Where are the smart investments for young adults?by Pattrick Smellie
As a stall in house-price rises turns the spotlight on other investment strategies, the investors of Generation Rent are wondering what’s best to do.
The advice is along the same lines he always adopts: start saving early; don’t invest in just one thing; take more risk when you’re younger, less when you’re older; and if it seems too good to be true, it probably is.
The messages may be old chestnuts, but Gaynor says the fact he is speaking to secondary-school kids at all signals a generational shift in New Zealanders’ attitudes to savings and investment. “Obviously the teachers bring them along, but you’d never have got that a while ago.”
The head of investment firm Milford Asset Management, Gaynor says the advent of the KiwiSaver retirement savings scheme a decade ago has driven two big attitude shifts: a challenge to the preference for residential property investment over other assets as house prices stall; and the dissipation, at last, of the fear experienced by a generation of investors after the 1987 sharemarket crash.
That fear persisted as house prices kept rising, fuelling the stampede to residential-property investment that bred an apathy towards other investments, especially after the collapse of finance companies in the late 2000s hammered confidence in that sector too.
Gaynor notes that it took nearly 30 years for Wall Street to recover from the 1929 crash that sparked the Great Depression.
“Sometimes, if you have something that’s quite bad, you take up to a generation to change it. What happened [after 1987] was that a whole pile of that age group swung into residential property, which proved to be a very good investment, and because it’s done so well and they’re able to borrow and leverage off it, there’s been huge interest in it.
“But now people are beginning to think, ‘Housing has done very well; can it keep going? I need more liquid assets’, because if you own a house, you can’t sell a window, but if you own shares or are in a fund like we run, you can take 5% of the fund out at any given time. The apathy is still there, but it’s not like it was.”
A new cohort
The change has been driven in part by a whole new cohort of savers that has begun to emerge as the effects of a decade’s worth of KiwiSaver savings start to kick in. For most of this generation of savers, their only experience of non-bank investment has been through a KiwiSaver managed fund. Today, there are almost 150 schemes offered by at least 15 providers, managing more than $47.5 billion. And that total is expanding quickly. By 2030, total funds under management by KiwiSaver providers are forecast to be more than $200 billion.
As these savings accumulate, interest in investment performance is rising. “You don’t change this environment from apathy to being really interested in a short period of time, but it’s definitely changing,” says Gaynor. “This is a 10- to 20-year process.”
Increasing life expectancy is changing behaviour, he says. “I was telling these students today that the biggest thing that has changed, to me, in the past 10 or 15 years is that people now expect that they’re going to live until they’re 80 or 90 or 95 and that National Super isn’t going to give them the lifestyle they want.”
Another major force is the diminishing expectation among younger New Zealanders that they will own their own home one day.
Of course, many of the kids at St Peter’s, where annual tuition fees range from $16,500 to $21,450, will probably achieve that goal: the children of financially secure households, they will be able to count on help from the bank of mum and dad for the deposit on an otherwise unaffordable house in Auckland, if and when the time comes.
But all over New Zealand and particularly in Auckland, the next generation is less likely than at any time in the past 66 years to end up as homeowners. About 63% of New Zealanders own their own homes and that is the lowest rate of home ownership since 1951, when 61.2% of homes were owner-occupied, according to official statistics.
Between then and now, which is getting on for three generations, the notion of home ownership became entrenched as part of the expected Kiwi way of life, before it started to become unattainable for many.
The home-ownership dream itself is alive and well. A small sample poll for Auckland real estate firm Barfoot & Thompson late last year found that nine out of 10 of the millennials surveyed wanted to own their own place. The vast majority also wanted a Kiwi-style standalone house rather than an apartment.
Gaynor sees plenty of young, salaried professionals giving up part of their potential annual bonus in return for a smaller sum that bumps up the income they can report to the bank, allowing them to borrow more.
But in 2017, the Generation Rent concept popularised by economists Shamubeel and Selena Eaqub – who recently took the plunge and bought a house – is shaping new debates about the next generation’s home-ownership expectations.
“They’re all sort of desperate to be in the game,” says Gaynor, “but it’s actually quite difficult. But they’re not depressed over it. Human beings are remarkable. They get used to whatever the conditions are.”
Exacerbating the challenge posed by the unaffordability of house prices is the prospect that the housing market may be topping out, eroding the potential for capital gains, at least in the short term. Prices in Auckland fell 2.5% over the three months to the end of July, according to the Real Estate Institute of New Zealand, prompting Prime Minister Bill English to urge the Reserve Bank to forget about imposing further lending restrictions.
The conditions may spur new interest in home buying, as increasingly debt-shy banks, local buyers without enough saved to make a deposit, and a slowdown in interest from foreign buyers all contribute to a slowing in house-price inflation.
