Real Estate Agent John Key Tells Local Government They Suck (If Only)

Prominent real estate agent John Key said the central government has to manage its finances carefully. He didn’t point out that local government can’t manage its finances carefully. If only he’d told them local governments around the country suck.

Sensible government is being destroyed. By turning KiwiSaver into HouseSaver and undermining the independence of the Reserve Bank through soundbite sparring, John Key is putting the economic recovery at risk.

Our economy grew 2.4% last year and is on track for similar growth, he told attendees. We know DSGE models are dangerous territory. We have no idea what economic growth will be, despite Treasury projecting out public finances for decades.

He didn’t talk about how GDP rising because of the Christchurch rebuild isn’t really economic growth, but simply replacing what was already there before. The broken window fallacy is a key driver of the economic recovery plan.

He was talking to a bunch of town clerks who’ve rebranded as “Chief Executives” and bumped their compensation packages to include comparison with NZX executives.

At no point was there any discussion of how town clerks are underperforming relative to NZX executives and how their supervisors – hapless councillors all round – are just as powerless as MPs.

There was an opportunity for John Key to point out how councils are spending way too much money on pet projects and over-inflated salaries for “make work” roles. But he didn’t bring it up because he already knows that the grey ones have the power.

“Better Local Government” is an oxymoron. All the reforms are for nothing if a town clerk can make $550,000 a year while spending more on wages than it earns in rates.

The RMA will be reformed, but not in a way that will change the billing opportunities for RMA consultants and lawyers. John Key didn’t discuss how some property developers have exited the market – a negative supply side shock – because of the RMA and decimation of lenders who had some gumption to lend.

The Productivity Symposium recently included a good presentation on construction productivity. Booking inspections is one of the biggest problems. It’s a bottleneck around the country, one of the real culprits for housing affordability.

Home buyers don’t want pre-fab anything and we’re a decade behind on trades training so most of the productivity improvements have to come from local and central government.

The need for special housing areas where the government agrees with a local council to make consents easier is an indication of how far gone local government is.

Simply inform councils that consent processing times have to drop lest they get a “Local Government Manager” installed like Environment Canterbury. They’ve had a decade to sort it out since the Local Government Act reforms.

It’s not like democracy in local government matters anyway – just look at how few people vote in Local Body elections! You made the best case against democracy in local government in your speech Prime Minister.

The “39,000 new homes over the next 3 years” target for Auckland house construction is pathetic. If you read the recent NZ Initiative report on housing affordability, you’d realise that hundreds of thousands of houses will need to be built over the next decade to make up for lower construction levels and population growth.

It is disappointing that in his discussion of the Reserve Bank having to raise interest rates, he seems to think the consequences of a rising Kiwi dollar and hurt exporters are bad. Is John Key really an NZ Inc evangelist when he had a career in the foreign exchange markets? Does he think “exporting stuff” is better than exporting services?

He also ignores the idea that demand for housing can come from better job opportunities, immigration and a completely different way that couples form households in 21st century New Zealand. A rapid price rise is a signal most of the time. Bubbles are rare, but bubble stories make more sense and get more reader attention.

He does support the independence of the Reserve Bank, but his Housing Minister is undermining the loan-to-value restrictions with potential changes to Kiwisaver first home subsidy rules and he’s having an effect on markets.

He dedicates more time in his speech to discussing the cycle trail. If there was ever an example of how local government can “get stuff done” on pet projects like that, whilst ignoring rising wage bills, rates and permission fees, the cycle trail is a sad reminder of what happens when you don’t take a blade to the permanent government every so often.

Local government sucks really bad at almost everything it does with respect to making it easier to build houses. Real estate agent John Key missed the opportunity to call them out at their “we’re so wonderful, pat me on the back please” conference.

 

How Much Does Using The Kiwisaver First Home Subsidy Really Cost You?

The government is trumpeting the news that there is a record number of Kiwisaver members withdrawing money to take advantage of the incentives offered around buying your first home.

The price of something is what you give up to get it. Economists call this concept opportunity cost.

When you use your Kiwisaver contributions and the first home subsidy, you give up an enormous amount of future returns in your Kiwisaver account.

When you buy your first home – you are giving up a higher Kiwisaver account balance at 65. This simple model is a look at how much that can cost you.

Let’s start with a basic scenario of a single person aged 25 earning $50,000 who contributes to Kiwisaver for 5 years and takes advantage of the first home subsidy at the age of 30.

