There is some hope for first-home buyers, writes Mary Holm. Photo / 123RF
Q: The statement in your last column, “Kiwis are living at least 10 years longer than they did in, say, the 1960s to 1980s”, is disingenuous.
The New Zealand Period Life Tables 2022-24 from Stats NZ show that, in 1980, life expectancy for 65-year-old men was 13.3 years and in 2024 it was 19.4 years - a difference of only 6.1 years. For women, the difference is only 4.4 years. A long way off 10 years. Your statement about the median house price in the 1950s to the 1980s being two to three times household incomes is also disingenuous.
I have kept a 1980s letter from my bank advising me that they were increasing my mortgage interest rate to 24%. At that rate, over 30 years, the total interest is 6.2 times the loan. Add that to three times household income and we get to nine times, which is about what houses cost today. Housing affordability has never changed. House prices rise to whatever people can afford.
Nowadays, interest rates are low and you don’t have to kowtow to the bank manager to get a loan. People can afford to pay more, so they do. And using the bank of Mum and Dad means they can afford to pay yet more.
A: Gosh, disingenuity – meaning slight dishonesty – all over the place! But is it really?
On life expectancy, Stats NZ says boys born in the early 1960s could expect to live to around 79 on average. Now it’s 89. For girls, the change is from 83 to 92. Looks like about 10 years to me.
It’s true that, if we look at the 1980s numbers, the difference is smaller. And your data – about people who make it to 65 as opposed to newborns – is different again.
But it doesn’t really matter. The correspondent’s main point is that New Zealanders are living longer, and that’s indisputable.
On house prices relative to incomes, our graph shows that what I said is correct.
Your example of what happened to you is a sample of one, starting in an extraordinary period. Interest rates were really high in the 1980s.
“Partly it was inflation, and then the new monetary policy regime,” says Simplicity chief economist Shamubeel Eaqub.
But our mortgage rate graph shows rates plummeted soon after.
Surely you benefited from that. Please tell me you didn’t take out a 30-year fixed-rate loan of 24%!
I’m not saying you didn’t go through some tough times. “If you bought a house in 1986, then it was very frightening,” says Eaqub.
“Interest rates were 20%, house prices were three times the average household income. Meaning, if you saved 5% of your income, it would take nearly 10 years to save the household deposit.
“And, initially, interest payments would be around 38% of household income. At those rates and incomes, if all stood still, it would take you around 30 years to repay the mortgage.”
But, says Eaqub, “things didn’t stand still”.
“The debt does not inflate, but inflation played a big part in the 1980s. Initially, interest rates were high, but they fell sharply. Before then, incomes rose. Meaning their ability to pay the original mortgage improved significantly, due to their increased income and lower interest rates over the mortgage term.
“Today, the equation is harder because, at current incomes, if you save 5% for a deposit, it would take you 22 years” to save a deposit.
Compare that 22 years with 10 years in the 80s.
On your conclusion, that housing affordability has never changed, Eaqub says, “His contention is clearly refuted, because we have seen home ownership fall in NZ since 1991. It has been because people cannot afford it.”
Still, there’s a ray of hope for would-be first-home buyers. Eaqub’s numbers show that, in the four years from December 2021, the house price to income ratio plunged from 10.9 to 7.5.
Q: I’ve been contributing to KiwiSaver since it started. Total contributions through until May 2016 were $26,824, with my account’s value then at $42,117.
I’ve been in the same ANZ growth fund since inception when I was 18. Today my KiwiSaver is worth $112,322, including $15,275 in additional contributions since May 2016. Since then, the S&P500 has gone from 2046 to 7520. InvestNow has a fund tracking the S&P500 index, with annual fees of 0.03%. Ignoring returns on my additional contributions and the small annual fee, my fund would be worth $170,054 today. I wonder how ANZ justifies delivering such abysmal returns and charging almost 1% annually. The two funds carry the same risk.
I’ve just switched to InvestNow US500 hedged, but that huge $58,000 difference will become an eye-watering $498,000, assuming 8% average post-tax annual returns until I turn 65.
A: I’ve received other similar letters, including one from a reader who put half his proceeds from selling two rental properties in 2022 into a SuperLife ETF fund, and half into a Fisher fund.
When the Fisher fund did considerably worse than the ETF over a year, he moved the money to a Milford fund.
“That was 10 months ago. It is now worth $300,000 less. You can buy a house in some places for that.
“This tells me active fund managers do not seem to know what they’re doing,” he says.