From here, the upside in residential property is less clear, making it more likely that savers and investors will look for new places to find better returns than the 3% interest in a bank account. The catalysts for new conversations about investment are in place.
“There are lots of places in the world where you wouldn’t expect to own a house,” says Ainsley McLaren, an investment markets specialist and Financial Markets Authority board member who spoke to the Listener in a personal capacity as she prepared to take up a new role with Wellington-based funds manager Harbour Asset Management.
“There are some issues around tenancy in New Zealand, to help people get into long-term tenancies where they can actually feel some sense of stability in the place that they live so they can stamp their own mark on it. Short-term tenancy agreements get in the way of people favouring renting.”
But the mood to fix that is growing. Most opposition political parties are promising full-scale tenancy-law reform to remove barriers to long-term renting and make it fairer for tenants. If that starts happening and with house prices likely still to be many times more than the average household income, investing what would have been the house deposit somewhere else will become even more common.
“The minimum deposit required for a house now is really significant,” says McLaren. “But with less money than that, you could get into a diversified portfolio that would generate pretty good returns through time with similar kinds of growth characteristics. I’m talking equities [shares] versus property investing, as an alternative.”
Says David Boyle of the Commission for Financial Literacy (CFL), “KiwiSaver is part of Kiwiana for our next generation. It’s there, it’s working. They don’t have to work it out or understand it, because their parents put them into it to get that $1000 kick-start. It’s part of life and that’s gold in itself.”
The average KiwiSaver portfolio is about $12,000 today, but compound growth rates apply and those sums are rising fast: at Milford, the average is worth well over $40,000. And as those balances mount up, some people are using their KiwiSaver nest eggs to pursue home ownership.
In the year to June, 33,000 KiwiSaver scheme members withdrew about $600 million to help with the deposit on a home, 10 times more than those making withdrawals because of financial hardship (the only other reason, apart from death, that withdrawals are permitted prior to retirement).
But large numbers have also opted out. A survey last October by the online publication Investment News found that 1.1 million of KiwiSaver’s 2.6 million members were classed as taking payment holidays, which can extend for as long as five years before a member is asked to resume payments.
The CFL wants a requirement for an annual decision about whether to continue opting out, given how significantly a five-year contributions gap reduces the most powerful element of any long-term savings scheme – compound earnings growth.
Furthermore, many KiwiSavers have never changed from the savings fund they were automatically allocated. Almost a fifth of the KiwiSaver funds under management are sitting in conservative default schemes, although many young savers should be considering investment profiles that target higher risk, but higher rewards over the long term.
Default schemes are also under less pressure than others to make sure their fees are competitive, especially as many default scheme members are as unaware of the costs of their scheme as they are of its profile.
Meanwhile, roughly 600,000 people are eligible to join KiwiSaver but haven’t done so. Some of them are suffering from misconceptions about the scheme, says the CFL’s Boyle. Two of the most common are that you could lose all your KiwiSaver funds and that all funds will return to the Government if you die before retiring. Neither is true, he says. “I reckon it would take a good meteor strike for [losing all your funds] to happen; the funds are so diversified.”
Likewise, you can’t lose the loot to the Government, although he knows plenty of people with KiwiSaver accounts haven’t realised they need a will. “If they don’t have a will, getting that money out is very expensive,” he says.
McLaren says one thing people with spare cash to invest rather than plough into a mortgage need to learn is the value of paying for professional advice.
“People seem a little reluctant to go into managed funds and to be a little reluctant to pay for investment advice, and yet you would not hesitate to pay for legal advice if you were buying a house,” she says. “There are a lot of transaction costs involved in buying a house, but people don’t apply the same discipline.”
The trend towards investment through managed funds, whether in a KiwiSaver or some other scheme, has implications too for business-news media, Gaynor suggests.
“I’m actually finding that the fund-management business and how companies are performing are more interesting than what’s happening in the stock market, because there’s a proliferation of new funds, new fund managers, different fees, different characteristics, different returns.
“It is a more interesting area at the moment than the listed companies, because people are going to have to make a decision. Just like ‘do we invest in Fletcher Building and Meridian Energy or Contact Energy?’, they’re going to have make a decision, ‘are we going to go into a growth fund or an ANZ Conservative Fund?’”
For McLaren, the biggest challenge for the providers of investment products to a newly curious generation of investors lies in making sure people know what they’re getting.
“It’s really important that markets are transparent and well behaved, so that people can be confident they’re getting something that’s a good thing rather than a scary thing or a bad thing.”
This article was first published in the September 2, 2017 issue of the New Zealand Listener.
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