The following is a transcript of our live web interactive with Bernard Hickey Friday Sept.7th as part of Money Week.
Amanda Morrall: Hi folks. We'll be getting our discussion underway in a few minutes. We welcome your questions, and comments. Don't be shy. Also a reminder that we can't give personalised advice. Cheers, Amanda
Bernard Hickey: Fire away Ladies and Gentlemen. I welcome your questions
Amanda Morrall: I'll start You are a big proponent of paying off the mortgage above all else, even saving. But is this approach for everyone. The arguement about also saving as you go along is that once you pay off the mortgage you'll just find something else to spend money on and savings will take a back seat. It's good in theory but does it work?
Bernard Hickey: Cheers Amanda. I reckon anyone with a mortgage should pay that off before they do anything else, including eating or having a holiday. Obviously eating is a good thing, but seriously, debt repayment first and then saving
Amanda Morrall: So then KiwiSaver doesn't make sense to you? Are you in KiwiSaver?
Bernard Hickey: Obviously KiwiSaver makes sense for me simply because of the government kickstart and subsidy. The key is avoiding high fees and ensuring your fund manager is doing a great job producing returns in line or better than the risks they're taking
Bernard Hickey: Obviously, after repaying the mortgage is the key question: where to put your savings
Michael Turner: Does that not mean that all your investment is in a single asset, flying in the face of divisifying?
Bernard Hickey: Michael. Great question. The answer is yes. I live in it. But it is property, and therefore I cannot lose. I used to think that was a silly thing to say, but I'm beginning to wonder. There is a huge tax incentive and a structural ability to leverage (because the banks will lend against easily real easy) that make it difficult to lose when (in Auckland at least) we aren't building any houses and we encourage migration
Amanda Morrall: Just a reminder folks Bernard is expressing his views and is not authorised to give personalised advice so please don't construe this as such. It is opinion. We enjoy a healthy debate.
Phil_Wheeler: So assuming I concentrate only on my mortgage and leave my Kiwisaver contributions at the bare minimum, what adjustments should I make investment/saving-wise once my debt is cleared?
Bernard Hickey: Phil Good question. Big caveat. I'm no financial adviser. As Amanda appointed out with glee. It's all about your appetite for risk and your confidence in the investment class you're looking at. Putting the money in term deposits in the bank means a solid, but low return with no formal government guarantee (although I'd love to see a PM allow a bank to go under (not))
Amanda Morrall: Amanda's view: The best investment you can make is in yourself and your ability to increase your earning capacity. Incorporate that into your plan.
SpikerBrian: Hi, newbi here. I have a 1950's home and only 25% equity in it. There is regular maintenance required - it's due for an external repaint. I assume I go ahead with that type of maintenance, to retain the value. How about potential upgrades, like a new kitchen? Should I finish repaying the mortgage before doing such upgrades?
Bernard Hickey: Spiker. Cheers. If you live in it then other things come into play such as how much comfort/pleasure you want and the likely return if/when you sell it. If I lived in it (and I have lived in a similar sort of do-uppy house) then I'd invest in maintenance and things like insulation and a heat pump. All depends on the serviceability and whether you think the value of the property will go up. And that's all about location and where you think the property market's going
Orlon Petterson: Here is a scenario, already in a super scheme (not kiwisaver) before getting the mortgage. Still worth putting into that, given there is also an employer top up which amounts to a slight "pay increase"?
Bernard Hickey: Orlon. Again, all depends on your personal situation, including your own goals around family/kids/job etc. My instincts are to buy a family home before investing in other assets, although KiwiSaver does have a 'freebie' via the govt kickstart, so it makes sense to stay in that. That's what I do
Craig Simpson: When saving for your retirement should you attempt to invest your funds yourself or trust a fund manager/sharebroker
Bernard Hickey: I'm reluctant to invest funds myself in anything other than the house I live in. At least with the house I live in I have to do the research on where/how safe/structural/local market conditions. And if it all goes pearshaped at least I have a house to live in. But if I was to invest in other assets such as bonds/stocks etc I'd use the lowest cost fund manager that I know and have done some research on. I use the KiwiSaver section of Interest.co.nz to find out more Please blantant plug
lac: Hi, would u consider having a mortgage and paying that for 25years. Or renting (which will save me 1/3 of paying a mortgage) and putting that 1/3 away for 25 years as my retirement. Is property increasing so much in value in the Auckland region that it would appreciate double what its worth today? Or would it be better to just keep saving that 1/3 every year and eventually at retirement just use that as a "huge" deposit. Do you think property will be so out of rage in 25years time?
