Mary Holm: Is it better to be in the real estate market – or on the sidelines?

OPINION:

Q: I am a 24-year-old millennial and have a partner who is 26, and we both live in Auckland. We are both low-medium income earners (me at $52,000 and him at $57,000). We have spent the last few years saving as much as we can (thanks to living with his parents) and currently have $100,000 saved for a house deposit.

We are starting to get quite disheartened though as we look into first home ownership. There are so few properties in Auckland that we have even a slight chance of affording, and those properties are so far out of Auckland.

I was wondering whether you had any advice for us, and also whether you know if the Government is looking to increase the first homeowner house price cap of $650,000 in Auckland for the first home buyer grant, as houses within this price range are few and far between! Thanks heaps 🙂

A: Well done on accumulating a $100,000 deposit by your mid-twenties — even if it was with the help of your partner’s parents.

If you keep up that level of saving, I’m sure you two will have your own home some time within the next 10years.

“Ten years!” you might be saying. “We want our own place now.” And you might get it much sooner than 10years — either by saving really fast, or by seeing house prices stabilise or fall. But there’s just no way of predicting what this crazy house market will do next.

Meanwhile, I suggest you either:

• Talk yourselves into a house well out of town — which may have its charm — or a small apartment or unit, or a tiny house. It can be an interesting challenge to make a small space work well. Plan to trade up in a few years.

• Take a break from the house hunting. Just don’t look for info about properties for sale for, say, six months.

Which feels better to you? If you’ve had enough disappointment — and I can appreciate that you could well have — there’s nothing wrong with pulling out of the game for a while, as long as you keep saving.

True, prices might keep rising in the meantime, but that cannot continue indefinitely. Some time in the next few years, the ratio of house prices to household incomes has got to get back closer to where it has been historically.

On the KiwiSaver first home help, there’s no price cap if you just want to withdraw money to buy a first home. But if you want the government grant, the cap is actually $600,000 in Auckland unless the home is newly built, when it’s $650,000.

Your joint incomes total less than $130,000, so you are eligible for the grant if you can find a place cheap enough. If you’ve both been in KiwiSaver for more than five years, you can get $10,000 between you — or $20,000 on a new build. So it’s well worth having.

I don’t know if the Government is considering raising the caps. They don’t tend to give advance info on things like that. But it wouldn’t be surprising if they do.

Come to think of it, that’s another reason to do a stint on the sidelines for a while. Relax, spend your weekends at the beach, in the bush, or somewhere else cheap that allows you to keep building up your deposit — in other words, not a shopping mall! Tell the housing market: “See you later next year.”

Which way mortgages?

Q: Do you think mortgage interest rates are going to go down any more, or should we lock in our house loan, as it has just come out of a fixed rate of 4.09 per cent.

ANZis offering us 2.45 per cent for one year, or 2.49 per cent for 18 months, or 2.65 per cent for two years. And when I look online, Heartland is offering 1.99 per cent fixed.

We have a large house loan and got caught with it last time. They said it was going to go even higher than what we fixed at, but instead it went down. Please advise what your thoughts are.

A: Sorry but I don’t know, and nor does anyone else. Even the experts often get interest rate forecasts wrong.

The best approach is probably to fix half your money for one year and half for longer — maybe two years or even five years.

If rates fall, you’ll be glad at least half your money can move soon to the lower rates. And if rates rise, you’ll be glad at least half your money is fixed for longer.

On switching to a cheaper bank, you could ask them how much it would cost to move your mortgage to them. Also ask ANZ about any charges for paying the loan off now. Then decide if it’s worth switching.

You might want to discuss your options with a mortgage adviser, whose services are free to you. Do ask them, though, where they get their money from, and consider how that might affect their advice.

Energy attracts

Q: Unlike many other sectors, it is not too bad having an over-representation of shares in the energy sector.

The customer base is diversified, although the potential Tiwai exit casts a shadow. Each energy company tends not to have its eggs all in one basket, with a range of hydro,
hydrothermal, wind and oil- and gas-based (for peak demand) generators in different locations around the country. For example, Mercury has hydro dams on the Waikato, Contact on the Clutha, Genesis across the North and South Island and Meridian on the Waitaki and Manapouri.

