By Martin Hawes
I often speak to property investment groups. At question-time, there is almost always someone who needs to tell me why KiwiSaver is a waste of space - why they haven’t joined and never will
They are usually self-employed, quite free-spirited and very proud of what they have achieved: most have done very well with their properties. They think no other investment can beat property and are happy to keep all their eggs in that basket.
There’s nothing in KiwiSaver for me, they say.
But are they right?
For people in employment, the KiwiSaver question is a no-brainer. Their employer matches contributions up to 3% of salary and that’s a deal that can’t be beat. Over a long period of time, these contributions combined with free money on offer from the Government and the employee’s own deposits grow to a very tidy nest egg.
But what about the property investors many of whom are self-employed; should they join too? I get why the self-employed would think twice about KiwiSaver. My advice is, think twice and join anyway.
Although there are not the same subsidies that wage and salary earners get, there are enough sure things about KiwiSaver to make anyone age 18 to 65 want in.
The first benefit is a subsidy from Government. This Government contribution is 50 cents for every dollar you contribute up to a maximum of $520. That means that if a self-employed person aged 18 to 65 pays $1040 p.a. into their account, the Government chips in $520 each year.
This is a great deal – in effect, it is a 50% investment return on day one. Even property investors can’t beat that. Property may have performed well as an investment in recent years but nothing like an immediate increase of 50%.
OK, say some property investors, I get that there is a good return on day one – but the numbers are small: we are only talking about $520 per anum.
Yes, that’s true – but $520 each year is still a very good payback for five minutes filling in a form and transferring some money. If you found $520 in cash lying around, would you not bother to pick it up?
After all, you are entitled to this money and surely it is worth stooping to collect it.
In any event, although the numbers may seem small to some property investors, the account will grow and should end up a good amount.
A second advantage for property investors is that KiwiSaver plays to one of the key principles of investment: diversification. Most property investors I know are so wedded to their properties that they own little or nothing else.
This means their future wealth hangs on just one asset type. The New Zealand property market has largely done well over the last few decades but that is never a guarantee that the good times will continue uninterrupted. It’s risky.
Perhaps most important for many of these people is that KiwiSaver allows diversification outside of New Zealand. New Zealand is a great place to live but, by global standards, its economy is small and quite brittle. Any number of things - natural disaster, poor political/economic decisions, biosecurity breach - could severely impact our economy and standard of living.
The easiest way to reduce these risks is by having some investments offshore and this is simple to do through KiwiSaver.
Finally, property investors – like all Kiwis – need to learn about all types of investment. Learning is best done by doing – opening a KiwiSaver account, investing some money and watching what the fund managers do with it ought to make a good lesson.
By all means keep investing in property. But even if you call yourself a property investor, don’t dismiss the value of other investments. KiwiSaver subsidies – even the reduced range of subsidies for the self-employed – could still make KiwiSaver the most profitable thing you do.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr. He is an Authorised Financial Adviser. More deatils here: www.martinhawes.com. This article is general in nature and not personalised advice.
90 Comments
"Most property investors I know are so wedded to their properties that they own little or nothing else. This means their future wealth hangs on just one asset type. The New Zealand property market has largely done well over the last few decades but that is never a guarantee that the good times will continue uninterrupted. It’s risky"
Very true. This is an excellent read Martin!
Generally in our society (Japan is a little special) people have no choice other than to put all their eggs in the housing basket. KiwiSaver has mitigated this somewhat although that was countered by allowing FHBs to raid their accounts. This tacitly supports the theory that this is indeed the best basket.
so so wrong, you mean uneducated or lacking knowledge, there are plenty of easy ways for a retail investors either to own shares outright or to purchase into a listed fund with exposure to many shares.
most people are too lazy or to conservative to find other investments other than rental property or term deposit
they think both these options are 100% risk free until a downturn then they find out otherwise
that coupled with incentives from the banks and our government (slowly being taken away) to take on debt and buy rental properties is the major reason property is favoured over every other type of investment.