The two of you are contrasting disappointing performance from some of New Zealand’s biggest active fund managers – Fisher, Milford and ANZ – with the strong performance of passive or index fund managers – a SuperLife ETF for him, and an InvestNow fund for you.
For the benefit of others, active managers choose what to invest in and when. By contrast, index fund managers simply buy all the shares in a market index and sit on them. That’s cheaper, so their fees are lower.
In general, active performance tends to vary widely, with some funds excelling for a while, while others do dismally. But the top performers can be bottom next time around. Meantime, index funds often chug along in the middle. But over time they are a better bet, partly because of their lower fees.
Lately, however, index funds that hold lots of US shares – which include quite a few KiwiSaver funds - have excelled.
This is largely because a small number of companies, mostly in the AI business, have seen massive growth. US share indexes, such as the S&P500, have become more and more dominated by these companies.
So far, that’s been great for funds based on those indexes. Experts worry, though, that AI shares have been overvalued, and may suddenly fall – just as dotcom shares fell in 2000-02.
While our two correspondents are impressed with their index fund’s performance, some would say they should be reducing their risk – at least somewhat.
One way to do this would be to move to a fund based on a global index. It will have somewhat less AI domination and will broaden your exposure to different industries and economies.
Another option is a fund based on an equal-weighted index. For example, the American S&P 500 Equal Weight Index gives all its 500 shares the same weight. AI shares don’t dominate.
And there are modified versions. The S&P/NZX 50 Portfolio Index holds 50 shares with a cap of 5% for any one share. And some funds, such as the Smart NZ Top 50 ETF, have their own 5% cap.
However, you might be content to just hang in your current fund. In any share fund, you should be investing only money that you’ll tie up for at least 10 years. Markets pretty much always recover from any plunge within that time, and go on to grow well.
Note to anyone who has invested shorter-term money in a share fund: I don’t recommend this in any market conditions. Better to move to a medium-risk fund or similar.
There’s another two-part question here, about whether you two have fairly judged your active funds:
While you both say the active funds are growth funds, that can include funds with as little as 63% of their money in growth assets such as shares. The rest is usually in bonds and cash. On average, we would expect somewhat lower returns than in 100% share funds, but also less volatility.
While our first correspondent is looking at long-term results, the second one is not.
In general, longer-term comparisons are fairer. But what if poor one-year performance shows the fund managers have now lost the plot? Or their luck has run out?
After watching past returns for decades, I don’t think it’s wise to take much notice of them, except to rule out funds that consistently perform badly.
I recommend choosing, instead, from funds charging the lowest fees, which are pretty much always index funds.
Q: On your recent Q&A on when to sell Rocket Lab shares, as a former sharebroker, I managed this issue by suggesting clients ask themselves both a financial and psychological question to assess acceptable levels of risk. The questions are:
If the answer to both questions is “Yes”, then continued exposure to the risk of loss is likely to be acceptable.
However, if the answer is “No” to either question, it is likely time to sell some, diversifying elsewhere.
The amount to sell can be determined by asking the same two questions against what the reduced exposure will then be.
In this current crazy geopolitical world, with some sharemarkets at historical highs, it may well be the time to pose these two questions.
A: Thanks for some helpful guidance.
Q: In your article about health insurance in Canvas last weekend, I was surprised that you did not mention the use of a higher excess to help keep premiums manageable.
In early 2021, I increased my excess to $2000, and that reduced the premium considerably. Later that year, and out of the blue, I was diagnosed with stage 4 kidney cancer.
Since then, Southern Cross has paid out a great deal – in one year, some $115,000 – but I still pay just under $5000 a year in premiums. I am 81. All my treatment has been in the private sector. The figure of $115,000 included two operations: removal of a kidney, and a hip replacement.
A: Thank goodness you kept up the insurance.
I did actually mention increasing your excess in that article. But, because of a technical error, some paragraphs were deleted. Here is the correct version of that section of the article:
How can you keep your health insurance but cut your costs?:
Think about what would happen financially if you die. If relatives – although hopefully sad! – would have enough money, you don’t need the insurance any more.
Healthy readers: Now is the time to shop around!
Further tips:
But if you don’t have that option, it’s tempting for a younger person to say, “I hardly ever go to the doc. I don’t need that cover yet.” Don’t. In the long run, it often works out better to start health insurance when you’re young and healthy, and the premiums are low.
You can read the full article online at tinyurl.com/NZHealthInsurance
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a former director of the Financial Markets Authority, the Banking Ombudsman Scheme and Financial Services Complaints Ltd. 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. 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.
Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.