With the trend to electrification of transport (road and rail), unless there is an unexpected shift to home-based solar systems (and the energy companies invest in this area too), energy stocks represent a resilient defensive holding that is suitable for small investors’ portfolios.

A: You’re responding to my concern, in last week’s column, that a correspondent not only held just two shares, but they were both in the same industry — a very undiversified portfolio.

It sounds as if you know quite a lot about the energy sector. But, despite your arguments, I’m sticking to my message.

Any industry can suffer a downturn. And I would think that energy companies are more vulnerable to unexpected developments than many others, given that global warming could lead to drastic changes in how we all use energy.

Or too many people may feel the way you do — that energy companies are good investments — and the shares could become overpriced. New investors might be buying into great companies, but if they pay too much they are not investing well.

If someone holds 30 or 40 different shares and a couple of them are energy companies, that’s fine. But concentrating on any sector is taking risk that the investor may not be compensated for.

Southern Cross costs

Q: My wife and I joined Southern Cross around 1968. At that time the younger people subsidised the older ones. Then some 25 years later, just as I turned 65, they changed the rules and started charging older people more every year. So after subsidising elderly ones for 25 years, I had to start paying more, which did not please me.

Regarding the tax rebate on health insurance premiums, we used to get that too, until the 1970s when Robert Muldoon became Finance Minister and scrubbed the rebate. He said people will buy insurance anyway. They did not. About a third of subscribers stopped paying it.

I believe we are the only country in the OECD which does not give a tax rebate to people who pay health insurance.

A: What you say in your first paragraph is correct, says Southern Cross.

When the organisation started, in 1961, it did use “community rates”. “The market then changed significantly in the 1990s when government health reforms and a rapidly growing range of health services drove increased consumer demand in the private health system,” says a spokesperson.

“Another significant development during the 1990s was the approach taken by competing health insurers to attract younger, ‘low risk’ customers by offering age-based premiums. Southern Cross Health Insurance (SCHI) had to respond to these market changes and transition from community rating to age-banding to ensure the financial sustainability of the organisation.” Bad luck for you — and for me actually.

Still, the spokesperson adds, “When it comes to premiums for our over 65 members, we are very conscious that people in this age group are usually faced with a reduced income.

“Until November 2016, SCHI operated a common rating approach for members aged 65 and over, which meant that a 65-year-old paid the same as a 95-year-old on the same plan.” This was to give people certainty in their budgeting.

“However, the effect was that there was a large increase in premiums for members when they turned 65. So we are gradually transitioning the common rating approach (in one-year increments) to come into effect at age 75 by 2025. This will help to smooth the premium increases associated with age.”

On the tax rebate, Southern Cross “did not experience a reduction in membership in the 1970s, so this would be incorrect. In fact, our membership grew steadily throughout that decade.

“Regarding the third paragraph (of your letter), we’re not aware of the tax implications of all countries so we are unable to confirm.”

More on Southern Cross next week.

Learning about money

Q: The Covid pandemic has really highlighted people’s financial resilience this year and their ability to survive major economic impacts like the GFC, earthquakes and pandemics. With this in mind, now is a good time to ensure children do not end up in financial strife when things like these events happen when they are adults.

If parents are not comfortable providing them a financial education themselves, they might consider MoneyTime’s online financial education game for Kiwi 10- to 14-year-olds.

The game incorporates 30 self-taught modules and automatically marked quizzes, covering the full spectrum of personal finance: from earning, saving and interest to borrowing, investing and business. It is highly interactive, with children having to solve problems regularly throughout the modules.

They are rewarded with money for each correct answer to spend on avatars and investments within the program. There is a strong emphasis on them having to choose between spending, saving, donating and investing — just like they will have to do in real life.

There are also 13 modules designed specifically for kids to do at home with their parents. These revise and reinforce the lessonsand put them into their family context.

MoneyTime recently launched a licensed version of the game to make it accessible at home at www.moneytime.co.nz. There is a one-off licence fee, then kids create an account and away they go.

A: I’m not here to run free ads! But I’ve made an exception because quite a few readers seek help with teaching their children about money. And if your game is being used in New Zealand schools, presumably it has some merit.

I should add, though, that I’m not endorsing the game as I don’t know enough about it.
Any other providers of similar home-based services — which are also used in schools — are welcome to briefly describe them in letters to this column.

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 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 [email protected] 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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