I've been renting for 10 years while I built a business. It has been a struggle from a capital perspective because banks dont see what I have (stock/sales/income) as a loan worthy asset (too much risk they scream, but wheres your house they yell), so dont like loaning me money. Fortunately I have some very supportive friends who have invested in it, they have had an average of 15% a year return and have seen the value of their shareholding grow at least 3 fold in that time. There is more than one way to skin a cat. I feel like I have built a future income stream, albeit at the mercy of the local economy. We work hard at mitigating risk and attempting to future proof what we have.
Not at all. The envy of all. Are the most wealthy.
Do you think the most wealthy people in society got there by waiting for their family home to appreciate & owning rental properties? Who could be bothered with that!
No, they have the skills to make money in other ways. Growing and investing in businesses. Owning a nice house is a bi-product of that success and their age.
The problem with democracy (for those who would live off the serfs) is that the serfs get to vote, and when things tip too far in one direction they do things such as vote in Land Value Taxes. Like early in NZ's history, the land taxes that broke up land banks and gave average Kiwis the chance to own land.
Of course, decades pass and people forget how they got where they are...
RP - That's a huge assumption on your part, it may apply to the property investors you know but its just a generalisation.
In my circle property is a corner stone but other investments are very much in the mix such as forestry, tourism, mixed porfolio's through the likes of Milford Management, horticulture and aged care investments. Also property held is for cashflow and overall capital appreciation.
And yes return on investment as far as cashflow goes is low at 3% but cashflow is cashflow with obvious capital appreciation over time but then I have a LVR of 93%.
Clearly property investment is some how toxic to you ( jealous perhaps of gains you missed ? ) but given the great return many have experienced over decades why would anyone want to sellout their property portfolio totally ?
There is no guarantee in anything, but I would trust property way more than Term Deposits in a major downturn when banks have the authority to take your TD to save themselves, Cyprus and Iceland come to mind in the last few years !
Conversely I now many older people even family members that are totally wedded to TD's and that's not healthy either. If you have money then it needs to be spread around several different types of investment.
Martin
It wasn’t long ago you were saying how many new Landcruisers you were seeing on the ski slopes & telling us how they must be all bought with house equity loans
You know why housing in Auckland has been a preferred investment Every accountant I had instructed me to borrow and buy property Every lawyer I had was more interested in my property portfolio than shares and the taxation system favoured property over shares as did the banking system because you could easily borrow on property purchases rather than shares
I do wonder about that share portfolio if it sits like a duck waiting for GFC2 Martin
This will be the biggest debt bubble bust in the history of the world
At least your houses will remain standing
Totally agree with you RP.
" , , there is almost always someone who needs to tell me why KiwiSaver is a waste of space - why they haven’t joined and never will . . "
I would like to know their current yield return on the value of their property(ies) - not historically what they paid for them but their current value. Interest.co calculations show yields at best about 4% with some risk of a correction to the property market over the next three or four years and consequently a capital loss of their current assets' value without even considering the workload of property investment and increasing costs and risks to meet new government requirements.
Property investors have been blinded by significant capital gains over the past 10 years (with decreasing yields on their capital value). They are also likely to point to the current volatility of the agressive/growth KiwSaver accounts to confirm their entrenched view.
The fluctuations in property and the share market is a great illustration of the need to spread risk.
Like you RP, I exited the property market a couple of years ago for a variety of personal factors (freedom) but the outlook and decreasing yields compared to KiwiSaver investment returns on that value cemented that decision.
Although retired (post 65) KiwiSaver is a excellent vehicle for exposure to the share market and compared to directly investing in selected shares (use the fund managers experience and knowledge) or similar managed funds having no entry or exit fee and lower management fees compared to similar managed funds.
Your statement is wrong Laminar.
Read the last sentence of the following from IRD website:
"Nearly everyone buying a property will sell it at some stage. Most people will hope that their property will gain in value, and we know that an increase in value is common. However, this alone isn't enough for any profits to be taxed. In most cases you don't have to pay tax on the eventual sale of your family home. If you bought a property as a long-term rental, then you may not have to pay tax on the sale either."
https://www.ird.govt.nz/property/property-selling/selling-property.html
"Common misconception
Q: If I only sell one property or hold a property for 10 years before I sell, I won't have to pay tax.
A: What the law says: Wrong on both counts. ..... It's a popular misconception that holding a property for 10 years means you avoid paying tax."