Bernard Hickey: Iac. Great question. My own view for myself (ie not financial advice for yourself) is it makes sense to borrow to buy a property I live in, simply because I get the benefit of the leveraged, capital gains tax free benefits of any price appreciation. When house prices rise, that always makes more sense, given any savings in term deposits or funds are taxed and can incur funds management costs. Sadly
Bernard Hickey: Iac. Ultimately all this depends on your view on interest rates and property prices in your area. Sadly for everyonelse (but not me! ) property prices in Auckland are rising because we don't build enough houses and we encourage migrants to come and spend their recently printed money here. Also, I think interest rates stay lower for longer
Amanda Morrall: Iac you can also check out our rent or buy charts and guide which shows you where it makes better sense to rent vs buy.
Amanda Morrall: https://www.interest.co.nz/property/rent-or-buy
Amanda Morrall: Bernard, I for one do not believe NZS will be around for me when I retire at the current rates. Are you banking on this being part of your retirement nestegg or are you relying on selling your mansion at 65 to live well into your 90s?
Bernard Hickey: Amanda. You're scaring me. I'm sure that nice Mr Key and his successors will never change NZ Super. But seriously, I haven't given it as much thought as I should have, mainly because the alternative scares me witless. It would mean me essentially downsizing everything right now, repaying all debt ASAP, saving most of my income and hunkering down with many, many tins of baked beans in a cave with Powerdownkiwi
Bernard Hickey: I should give you a serious answer. Some form of NZ Super will probably be around, albeit in (perhaps) meanstested or reduced form.
Amanda Morrall: I rest my case. Invest in yourself and grow your income. Next question please.
jonogramps: Hi, do you consider the current housing market is heading for bubble status? Or is this sort of growth sustainable in the current circumstances?
Bernard Hickey: Jono. A very topical and difficult question that everyone asks themselves and each other every day, particularly in Auckland. On the pro bubble side is the obvious disconnection with incomes, particularly in Auckland. But then again, if interest rates stay flat or fall and we don't build houses and we keep encouraging migration with big capital inflows then I struggle to see it bursting. Auckland is different though. NZ would need a massive recession and unemployment headed north of 10% for a real slump.
@tony: Do you honestly trust the government not to tinker with and pension money. In the UK profits on pension funds suddenly became taxed; a truly massive stealth tax.
Bernard Hickey: Tony. Hmmm. You're asking if we trust our government. In a democracy that means do we trust ourselves, assuming it's a real democracy. You voice a common thought and I don't have a slam dunk response. Ultimately though, govt sponsored pension schemes are vulnerable. Although KiwiSaver funds are not directly controlled by government. They would be hard to claw back.
Austin Fisher: Many households rely 100% on the eventual equity in their home to provide them with wealth at retirement. Residential property seems highly volatile, particularly in Auckland. Do you think things are going to get rocky there? Maybe a KiwiSaver fund running in parallel, investing in less volatile funds makes sense for the nervous?
Bernard Hickey: Austin. Great question. In a way I've avoided having to make the decision by focusing utterly on mortgage repayment for the house I live in. I haven't fortunate enough or clever enough to have paid it off or have surplus to invest elsewhere. I still think that's the baseline. After that it makes sense to diversify.
Bernard Hickey: Austin. I have to say, though, I'm jaundiced and nervous about stock markets given their structural decline in the last decade. Bonds way outperformed for a long, long time, contrary to accepted wisdom.
lac: In your personal opionion, how much of how you currently save/pay for mortgage/invest in rental property would change if tomorrow Captial Gain Taxes were intoduced? Do you think if CGT was intoduced there would be a large number of properties on the market as New Zealanders will stop wanting to invest in property? Thanks for the link Amanda.
Bernard Hickey: Iac. So the question is: would a CGT change my behaviour? Not for investment/debt repayment in my own house. But it might make a difference for investments in rental or other property. The trouble is the structural incentive to leverage up given the banks' keenness to lend against property remains. As does the lack of confidence in other asset classes.
MortgageBelt: How a bout a bob each way? Start KS for a couple years then take a holiday & repay mortgage faster. Then go back to KS every year or so?
Bernard Hickey: Iac. For those questioning my argument about structural underperformance of stocks vs bonds over recent years. Check out this San Fran Fed paper on stock market valuations in recent years.
Bernard Hickey: "Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades."
