Bernard Hickey on safe investments, KiwiSaver, good returns, property bubbles and getting old.

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 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:
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:

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.
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: or Until next time....

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I agree with your point but don't forget about the opportunity cost of having to rent a house if you don't own one as well.

Only if you get a mortgage to buy it. If you pay cash, you get tax free capital gains on it (or losses when the property bubble bursts and you buy at the top of the bubble).
Aucklands house prices are maddness, and can see a bit of a car crash happening in a  few years when interest rates rise.

I dont think interest rates are going anywhere for a decade....but in terms of ability to pay then yes there will be a squeeze.

And as a counter argument to Bernard's replies to questions , the Gummster would recommend :
Not paying off your house mortgage ! ...... over time , inflation will erode the cost of the payments , leaving you giving Monopoly Money to the poor old bank !
Bonds have kept pace with sharemarkets over the last decade ...... a rare performance ...... wanna bet that will continue ? ....... bonds have never outperformed stockmarkets over any 20 year period ....... None !
KiwiSaver ? ...... avoid it 'like the plague ..... current & future governments can ( and probably will ) manipulate it to bolster their funds to bribe votes through their unaffordable welfare packages ......
Don't trust financial industry " experts " with your savings ....... learn the hard way , to invest successfully for yourself . Take personal responsibliity for your future . Cut out the unnecessary ticket clippers .......if the investments you're contemplating look so complicated that you think you need expert help , run the hell away from them .....good  investing ain't rocket science .

Q+A with did I miss that ..? I have so many questions, and yet I'm not sure I want answers.
Me ...whats it like on the dark side...... Big B, well it's a little bit dark.
Me....can you make money selling Gloom......... Big B well gloom sells itself really. so....?............. Big B well your here are you not..?and we sell advertising space to people who are not here, but know you are....sort of.
Me.... Wow..! does it help to know about economics...? Big B..well it hasn't helped Bernake any...(chortle... titter), but erm yes ,yes it certainly helps to have a grounding in economics.
Me.....Holy smokes, awsome, ..what did you make of Allan Bollards tenure at the RBNZ..?
Amanda...sorry, I'll have to stop you there as this is all we have time for today.
Join us next week when we'll be talking to Alexi Tarantski on Russian affairs and loose cannons. Cheerio!

" um well gloom sells itself  really " ......Nailed the dark heart of , Count !
........ you really are a scally-wag ........ bloody funny too !

Be well GBH...enjoy your evening, .....and your not too shabby on the smiles yourself there my good man .
 Talk soon. 

Yes, because we've suffered from so many deflation crises ... (that is sarcasm if you weren't sure).
Deflation is so easily and cheaply cured with paper money that it will never be a problem.

We have for 80 years avoided deflation like the plague. Right now however the debt overhang is bigger than the Great Depression. You and fools like you are running around buying up property thinking its the economy.....and its "good" business, its neither and the debt is staggering....and cant be paid back, so it will topple and be liquidated.

Ah...     No
Debt is easily paid back if tomorrow's dollars are worth a quarter of today's.
Inflation together with negative real interest rates are the only solution to the problem you describe.

I'm not convinced that central banks can easily counter a strong deleveraging by the private sector. Japan has been trying for twenty years and asset prices are now well below the 1989 peak. This despite a massive central bank balance sheet and government debt rising to over 200%GDP. Sure they have hads demographic issues but not fundamentaly differant from the situation the entire developed world is now in.
In many ways we have already had our inflation but with housing removed from the equation and lower prices due to technology and a massive surge in the workforce due to globalisation the price rises have been modest. Forty years of the money supply rising at double the gain in nominal GDP and real assets is inflation as defined by Friedman.
The price inflation that developed in the 70's was possible due to very low exsisting private sector debt, rising demographics and the fateful decision by Nixon to remove the dollar link to gold. The reaction of the oil producers to this move was the trigger. The rise in prices that followed would not have occured if the private sector was overleveraged and still had strong pricing power and the oil producers were able to collude to restrict supply, add in a rising demographic tailwind (boomers + divorce) leeding to a doubling in new household formation. Also the rising welfare safety net meant households could forget about saving and dive into debt. High and rising government spending sealed the deal as inflation ripped into the high teens.
Do any of these things apply now? Weak unions, super low priced labour competition, high exsisting debt, welfare support being wound back, an aging demographic and overcapacity almost everywhere. It all points to weak inflation if not outright deflation.
At the moment we are walking a tight rope with the forces of inflation and deflation more or less in balance.
However, the central banks could be desperate enough, after years of low growth to go the nuclear option - full monty money printing. God help us if inflation does take hold and everyone rushes to the other side of the boat. Capital is destoyed, pension funds are worthless, contracts meaningless and the entire middle class ruined.
Be careful what you wish for.