(From that IRD article.
The days of 'the IRD have to prove I didn't mean to hold it as a long-term investment so I don't have to pay tax', have quietly changed to 'The Landlord now has to prove to the IRD that they weren't buying it as a capital gains vehicle". The onus, I believe, has been flipped 180* NB: Any property where GST rebates have been claimed are looked at particularly carefully!)
Any secondary property that was bought negatively geared from the word GO ( most properties in the last 10 years? and many before that) had better have a very, VERY good accountant. The IRD will want an iron-clad reason to buy an otherwise loss leading asset if it wasn't for capital gains purposes, to offset ongoing cash flow losses before sale, and saying that 'it was hoped to become cashflow positive over time' is unlikely to cut it.
Hi bw
You seem to be a little upset (possibly bitter?) that landlords MAY be able to sell a property without necessarily having to pay tax on capital gains. Your view seems a little more entrenched than this view from the IRD:
"There may be a number of reasons you decide to sell a rental property sooner than you thought. Or you may decide it's time to sell your entire portfolio of rental properties.
In both cases it doesn't mean you'll have to pay tax on any profit from the sales. It comes back to your original intentions when you bought the properties, if you have a regular pattern of buying and selling or you bought and sold within two years.
Everyone's case is different."
Note the last sentence that "Everyone's case is different"; it is not a broad brush situation that you paint in your posting.
The key is that it is the intent that you had at the time you bought the property.
Despite your assertion that anyone negatively geared will be taxed is not necessarily so.
One could have purchased a property negatively geared - as has been common practice for the past 20 years - but with the intent to be a long term landlord and that the property would be come profitable in the future as one paid the mortgage down. That has been my experience over the past 20 years, and that of a number of other property investors I know.
A consideration is the recent introduction of the bright-line test and the more recent extension of that to five years.
However, for landlords purchasing a property and intending to hold it longer than the 5 year bright line test there are probably two key questions: What was your intent when purchasing the property and how can you prove that? Twenty years ago - prior to the brightline tests and when the 10 year ownership as a common understanding - my accountant advised me that when applying for a mortgage (yes, to buy it negatively geared) was to present to the bank a "business plan" in support of my application not only showing immediate returns but how in the long term it would become profitable due to paying down the principal and projected rent increases and to mention that it was intended as a proposed retirement plan. I was also told to get the bank to date stamp this and keep a copy.
While I do not claim that this is necessarily rock-solid, it does provide support on my intent and provided I carried that out - although there may be reason for selling - I don't see it necessarily meaning that any capital gain is liable to tax. I suggest that IRD would also be looking at my reason for selling.
I don't dispute that much weight would be given to this course of action if the property investor had a short term interest-only mortgage.
But again; as IRD says - "everyone's case is different", so there is not a broad-brush generalized statement such as yours that one can make and Laminar's statement is clearly erroneous.
How many Landlord/speculators would ring the IRD and clarify their obligations after sale??? This is why the IRD has an investigations unit. There is no time frame for retrospective investigations and their resulting assessments. IRD's sources for gathering information are quite vast now (data matching - Bank Manager).
It's not worth it when a relative or jealous mate at the pub can easily dob you in. While you're enjoying the spoils in denial, penalties and interest could be accruing on top of the principal amount owed.
If selling housing investments through hardship or other changes in circumstances, I guess that's different.
"CGT voluntary compliance appeared to be getting worse. It estimated that in the 2017 tax year as many as 2,625 sales that may be subject to the test had yet to file a return"
https://www.newsroom.co.nz/2018/08/08/184105/property-investors-ignorin…
Speculators are living in denial.
...
On the contrary. I am a property owner myself and have been in 4 countries for several decades, and I reckon that if I make a Capital Gain on any property I sell; ANY, including the 'family home' I should have to pay (in effect) income tax on that gain. Income is income is income to me, no matter how I generate it.
It's actually to my advantage to maintain the status quo.