Bernard Hickey: http://www.frbsf.org/publications/economics/letter/2011/el2011-26.
Bernard Hickey: Mortgage belt: A lot of young savers are using KiwiSaver to build up their deposits. Then they withdraw their money with the government's deposit subsidy. Details are here. http://www.kiwisaver.govt.nz/new/benefits/home-sub/
Bernard Hickey: Ultimately though, when using your own money for debt repayment, the effective returns are much greater than putting in any extra into KiwiSaver, beyond the minimum to keep getting the subsidy.
Ashok Parbhu: Hi Bernard, can you comment on the issue of kiwisaver funds increasing in size, there demand for shares will drive up share prices, without the underlining fundamentals.
Bernard Hickey: Ashok. Great question. There's a risk if no new shares were added to the market and it was too illiquid and small to cope with surges of fresh funds that the 'weight of money' would push up valuations. I suspect that's one reason for the SOE floats. Eventually though, you'd hope the extra shares would follow the extra money being raised.
rhys.lewis: If there is no government super, the it would be necessary to put away a sum similar to the investment of paying off a house, but in the short time that remains after getting mortgage free - how is that possible?
Bernard Hickey: Rhys. That's why I try and avoid spending money and do whatever I can to earn as much as possible. My other option to marrry a very, very rich woman. Or bat for the other side and find myself a beautiful and rich man. Luckily for me my wife is both beautiful and a moderately good income earner.
Ralph: If you believed high inflation is our medium term future, do you think it is worth keeping some mortgage that will get inflated away - or - will interest rates kill that gain?
Bernard Hickey: Ralph. Great question. You are getting to the heart of all investment theory and the possible solution to the Global Financial Crisis. Many believe the world's central banks and governments are pursuing a strategy of default by stealth by repressing interest rates using money printing and official rate cuts to ensure they stay below inflation rates.
Bernard Hickey: The key question is: will be have inflation or deflation? Will the money printing work to lift inflation above interest rates? So far it hasn't worked, in part because the sheer weight of the household deleveraging is pressing down on GDP growth and inflation rates
Bernard Hickey: I look to Japan for a sneak preview of whether the financial repression will work in an era of ageing workforces and debt deleveraging after a big asset bubble bursts. Japan's interest rates have been near 0% since the mid 1990s, yet it has still suffered deflation for long periods.
Chris_J: Bernard, if you are careful with money do you think it is ever advisable to pay more into a Kiwisaver account than the minimum required to receive the government top-up? If you are in a position to save extra, having a scheme separate from Kiwisaver would offer more freedom to withdraw or use funds in case of emergency, wouldn't it?
Bernard Hickey: Chris_J. Hello. I can see your logic. The minimum makes sense. However, if your KiwiSaver has a low performance fee and is performing well, it makes just as much sense to put your 'extra' in there. Assuming of course you are saving for retirement, and not just for a holiday in your 50s.
Amanda Morrall: Bernard has time for a couple more questions.
@tony: Bernard, you propose Bonds; but they are only safe if they will be paid back and in this economic climate that may be wishful thinking.
Bernard Hickey: Tony. Interesting debate on bonds vs stocks. Government bonds are dependent on the ability of governmments to impose taxes on residents. They're quite good at that.
Bernard Hickey: But ultimately, yes, there is a risk that governments default. We saw that in Greece. The question is: what is riskier? A government bond? A corporate bonds? Equity in a company? Savings in the bank? Or owning a house? All have different risk profiles. I'm saying bonds have outperformed stocks in recent years for structural reasons to do with ageing populations
jonogramps: Where do you suggest this building of housing take place? Do you believe there is enough land that could be released to reduce such a heavy demand for housing?
Bernard Hickey: Jono. Many thanks. Slightly off topic, but I agree we need to build a shed load more houses in Auckland. I'd prefer closer to the CBD and brownfields to greenfields on the fringes, particularly given we're likely to have US$200/barrel oil within a few years.
Bernard Hickey: Many thanks to all. Hope that was useful. Cheers.
Bernard Hickey: Question: Is this useful to do on a regular basis? Maybe a Friday afternoon once a month?
Amanda Morrall: Great idea Bernard. The rest of us will take the arvo off. Thanks for doing this. We'd love to get you back in the hotseat.
Amanda Morrall: Thanks everyone for your great questions and participation. Your feedback is welcomed. You can write into the comment stream below or drop us an email: Bernard.firstname.lastname@example.org or email@example.com Until next time....