By most metrics we have a 2 x bubble.
So the drop is 50%+ not 10 or 20% IMHO.

Good luck with that, IMHO.

Providing one keeps paying their loan I doubt they will call you and everyone else up.
In the early 1990 when house prices dropped loan were only called in if payments were no made.
Why would a bank want to crystalise a potential loss and who are they going to sell the house to?

Which is the point.....

"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."
Yes, provided you have the ability to go, without doubt.
The two dangers are
1) really the likes of WINZ throwing ppl into training without the capability to take it on and use it. 
2) Level or amount of debt to do it.
In a deflation scenario neither are doable with significant sums, which of course will hit NZ in years to come.

Why do you assume people go to WINZ for direction ? .....
.... most folk I know are self motivated , and seek studies to suit themselves , without consulting a government bureaucracy ......
And why does debt come into it ?
.... just go to a library ..... the books are free for you to read , and to learn from .....

Also if you want to re-train and need a loan doing it via WINZ is a lot easier.
What I have seen is a number of ppl put on courses by WINZ who dont have the intelect to do the course or the job afterwards.
but then WINZ or the "educator" dont care, they get the KPIs as mist says and money....
Books these days are too out of date, and libraries have to few unless its a Uni lbrary.  The good thing about the library is the free internet, lots of far more modern work there....
GBH, really your idea you can self-teach is like your thought process, limited at best. I actually tried that, learning IT and got nowhere in getting a job. So I got a small course done which I passed and took the first crap IT job that I could find...I had that 7 months and then far better....and so it has progressed.

Aha , you did one of the " Computing For Free " courses that the Polytech runs ?
....... " free " being the operative word ....

Free as in open source.....

Yes , " free " ...... no WINZ , no debt ........... FREE ! ........ an education , extra skills for free ...

Thank you Gummy. WINZ and what not was not what I was thinking at all when I made that comment.
Library, yes, leveraging off your connections, working hard(er) and thinking outside the box. Your other comments are valued too. Cheers

One of the biggest mistakes NZ made was introducing the studebnt loan schme. It mean that once people graduated they did their OE, and then there was no real point in coming back to NZ with such a big debt over their head, and where they can earn a lot more to pay it off quicker. Almost all my frends now live overseas. It is almost as though there is a bit of a lost generation of educated people in NZ because of this.

Yes....the lofty  idea was to educate NZers, sadly its done too well, they have learned its time to go and never come back.
"It is almost as though there is a bit of a lost generation of educated people TO NZ because of this."
I would suggest.

the best investment in nz at the moment is your own home.
it provides shelter from the weather,shelter from roaming gangs of ferals and best of all you can make a tax free profit when you sell it.

I am not so sure about that.  If people rely on it as their only source of wealth, it has become  a risky game IMO.    Great while prices go up 10% p.a. in Auckland but there is, surely, going to be a painful correction at some point.   All the same pre-2008  things seem to be  happening again, but without the prospect of growth (apart from Chch rebuilding).
All things equal, I wouldn't put my life savings in residential property.  Some - sure - but not all.

A very large correction.....problem is ppl look at the past and project it forward into [their] future....doesnt work like that and a lot of ppl are going to learn that vary hard lesson.
After the correction though property could well be a good bet, I cant think of a better one off hand. As Mist42nz says ppl have to live somewhere, you just have to buy cheap enough to make sure the rent covers costs and gives you an income...

mist42nz - You're right - perhaps I should have responded to the comment above your one.   I was responding to the notion that residential property is a reliable investment .

A lot of Bernard’s views on the value of property are comical. I realize these are his personal opinions, but some of these escape from his mouth like smelly gas from a geriatric! Spending a large amount on a vacation can take a backseat for awhile if you’ve put your hard earned money into owning your own home. Being a homeowner means I have the security of a roof over my head and don’t have to scramble to make the rent, should I find myself in such an unfortunate earning situation. I wouldn’t think of it as an investment that I want to let go of in the future and hope for a decent return (and most likely not really going to happen). I would learn how to maintain my property myself and only call in a professional if it were absolutely necessary. I would purchase fixtures for my home that didn’t require special parts and are simple to upkeep. Sure, these things take a lot of thought and use up time that you may not have, but an investment is just that. Learn to be your own electrician, gardener, plumber, carpenter, decorator, consultant – wherever you can take care of your investment yourself. You’ll save money for when you really need the experts to come in.