But here's something that's become apparent to me in my property dealings in New Zealand since I bought my first holiday home in Queenstown ("Hi, Martin!) some years back - the vendors all LIE about the original intentions of their purchase for taxation minimisation. In all cases, whether it's been a small farm; a 'lifestyle block'; a residential block or a second hand house, The Accountant has added words to the contract along the lines of "The intention for the ownership of this property having failed...." etc ( "Honestly, we were going to relocate to Christchurch from Auckland and build on this vacant block, and we just happen to own 4 so we could pick the exact one to build our family home on, but we've decided to stay in Auckland, so - no tax on the fortuitous gain!"
Now that could be 'just me' - but from what I see and what I'm told - I doubt it!
Hi bw
Re your comments regarding IRD seeking instances through means such as data matching is not necessarily required by IRD as on sale/transfer of a property your lawyer now needs to complete a return to IRD. So it appears IRD are monitoring each sale and no doubt making their judgement on a case by case basis.
I trust that we haven't lost sight of Martin's article; there is good reason for property investors to spread their investments and KiwiSaver has many advantages pre and post retirement. Personally, given the situation currently in the property market, I would be looking at moving some capital to other investment vehicles including KS. This could even include some into KS growth funds and exposure to the sharemarket (although I would be looking at the timing of this considering the volatile nature of the market at the moment).
Oh, given your propensity to pay IRD when possibly not required, will be rewarded in the afterlife :)
We're now witnessing many property investors boasting atop a tsunami of unrealized gains. As a group who regard themselves as Property Oracles, they sure do place a lot of faith in mankind's greatest pyramid. When realization begins, what happens to the unbanked gains? Like visions of an easy well funded retirement, they'll vanish.
Its reset time.
Spent on imported consumer goods most likely. So borrowed money *whoosh* straight out the country again based on the landed cost of goods, then repaid with interest to one of the big Australian 4 banks. For what purpose? Improving quality of life for those fortunate enough to already own property, i.e. previous generations.
The reset would be getting back to a point where it is a little more expensive to buy a house than it is to rent one.
Let's say an entry level house in West Auckland is 700k. The buyer has a 20% deposit which is 140k. That is a mortgage of 560k. which is about $425 a week in interest currently. The same house costs $500 to rent which would be like $440 to the person who had 140k in a term deposit because they would net $60 in interest.
But ownership is more preferable generally as it offers security of tenure and things tend to get better over time with rising wages while rents increase over time. The house also keeps up with inflation.
At these prices and interest rates it seems better to buy than rent so we currently have a situation where a reset doesn't really have any pressing impetus.
I just did a TradeMe search of houses in West Auckland and there are many between 580-650k.
Of course it does depend on interest rates. The great reset wouldn't happen unless there is a significant rise in interest rates
Zachary, you should know better than to try excluding rates, maintenance and insurance when pressing your point. As you know, in depth analysis has already been done for renting vs owning. The winner is certainly renting ; https://www.interest.co.nz/property/rent-or-buy.
Even absent a Global shock, banks will soon further adjust the goalposts in unison with Australian parents. Property prices are going to fall as the days of responsible lending practices return. The key question is, will it all create a negative price loop. The tide IS going out.
Indeed, Zachary.
The track-record of property over generations of NZ families makes it very attractive to owners/investors. The impact of globalisation continues adding to the demand for (and appeal of) property here. Further, structural factors will go on underpinning the viability of property - and certainly over the medium/long term.
In any case, there's a certain satisfaction to be gained from ownership of real/physical assets (as opposed to paper assets) over and above capital growth and yield. Intangible benefits often tend to be ignored - but for many people they are important. (Just because they are difficult to measure/value doesn't mean they should be dismissed.)
For fun (and perhaps a $ return), try buying some good art, antiques, precious metals/stones, collectable wine/scotch - or whatever takes your fancy. It can make a great hobby/interest. (I firmly believe investment should have an element of enjoyment.)
KiwiSaver is a good bet too - provided any weakening of share prices (and/or fund mismanagement) doesn't wreak havoc. Indeed, employer subsidies are an important part of the KiwiSaver equation and for many people these subsidies serve as adequate compensation for risk........
Not too much enthusiasm for finance companies - given the carnage of a few years back.
Banks remain a good holding pen for cash. But term deposit interest rates are discouraging..... If rates fall lower or even negative (the latter being unlikely but not impossible) an "interesting" situation for depositors will arise.