Putting aside all discussion over the pros and cons of buying a house, how much does this actually cost you in future Kiwisaver returns?

balancewithnowithdrawal

Simple Assumptions:
Income = $50,000 from age 25 to 65
Contributions = 3% Employee, 3% Employer
Member Tax Credit = $521.43
Return = 5%, fees and taxes not taken into consideration for simplicity
Withdrawal after 5 Years = Balance less kickstart of $1,000 + 5 x member tax credit payments = $3,607.13 left in account at start of year 6.

You’re only taking out $22,882.87 at the end of Year 5.

How much does that affect your account balance at age 65?

balanceifyoutakemoneyoutIn this model you give up over $104,000 in your closing balance at 65. 

At a 5% return that’s $100 a week in income in retirement that has to be recovered from somewhere.

You can have a look at my working using the Google Spreadsheet I used.

There is a reason why this is something to think about carefully – in this model I’ve assumed you keep contributing to Kiwisaver at the same rate that you were before.

Most people will start diverting some of their Kiwisaver contributions towards their mortgage or stop contributing at all. Which means they will have even less liquid assets with which to cover the costs of their paid off home at retirement.

Kiwisaver is a retirement savings scheme. When you hit 65, you will need liquid assets to cover your living expenses. Why? Because NZ Super is at risk of being reduced or the age of eligibility increased. That’s why having a retirement savings scheme is essential no matter what your current situation is.

Before copying everyone else in New Zealand and jumping on the home buying bandwagon, think about what you are giving up in exchange for your first home. There are a lot of downsides to buying a home that the property industry likes to ignore. At the end of the day, there won’t be any bailouts for people who haven’t saved enough for retirement.

Disclaimer: This post is of a general nature and does not constitute investment advice tailored to the specifics of your situation. I advise consulting an Authorised Financial Advisor, your accountant or your solicitor when it comes to Kiwisaver and anything investment related.

There are no guarantees in life and taking responsibility for your investments and educating yourself even if it seems boring is the best way of protecting your financial future. You owe it to yourself, your partner and your children to learn as much as you can about finance and investment – nothing else matters in our user pays society where we all have to take responsibility for our financial security.

Maybe Having Your Kiwisaver Account With Your Bank Is Risky

Apparently one of the main reasons why people are switching Kiwisaver providers is because they want to see their Kiwisaver account balance when they log into their online banking. Maybe getting less regular updates about your Kiwisaver performance will increase long-term returns because of the costs of switching Kiwisaver provider.

When you think about Kiwisaver, and its goal as a long-term investment to help you in your retirement, is it really a good idea to be constantly checking the performance of a long-term investment vehicle?

Our brains are wired to be far more risk-averse than we should be. We also prefer avoiding losses at any cost – we sell low and buy high more often than we think we would. In short, we’re terrible investors almost always better off investing in an index fund unless we dedicate a substantial amount of time and effort to investing activities.

Past performance is no guarantee of future performance. In fact, just on a coin-flipping basis, there will always be some Kiwisaver funds that will outperform their competition and see a substantial inflow of funds the year after the stellar performance.

Having your Kiwisaver account with your bank is risky – you’re unlikely to possess the information with which to constantly assess the ups and downs of that account balance and therefore will experience strong reactions to the viscissitudes of that balance that stares at you in the face when you pay your bills or make transfers to your other savings accounts.

It is also a violation of the idea of diversification. Having all of your eggs in one basket is what cost finance company silly buggers so much. One of the things that I haven’t found any discussion of is how Kiwisaver cash funds would be treated in an open bank resolution situation.

As counter-intuitive as it might sound, maybe setting and forgetting about your Kiwisaver is the optimal strategy in the long-run. If you’ve already chosen a provider with low fees then the error costs from choosing a high fee-poor performer will be lower anyway.

You have no direct control over the performance of your Kiwisaver account so getting all worried and worked up about it isn’t the right choice. The United States’ experience with 401(k) retirement accounts has shown that constant changing of providers hurts long-term returns more than simply sticking with the default choice offered in the plan!

Having your Kiwisaver account balance right in your online banking login is just putting more stress and worry on your shoulders. When more than 2.2 million Kiwisaver members are chopping and changing their Kiwisaver provider so frequently, it’s clear that many of them haven’t read enough about finance and economics.

Disclaimer: I am not an Authorised Financial Advisor. You should contact your financial advisor, accountant or solicitor for personalised advice based on the specifics of your situation and objectives before making any investment decisions.

