Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.
NZ Herald June 25 2005
Q&As: Should you sell your house and buy again after prices fall?
The best way to rebalance your investments after the markets put them out of balance.
How to measure inflation.
Question: You mentioned in last weekend's Herald a friend who is thinking of selling her house and renting, in anticipation of a decline in the house market.
I have seen this idea come around the track several times but have never heard of anyone who succeeded at it.
If it were such a good idea, you would think there would be plenty of people who could say, "It worked. I sold my house, invested the proceeds and rented a comparable house. After two years, I cashed up and bought a comparable house for 20 per cent less than I sold the old one.
"After deducting rent from investment earnings and factoring in agents' commission, legal costs, house moving and an allowance for my time, I'm $80,000 better off than I would otherwise have been."
I've never heard anyone tell that story. Have you?
If there are no success stories, should the idea be enshrined in the Hall of Financial Myths?
Firstly, let's set the record straight. My friend is planning to sell her house and rent, and may never buy again. She's not trying to time the market.
If she were, though, I would be rather worried. I can think of four reasons most people don't, or shouldn't, try it:
* The hassle of selling, moving, buying and moving again.
* The fact that we're talking about our homes, not mere investments.
Most people develop an emotional attachment to their home, and won't readily flick it off just for financial gain. Nor would they like the lack of security of renting for a period.
* The huge transaction costs, and the necessity to pay to accommodate yourself in the meantime, as you point out.
The proceeds from the house sale would need to be invested somewhere safe and non-volatile, so there's virtually no chance you would lose money over a couple of years.
The obvious place would be bank term deposits. And chances are that the return on those, after tax, would barely cover your rent on a comparable house, leaving no profit there.
You could still gain from the falling market. But your house would need to be worth at least $500,000, dropping by your suggested 20 per cent to $400,000, to end up with a $80,000 profit after paying commissions and legal and moving expenses.
And 20 per cent is a pretty big drop.
* Perhaps the most important reason - the impossibility of predicting the market.
When we look back, sure enough, house prices rise fast for a while and then they rise slowly for a while or, in recent lower-inflation times, they fall.
But there's huge variation in the height of the peaks and the depths of the troughs, and in how far apart they are.
This means there's no way to know when you should bail out of the housing market, nor when you should buy back in.
As Anne Gibson said in her Business article last weekend - which included my comment about my friend - some people thought the market was slowing in 2003.
If you had sold your place then, in the hopes of making a quick profit, you would now be looking at either buying back in and swallowing your loss or continuing to rent for a long time.
While it's quite likely that some time in the next few years prices will fall, nobody knows how far. Maybe they won't ever get back to 2003 levels.
Trying to time any market is highly risky. Doing it with what for most people is their biggest asset - and it's also their home - seems like a mug's game to me.
Footnote: Our graph shows not only how erratic the house price cycle is, but also the effects of declining inflation.
Nominal house prices - the ones normally used - didn't ever fall until the 1990s. They grew fast sometimes and slowly other times.
Since inflation has been lower, though, nominal and real (inflation-adjusted) prices are much closer, and both have fallen - when the lines go below zero on the graph.
Question: A comment that I would have made in your first Q&A last week was that if the reader was investing regular monthly amounts, then he should rebalance by way of the direction of new cash flow.
One of the criticisms that I have of financial planners is that they automatically sell and buy to rebalance and don't think about other methods i.e. using new money or the reinvestment of dividends.
Answer: Excellent point.
For the benefit of those who didn't read last week's column (tut tut!), rebalancing is when you change your investments back to your ideal allocation.
For instance, you might have decided - given your appetite for risk and when you are likely to spend the money - to have 20 per cent of your long-term savings in bonds, 40 per cent in diversified New Zealand shares and 40 per cent in an international share fund.
Also, within your NZ share portfolio, you might have the same amount in each of 20 shares.
Over time, though, the movements of the different markets and different shares changed that.
When you rebalance, perhaps every year or two, you usually sell some of the assets or shares whose value has risen the most, giving them a stronger presence in your portfolio, and buy some of the poorer performers, to bring you back to Square One.
The good part is you sell what has done well and buy what has done badly -which is perhaps the closest any of us ever get to the ideal but impossible investment strategy: "buy low, sell high".
The bad parts are:
* It can be difficult, psychologically, to buy more of something that has performed badly.
And, with individual shares, there are times when it's not wise to put good money after bad, especially if you're not much of a risk-taker.
But often - especially at the broader asset level, for example shares versus bonds - it's good to buy more of whatever has done badly lately. You'll tend to do better than if you buy recent high performers.
* It costs money to buy and sell. And, as I said last week, sometimes you end up selling an investment, only to buy it back soon after, with lots of transaction costs en route.
Your point is that a regular investor can avoid the extra transaction costs by simply steering new savings or dividend income into whichever assets or shares have decreased in the portfolio.
That makes all the sense in the world.
Question: In planning our investment options and looking at insurance costs, I have been compiling figures in spreadsheets and trying to estimate returns for future years and cost of premiums for years out.
As I want to increase some figures per year to keep up with the rate of CPI - for example, each year invest a bit more to match CPI, and each year work out what it is costing me for insurance if it goes up with CPI - I need a standard sort of figure to help my calculations.
What is an average figure I should use? Am I mixing up inflation with CPI?
Answer: No, you're not mixing up anything. The Consumers Price Index is almost always used to measure inflation.
There are other measures, such as the Producers Price Index, but the CPI is the one that best shows how much your expenses are rising.
The latest CPI figure is 2.8 per cent. But economists expect it to fall.
Aon Consulting regularly surveys 11 economists in banks and other big financial institutions. The most recent survey, in April, shows that on average they expect the CPI to be 2.7 per cent a year from now.
Four years from now, they're predicting 2.2 per cent, and the figure is the same for seven years from now.
That's probably as good a forecast as you'll get.
* Mary Holm's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following her advice. Send questions to email@example.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.