buy.
Not only is the second option better financially - you don't sell for a low price and you know how much you've got to spend on a new place - but there's much more you can do to resolve the situation.
If you buy first, you can't speed up the selling of your old home. You just wait and hope a buyer will please, please come to the next open home and make a halfway decent offer. Please.
On the other hand, if you sell first, you can spend every spare minute looking at houses.
You can also make good use of real estate agents. Once, years ago in the US, my husband and I got sick of an agent phoning us, so I gave him our list of "needs" and "wants" and said, "Please don't come back unless you've found a house that ticks all the boxes." Three weeks later he rang. He'd found a house that had it all, and we bought it.
A couple more points:
• One possible approach is to buy first, but only on condition that you can sell your current home for at least a certain price and within a certain time. Sellers don't like such offers much, but they might listen if you offer an attractive price. But there's a worry. You might fall in love with the place, and if the agent then tells you someone else is about to make an unconditional offer - which might or might not be true - you'll switch to buying unconditionally.
• If you sell first, you won't necessarily have only a few weeks to find your next home. Ask your buyer how they're placed. Sometimes it suits a buyer to delay settlement for several months.
I hope this convinces your son and daughter-in-law. But the sad truth is that sometimes we have to learn from our own mistakes. That's what happened to me!
By the way, it might seem that 95 per cent of house sales in Auckland are by auction, but in fact only about half that - 46.3 per cent - were auctioned off during October, says the Real Estate Institute. But that's still way above 14.5 per cent for the rest of New Zealand.
Interest on bonds
Q: I skidded to a stop after reading the last paragraph of the "Golden Goose" letter last week where you said, "Mind you, interest on a portfolio of bonds can also fall a long way, as many people have seen in recent years." What does this mean?, I said to myself. Interest on bonds is fixed, isn't it? What have I missed?
But then I calmed down and thought that you must surely have been talking about long-term trends in bond yields, and not within the life of a single bond (except in exceptional circumstances)? I hope that I have simply misunderstood this at first read, but then I thought that perhaps others might also have done so.
Nobody else has written about this. But if even just one reader is skidding all over the place, we can't have that!
I was indeed talking about long-term trends in bond yields.
Eight years ago, at the end of October 2007, 90-day New Zealand bonds were paying 8.7 per cent. Now it's 3 per cent, says Reserve Bank data. On five-year bonds, interest has dropped from 7 to 2.7 per cent. And on ten-year bonds it's dropped from 6.5 to 3.3 per cent.
Most of the fall, especially for the 90-day bonds, happened during the global financial crisis in 2008-09. The decline for longer-term bonds has been more gradual. But still, many bondholders have been seriously disappointed with the rate on new bonds as their old ones mature.
Q: The first letter last week has me wondering. The writer and his father are making good income from dividends, and he says, "the majority return for the both of us is more than 8 per cent pre-tax."
If one consults the NZ Herald's daily share market tables, under yield, those companies achieving 8 per cent or better yield must be somewhat risky? Possibly an investor could achieve a somewhat similar return with less risk factor by investing in fully imputed shares with no tax to pay.
It would be interesting to read your comments on that way of investing, in comparison to the letter I have quoted.
But that is what makes life interesting in the investment scene - the various ways people invest to their best advantage in their particular case.
A: This is getting a bit beyond my expertise. I prefer low-fee share funds over individual shares - and recommend that approach for most people, mainly because funds give you wide diversification even with small amounts of money.
So I asked my fellow Herald correspondent, Brent Sheather, an authorized financial adviser who knows lots about shares. And he agrees that there's possibly a link between high dividend yields and risk.
"One of the golden rules in share investing is 'beware of high yields'," says Sheather. "This alludes to the fact that, all things being equal, companies with higher dividends - like 8 per cent or more in New Zealand - are often priced lowly because the market believes that there is a risk that their dividends will fall or at least not grow, or that their balance sheet is weak, i.e. their earnings will be volatile."
To help get your head around this, the dividend rate or yield is affected by the share price. Think of a $10 share paying a dividend of 40c or 4 per cent. If the share price falls to $5 and the dividend continues at 40c, it's now paying 8 per cent.
Continues Sheather, "There are a number of stocks that yield 8 per cent or more on the NZ stockmarket, and the energy companies like Mighty River Power, Genesis Energy etc. are popular examples. That does not make them cheap necessarily because their dividend payments are, in many cases, in excess of their profits, so they are funding their dividends by paying out all of their cash flow.
"This may or may not be sustainable, depending on how realistic their depreciation charges are. Most companies need to put aside some of their cash flow to preserve future profitability.
"Focusing on high dividend paying companies risks compromising the number one rule of investing and that is diversification."
On your point about imputation, first a note for other readers. In New Zealand, investors in shares - whether directly or in share funds - get credit for the fact that the company has already paid tax on its profits. When the company pays dividends, shareholders receive "imputation credits", which means they end up paying less or no tax on the dividends.
Companies that pay full rates of tax generally can pay fully imputed dividends. And this is the case for most New Zealand shares, says Sheather. "Those that pay 8 per cent or more generally pay imputed dividends, and the 8 per cent includes the imputation credits."
Over all, though, "the New Zealand stockmarket yields somewhere around 6 per cent inclusive of imputation credits." Does that mean last week's correspondent and his Dad have been going for the high-yield stocks?
Not necessarily. They probably bought some of their shares a while back. The share price has since risen, but they are calculating their dividend rate on the price they paid - which is fair enough.
Where does this leave us? Seeking out high dividends, or full imputation, or what?
"There is a view, reasonably widely held locally and overseas," says Sheather, "that low interest rates have had the side effect of forcing people to favour dividend-paying stocks. And as a consequence dividend-paying stocks may be more expensive than they should be."
It's the good old supply and demand. If lots of people want something, that tends to push up its price.
"The safest way of investing, according to the theory, is to avoid tilting your equity portfolio too far any way - like growth, income, water, technology etc etc - and just buy the broad market using a low-cost fund," he says.
"In New Zealand, this means a combination of the SmartTENZ, SmartMIDZ and SmartFONZ funds. As a general rule specialist funds cost more, are more volatile and are often reflective of fads."
Which brings us back full circle. Sheather, like me, prefers low-fee share funds.
Q: Just a note about your recent request to know about KiwiSaver providers offering regular withdrawals in retirement. The ASB scheme also offers this, and would be pleased to be on this list.
Thanks. The list now reads: AMP, ANZ, ASB, Civic, Fisher, Grosvenor, Kiwi Wealth, Medical Assurance, Milford, NZ Anglican Church, SuperLife and Westpac.