Enjoy life!
TTP
Agent TTP you comment "The impact of globalisation continues adding to the demand for (and appeal of) property here" Now, back to reality. With the removal of the already fading influence of the marginal buyer, we are no less exposed to the chills that come with globalization. As a globalized economy, you've yet to produce sound evidence explaining how NZ will be insulated from future missteps (debt hangovers) of our biggest trading partners.
Show us your facts.
Hi Crash-Crusader,
Globalisation has benefited New Zealand (adding to its wealth/prosperity and the wellbeing of its people) at least since the first shipment of frozen meat to Britain in 1882 - and possibly earlier.
I doubt that's about to change - even if you want it to........
TTP
Agent TTP, I never suggested globalization hadn't benefited NZ. It most certainly has. But sadly, it brings with it some serious contagions. In such times, while many are chucking their toys, those that are cashed up continue living largely unhindered. Why do I feel you're always leaving it to others to spoon feed vital knowledge?
Agent TTP, more and more disillusioned vendors are wising up that the REINZ reported Auckland overall median is flawed. Like you, they are also leaking credibility.
Did you know that straight after the FBB introduction, Barfoots clearance rates plunged into the 20 percentile. Go figure?
Globalization hasn’t hurt NZ or anywhere else
It’s the lack of government policies to control immigration that’s hurt societies from UK to NZ
As forvAustralia they’ve just gone immigrant crazy They have had incompetent leadership hence so many PMs lately it’s like swapping deck chairs on titanic
Housing Sold
Shares Sold
Wait for markets
Be cashed up
However I see people losing far more invested in shares coming down the line
You can’t live in your share portfolio & when you get in trouble it’s easier to refinance property Try refinancing your share portfolio ? Good luck with that
Kiwi Saver is great for many people as it is a passive investment for them that doesn’t require them to do anything.
Property investment done correctly will enable you to quit your day job 20 years early and give you a lifestyle that every working person would desire.
It is great that not everyone is into property investment as investors would not have tenants!
Obviously Personally haven’t got a Kiwi Saver Account and don’t need one, as property has made us multi millionaires many times over.
We know property investment done well can make people wealthy.
While property can make an individual wealthy it makes the underlying community poorer. The tragedy is that property investors are too stupid to understand this or too callous to care. They will even throw their own kids under the bus for their little bit of selfish wealth effect.
Gordon and Scarfie believe you are responsible for all the world's children.
I think this is an aspect of globalsim that people haven't thought deeply enough about. Globalism isn't about plundering the resources of other countries and stealing their best people and getting them to pay your pension. Globalsim is about caring and sharing with the whole world.
Scarfie, firstly how does it make the community poorer?
We provide a roof over over the heads of people that do not want to own a home!
Secondly, what a stupid thing to say about throwing kids under a bus?
What on earth does that mean in regards to property investment.
Quite the opposite I would say, we are protecting our kids future!!
Home ownership rates have been in decline. This is obviously not a generational choice. Clearly landlords are housing not jut people who do not want to own a home but also people who do want to own their own home therefore depriving them of ownership. Property investors do this by taking out loans/ creating new money and allocating to an asset class that is required for survival but already exists, inflating that asset price causing more people of the community to rent. Essentially we have traded the life blood of youth for boomer paper wealth and banker profits. Your kids maybe better off but in exchange for another child's future which will be poorer, but we will see what the future holds.
there day of reckoning will come there no more asian investors to off load there dumps to new buyers will migrate to kiwibuild .the greedy baby boomers wont be able to off load there assets at anywhere near the price they want simple because the next generation hasn't
got the money to buy them boom! crash
Agent TTP, I guess you must have met the stringent criteria for a Kiwisaver hardship withdrawal. Its equally sad that first time buyers are also withdrawing funds to buy overpriced homes at a time it's cheaper to rent. This disparity in costs is well documented.
