FMA Worried About the Auckland Property Bubble

The Financial Markets Authority (FMA) was established in little over a year ago, and their main objective is to promote and facilitate the development of fair, efficient and transparent financial markets.

The FMA chief executive Sean Hughes has recently been reported to have said "the FMA is worried about that an Auckland property bubble has formed and that potentially catastrophic society- wide consequences would result if a correction took place."

Hughes said "anyone who might be advising people to put their entire savings into housing were giving unsound advice. We would challenge any financial adviser who said you should put all of your nest egg into a single asset class, particularly where there is a risk that the value of that asset class could be overheated."

Why would any investor want to buy into a market that was already overheated?

And all investors know not to put all their eggs in one basket, don't they? I hope so.

The FMA is saying it will expand its attention to real estate as an investment if it appears unsound advice is being given.

Kiwis like property

However diversification is essential if investors are to have long a long-term successful investment experience.

It is also pretty well known that investors should in fact be going the opposite way to the herd.

If everyone seems to be piling into Auckland property, then prices are likely to be high (they are) and so intending investors should perhaps hold off for a while, and keep their powder dry.

But "they say" get in now as prices will just keep rising. Maybe "they" are right, it's impossible to say.

If an investor takes that view and wants to go ahead invest, then that is a personal decision, but maybe it would be a good idea to rationalise and just buy one property.

Single big picks vs diversification

It does not matter really what sort of investor you are, you will do better in the long run if you make sure you understand and practice diversification.

Some years ago I met an investor who decided to put 25% of his money into Telecom shares because "they were paying such good dividends and they owned all the copper wires in NZ". However technology and competition clobbered Telecom and the share price fell by over 50% and he lost over $50,000.

Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, speculating in areas like interest rate movements, and relying solely on information from third-party analysts.

The FMA tomorrow

The FMA cannot protect investors in every instance, and cannot guarantee that every investment will be successful.

However they are certainly on the right track when it comes to ensuring that sound advice is being given, and that diversification is emphasised and encouraged.

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This article was supplied by Alan Clarke who is the author of a book entitled "Retire Richer" which is a practical guide for everyone age 25 to 85. Alan also writes a regular blog on www.investandretire.co.nz

Alan is an independent authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.