P.S If you don’t do so, the economist in me tells me that you should internalise the costs of your mistakes but sadly that’s not how regulation works these days. Mummy and daddy taxpayer & regulator are here to protect you from sub-optimal decision making.

P.P.S I wrote a post a while back about how to learn more about finance. It is negligent for anyone to fail to educate themselves given the enormous amount of free knowledge available on the internet these days. Try educating yourself instead of watching the rugby or some cooking show.

P.P.P.S If you are using Kiwisaver as a vehicle to get money for your first home, maybe you should think about the opportunity cost of buying a home. What’s an opportunity cost? It’s what you give up to get something. Renting is almost always cheaper than buying. A housing expense is a housing expense. There’s no such thing as “throwing money away” – if you didn’t value a roof over your head you’d live on the street.

Why More Kiwisaver Advertising Is A Good Thing

I have been noticing a lot more Kiwisaver advertising recently. This is a good thing.

Wait, what? How can advertising be a good thing? Doesn’t it persuade us to do things we shouldn’t because we are weak and powerless individuals? *

Advertising is a way of getting information about valuable products and services to the marketplace.

Without advertising, we are fumbling around in the darkness. Because we have no brands or products to connect with different things we need in our grocery shop, it could conceivably take hours to get around your local Countdown or New World.

More Kiwisaver advertising is a sign of a developed market. Firms are prepared to spend money on advertising.

Because advertising is a sunk cost – once it is spent it can’t be recovered – a firm will only advertise when it believes that it will earn a return on that advertising.

Advertising in the age of Google triggers searches for product information, comparing prices with other potential suppliers and reading product reviews.

It directly enhances the price discovery process because firms have to differentiate their product offerings somehow – either cosmetically or substantially.

As the Kiwisaver industry develops, firms will need to ensure that their fees and services available to Kiwisaver members are competitive.

The differences between firms can be highlighted in rival’s advertising, so the process of competition and comparison in advertising acts as a “mic check” on competitors claims.

I’d be really worried if there wasn’t Kiwisaver advertising – firms would be revealing that they think Winston Peters will seize everyone’s Kiwisaver accounts.

* Some people actually believe this.

Why Kiwisaver Won’t Cover Your Retirement

Kiwisaver is unlikely to cover the cost of your retirement. But it’s very likely to cover the retirements of Kiwisaver providers, fund managers, bankers, accountants, lawyers, public servants and everyone else connected to the growing Kiwisaver industry.

Before I discuss the specifics of Kiwisaver, I’m going to share with you the basic maths of retirement. Like an economist, I’m going to build a basic model that ignores the real world and makes some simplistic assumptions. I’ll then share with you why this standard model of retirement is extremely risky.

The basic model goes like this:

  • You work from age 25 to age 65
  • You earn the median income ($560 / week) for that entire period with 4 weeks off.
  • You contribute 2% to Kiwisaver with your employer matching that
  • The Sorted.org.nz calculator assumptions apply

Selection_068This is where the fun begins and I can destroy the silly assumptions made by this model, upon which most people are planning their retirements. What is scary is that I chose the median income – 48 weeks a year @ $560 a week. That’s just $27k a year and 50% of the population earn less than that and probably can’t even manage the 2% Kiwisaver contribution.

Furthermore, I am assuming a regular income. There is no option for people who can’t get full time hours or anything more than a string of casualised positions. How will they accumulate any sort of Kiwisaver account balance that can help them in old age?

The next hurdle is the option that Kiwisaver has to withdraw your account balance to put a deposit on a house. Putting aside the reality that buying is almost always a worse idea than renting, how many people who take money out of their Kiwisaver accounts will start their contributions back up again?

Again, once they have sacrificed their retirement on the altar of home ownership, exposing themselves to the risk of negative equity and working as a debt slave for an Australian bank, will they ever be in a position to “save” again?

It’s unlikely. That’s because the standard models forget about something stock standard in the modern New Zealand lifepath. Divorce! Separation! This means that many people will get hit with payouts and recurring monthly obligations (child support, spousal maintenance) that lower their ability to save.

Even if you have accumulated a healthy Kiwisaver account balance, you’ll have to share it with your departing partner. Most of the reading I’ve done around this topic shows that neither partner typically recovers from the cost of separation. They’re both screwed for at least a decade. On the back foot. Struggling.

There’s another massive assumption that the Kiwisaver model doesn’t take into account. That you’ll have employment consistently from 25 to 65! Just ask old guys who have 20+ years of experience in IT and have kept ahead of the curve but can’t find work in their late 40’s / early 50’s how life long employment worked out for them.