It's not wise to refer to Kiwisaver as "spare cash". Best you forget it's there.
and on the downside plotical parties can change the terms and conditions without your input
ie reducing the start amount and taxing it, allowing the funds to be tapped to buy a house as national did.
unless you can get all the parties to agree it will be changed over the time of your investment again and again depending on whos in power.
in saying that it is free money at the moment and many of us that joined early got a % pay rise before companies figured out what was happening
Kiwisaver depends on many things, mainly how old you were when it was introduced. For me already in my 40's the money was better off going against my mortgage, it was a guaranteed return in reducing the term of the mortgage. If I was just leaving school then maybe I would look at it but I also have a problem with someone else in control of my money. if you had the discipline of saving that amount in an interest paying account and forgetting you had it, the result by the time you retired would still be a huge return.
Have a lot of disabled clients whose retirement is actually in their 40s, they would be lucky to see 65, and live in close to destitution conditions already. They cannot access their investments for needed medical equipment & specialist access to survive and also have difficulty meeting the conditions to withdraw it. When they retire the money will still be locked away and they will suffer not being able to afford the medical needs they have then. Degenerative diseases are a bugger and no disabled person can trust an investment that does not account for basic medical needs to live day to day. One needed to just be able to arrange transport to work but because they could not afford specialised transport they could not get to their job any more. Bit of the downside when the scheme only banks on people lucky enough to have the health and physical ability up to 65 years of age.
Did you even read the article? It explains why you are wrong. Guaranteed 150% return on 1st $1000 (govt plus employer matching) is much better than you’ll ever get paying down the mortgage. 100% return with employer matching up to 3% of salary also beats return from paying down the mortgage. And that’s not even considering the investment returns you get from the money.
Here is where the comparison actually exists, what utility & benefits does one investment provide over another scheme when the initial 1043 is already exhausted. Many people cannot see past the initial government contribution, but often better utility and investment performance can be achieved elsewhere as well, with lower fees. Implicitly trusting providers even when simple backend faults can have significant effects (such as denying people their rightful government contribution or hindering fund management) makes kiwisaver far more risky as the assumption of safety & best performance is assumed, along with betting on absolute perfect luck in life, (something many do not have the luxury of). Better to educate on due diligence and judgement. Sure take the government bonus but really think: what past that makes the scheme preferential even to others offered by the same provider. For many people having no access and doubtful restoration of access to their own invested funds is normally a huge detriment.
Hi pacifica,
Thank you. You make an extremely worthwhile point.
We can only hope that changes are made to the regulations so that people with debilitating conditions can access their funds when genuinely required.
I'm certainly with you on this one. Any of us could find ourselves disabled and in need.
TTP
Indeed, thank you. It is a bit hard in the sessions even with the gallows humour many in that position have. The whole if they don't laugh they would be crying. Many are heavily reliant on charity for necessary medical access... and often many cannot even get that.
Martin tries to make a point by writing a whole article based on one point. assumption based on a Kiwi saver return on investment. Well Martin that will take you 45 years if you are starting out all the while going through different aspects of your career. You may not be employed throughout your career, things are changing martin in the workplace. Kiwi saver is good I admit (have one ) but it will not make me financially well off , just live a basic retirement. In the 10 years my house has gained network worth 10 times than my kiwsaver..
And you are implying housing will do the same in future. It's as big an assumption as assuming kiwisaver will return any percentage on average in future. NZ housing (particularly Auckland) is as overvalued as the US stock markets, and being in a highly leveraged position in either right now is risky as all heck.
Also, kiwisaver covers a broad set of asset groups, and no doubt more providers will pop up with interesting offers and investment opportunities in future, so trying to equate kiwisaver with stocks alone is false.
Personally I'm all for the minimum employer match, or if self employed the minimum contribution and out the bulk of your money in other vehicle that don't have the constraints on KS.
I wonder what returns someone would have made off the stock markets if investing with leverage over those same 10 years 60% margin loan would about double the returns I would guess.
Jimmy James, I can assure you that when we buy an investment property, we do not cause property to inflate.
We buy out properties under true market value!
I can assure you that if you want to own a property in NZ then it is still extremely possible, but many on here don’t want it bad enough, they prefer to just moan about prices and do nothing about it!
Just did a quick calculation and this is how good KiwiSaver is: From the age of 18 to 65 put in the minimum each year to get the Government subsidy and you will have banked $73,320. This doesn't include interest or inflation for that matter but its a great start to a good retirement.
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