With Great Depression 2.0 likely to result in a jobless recovery and future prosperity unlikely to result in marginal workers getting hired to do “make work” stuff any time soon, the Kiwisaver account model of regular contributions has no relationship to how the modern labour market is working out.

The only group of people likely to benefit from Kiwisaver accounts are highly paid public servants. Even professionals who earn partnership income won’t benefit – they need to have access to the cash to cover their upper middle class lifestyle when finance companies go through and their firm writes off a lot of receivables!

I would go so far as to say that if the Kiwisaver model can’t work for a person earning the median (50th percentile remember) income, it is nigh on impossible for it to work for the bottom 50%. And with rising living costs and stagnating incomes, the next few deciles (60th, 70th, 80th) are unlikely to benefit from the model either.

This means that Kiwisaver accounts will cover the retirement only for people who earn really high incomes and would be saving with or without Kiwisaver anyway.They’ve opened accounts for all of their family because they can earn quick 100% return on investment from depositing $1,040 a year for the past few years.

Because of the power of compound interest, little Johnny who gets that Kiwisaver account from birth will end up with a Kiwisaver account like Mitt Romney’s 401(k) by the time he’s eligible to access it.

Kiwisaver accounts are going to be the target of increased lobbying over time. Because they’re going to become a wealth vehicle for high income / high wealth New Zealanders. They’re going to reinforce wealth inequality and make people connected to the Kiwisaver industry extremely wealthy.

Kiwisaver won’t cover your retirement because the fees will eat up most of the returns your account earns. If your fund makes 6% and you’re paying a 1.5% management, trustee and custodial fee along with a 15% performance fee that’s a net 3.6% return before inflation!

6% – (6% * 0.15) – 1.5% = 3.6%

When I read that most Kiwisaver members haven’t changed the default account they were allocated, I despair. If you can find a non-scammy Kiwisaver provider, you still can’t touch the money until you’re 65. Try asking people in genuine financial strife who tried to get money from their Kiwisaver as a last resort. Watch for more complaints around this in the future.

All of this stuff comes back to basic maths. If you want to replace your income in retirement you need to accumulate between 20 and 30 times that amount in liquid or income earning assets.

If you want to replace $50,000 in income that’s at least $1 million in income earning assets. That’s rental property, commercial property, bonds, shares, term deposits, whatever. If you don’t hit that target you have to spend your capital.

When you think about the cost of retirement that way, it’s easy to see how so many people jumped at the high returns offered by finance companies. It’s easy to see how so many people fail to do their due diligence on investment opportunities that finally offer a way out of mathematical impossibility.

But remember folks, this is an affliction mainly suffered by people who have lived above their means. A lot of “boring” people who kept their living expenses reasonable and avoided flashy stuff will be quite happy living off NZ Super and an extra $10k a year from their investments.

Simple living is the simplest way to cover your retirement. But that’s not sexy, and that’s why baby boomers will experience a whole world of pain and adjustment when their post-retirement lifestyles resemble those of the sorts of Kiwis they can’t stand and have discriminated against through the polling booths over the past couple of decades.

Instead of contributing to Kiwisaver, I’m working on small side businesses that will bring in regular but modest income streams. That’s a smarter retirement plan than transferring your hard earned cash to someone whose incentives are completely different to yours.

 

Due Diligence Questions For Investors

If you are thinking about investing in something, you have to do your due diligence. The finance company collapses, ponzi scheme failures and property investment scams that have been revealed following the global financial crisis ram home the fact that most investors don’t do their due diligence.

How can an average investor perform due diligence on a prospective investment? The truth is they probably can’t. If you don’t have above average knowledge of the relationship between risk and return, how probability actually works, what the law is surrounding investments and standard procedure for legitimate investment firms you should stick to investing in index funds.

The inability of the average investor to perform due diligence is why we have to make silly statements like “taking my investment advice without consulting a financial advisor or 3rd party solicitor first is really stupid”. The development of “plain English” product disclosure statements prepared in the format preferred by the Financial Markets Authority can’t account for how stupid some people are.

If you can’t explain to a reasonably clever teenager concepts like diversification, correlation of returns, the risks and rewards of Kiwisaver accounts, performance relative to benchmarks, impact of performance and management fees on long-term returns and answer questions that dullards send into Mary Holm every week you have no business going anywhere near the financial markets.

Armed with your above average knowledge of basic financial topics, you should be able to pigeon hole investment products you’re looking at. When you know the category of investment you are dealing with you can then ask the best questions for that category of investment. The Financial Markets Authority actually has some great information on its website. As does the Retirement Commission’s “Sorted”.

For example the Moa Brewery IPO can be filed under “new listing backed by guys with a track record of selling NZ brands for a premium to large corporates and non-trivial likelihood of success”. Examples of questions you’d want to answer before investing here would be:

  • How are the founders and IPO participants incentives aligned?
  • Who is managing the listing and what fees are they getting? Do they have to support the initial listing price?
  • What do the back-of-the-envelope calculations look like for the premium beer market?
  • What is the worst-case scenario if I put my money in the IPO?
  • What are the risks I am exposed to here? Currency risk? Distributor solvency risk? Consumer tastes and preferences risk?
  • Can I build a basic model in Excel that resembles what the Moa guys have put in the prospectus and test their assumptions?

If you are performing due diligence on a specific asset manager, there are lots of things you can do to lower the risk of getting “Madoffed”. Reading the disclosure documents very carefully is the first step. Then, conducting a detailed Google search on the asset manager, entities they are associated with, similar investment products, credit checks, background checks if you are investing a lot of money with one manager and testing whoever is trying to sell you the investment product with aggressive lines of questioning are all part of investigating whether an asset manager’s track record is plausible or someone is taking the mickey.

A clear understanding of probability and investment returns is also essential. Past performance does not predict future performance. Just because a hot-shot asset manager has beaten the NZX50 for the past decade doesn’t mean they possess some amazing ability. Never discount the possibility that someone has had really good luck and is rationalising their success by pointing to their “track record” and “investing acumen”.

If you’ve been reading this article and don’t understand every single concept I’m referring to, you have no business actively investing. The Financial Markets Authority should restrict investment products to people who are capable of performing due diligence independently.

Why is this? Well, it’s because in New Zealand we privatise profits and socialise the losses. If someone makes a bad investment and loses their retirement savings they will become a burden on every other Kiwi by accessing superannuation when they previously would have been able to decline it. They’ll also become eligible for nursing home subsidies if they haven’t stashed the rest of their assets in trusts.

Behavioural finance studies have proven that very few people are capable of making rational investment decisions. They are subject to enormous biases, under-estimate the likelihood that they are making a poor decision and over-estimate the likely returns from investment products they are considering. We think we know more about investing than we actually do and cry to the media when we make really dumb decisions.

I am not currently in a position to make substantial investments in hedge funds or pick individual stocks. My strategy at present is pure capital preservation and hedging against inflation. An index tracking product like the NZX SmartShares is the most reasonable level of risk I’d be comfortable with at this stage. Taking long-term bets with out-of-the-money options is too risky at present.

Handing over your entire investment strategy to a person whose incentives are not aligned with yours (think : commissions, kickbacks, golfing trips, liquid lunches at restaurants you’ve never heard of) and then losing it all is proof positive that financial darwinism exists.

If you are not prepared to do enormous groundwork in analysing potential investment products, doing the due diligence, clarifying things you don’t understand with your solicitor, asking your accountant whether claimed tax benefits are likely to result in an IRD audit or even performing a Google search on the potential investment provider and associated entities, you shouldn’t even consider index funds.

You could choose the conservative option on your Kiwisaver and keep all of your money in term deposits. But even then you’re an unsecured creditor to the Big Four banks and will get clipped if Open Bank Resolution is ever implemented. Do you even know how Open Bank Resolution will work? If not, you should take five minutes from your busy day to read about it.

I think you should read dozens of books before you go anywhere near the shark-infested waters of investing. If you don’t have a broad understanding of investing, risk and probability you are a mark for shysters who will take advantage of your naivety. Just because you have achieved success in one area of your life, namely having enough money to invest, doesn’t mean that success will transfer to your investing efforts.

I am reasonably smart. I read extremely widely in economics and finance. I have extremely low levels of confidence in the financial markets and the “professionals” who work there. Commingling of client funds and business funds, expenses being charged to investors and exceptionally poor after tax and after inflation returns make me wonder what excess return can be earned from assets even marginally more sophisticated than index funds like ETFs.

NB: For the illiterate I’m not an Authorised Financial Advisor and this shouldn’t be taken as financial advice tailored to your specific situation. If you actually don’t do your own research you are a dunce who deserves to lose everything. Search for an independent financial advisor who won’t charge commissions on investment products or read a few basic investing books before even visiting a sharebroker’s website or requesting information on something you’re unlikely to understand.