Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald November 11 2006
Q&As: What's happened to the price of pies over the years?
Would it be good for NZ if Inland Revenue was tougher on rental property capital gains?
When is "income" really "profit"?
Reluctant shareholders worry about their lack of power - How best to hold shares.
Question: I read a column of yours from 2003 which talked about inflation and buying power etc.
I need some simple information suitable for a label in an exhibition which can help the average person understand the buying power of say a NZ pound (or 100 pounds) in the 1950s, to a dollar, or 100 dollars today. e.g. is 100 pounds or 10 pounds (or whatever) equivalent to 2000, or 150 dollars in 'today's money'?
Someone told me to use a pie as an indicator?
Answer: There's a useful and interesting inflation calculator on the Reserve Bank's website, www.rbnz.govt.nz. Click on "CPI inflation calculator" on the right side of the home page.
The calculator automatically adjusts for the change from pounds to dollars in July 1967, and you don't need to use a pound sign.
For example, if you enter "1" and "1955, first quarter", and click "calculate", you will learn that one pound's worth of goods or services back then would cost $42.27 now, and 100 pounds worth would cost $4227.
That's somewhat more than you guessed, largely because inflation in the late 1970s and the 1980s was high - often more than 16 per cent.
The pie idea probably comes from international cost of living figures that sometimes compare the cost of a McDonald's burger in different countries.
Instead you would be looking at the cost of a kiwi pie in different periods.
So where would you start? A friend thinks she recalls buying a pie for lunch in the 1950s for about sixpence, so let's try with that.
You'll have a bit of a problem feeding amounts as small as sixpence, which is 0.025 of a pound, into the calculator, as it cuts you off at two decimal places.
For a more accurate calculation, you could look at ten pies, costing 0.25 of a pound. Then divide the answer by ten to get back to the single pie.
Example: Ten sixpenny pies, at 0.25 of a pound in the first quarter of 1955, would cost $10.57 now if pie prices grew exactly by inflation. So one pie would cost $1.06.
I hardly ever buy pies, but I think they cost more than that. If the original sixpence is correct, then, pie prices have grown faster than inflation.
Anyone got more accurate data on 1950s pie prices?
By the way, the calculator goes all the way back to 1862, although the Reserve Bank acknowledges that the older numbers are a bit iffy. Still, they're probably as good as we'll get from anywhere.
Question: Investors investing in rental properties do so using current taxation policies.
If the goalposts are moved, there would be a mass exodus out of the quality house rental market, where returns are very low on top of the recent changes to depreciation. Capital gain would be a major reason to invest in this type of rental.
The net result would sky rocket rents, and house prices would drop through the floor, just about affecting everyone. Leave well alone.
Answer: There was surprisingly little response to my suggestion, in last week's column, that Inland Revenue should more closely enforce the law about taxing capital gains.
New Zealand has no capital gains tax as such. But if the main reason someone buys an asset is to sell it later at a profit, that profit is taxable as income.
In the past, most landlords could say they bought mainly for rental income. But, I argued last week, these days rents don't usually cover expenses, so recent investors must have bought mainly to sell at a profit - a statement you agree with, at least for "quality" properties.
Under "current taxation policies" then, recent landlords should be paying tax on their gain when they sell. There are no goalposts to move, just the need for a referee who follows the rules of the game.
The irony is that the government has said repeatedly it wants to encourage New Zealanders to invest beyond rental properties. It could do that simply by enforcing the law.
Wider-ranging investment would not only be good for the economy, but also for individuals, who would reduce their risk by diversifying beyond one type of asset.
While New Zealanders keep insisting that property prices won't plunge here, they have done so in many other developed countries, and there's no reason we should be immune. When the great New Zealand property crash comes, those who have diversified will fare much better.
That is argument enough not to "leave well alone".
But what about your "net result" - that closer enforcement of the law would lead to sky rocketing rents and falling house prices?
Sure, some landlords would get out of the game, reducing demand and hence house prices. And, with fewer rental properties, rents would tend to rise.
But higher rents and lower house prices would encourage tenants to buy their own homes.
The net result might actually be that we have more owner occupied houses. That, along with broader diversification, sounds pretty good to me.
Question: Just a stickler point. Being an accountant, I notice you tend to use the word "income" to mean "profit".
For example, you talk about rental properties bought recently having no taxable income. In fact the income is taxable, it's just that it's outweighed by the tax deductible outgoings - i.e. there is no taxable profit.
Very much enjoy your column.
Answer: Thanks. I usually edit out kind comments like your last one, but I thought I should leave this one in, to show that even stickler accountants are human!
About income and profits: When landlords calculate their taxes, they might well list rent under "taxable income", and rates, insurance and so on under "deductible expenses". But what ends up as taxable is the excess of the income over the expenses.
I guess I could call that excess "taxable profit". But the words "profit" and "gain" are sometimes interchangeable, and people would start saying, "Hey, there's no capital gains tax in New Zealand. We tax income."
As it happens, before this column was published last week, I asked experts in the private sector and Inland Revenue to check that what I said about tax law was accurate. Nobody suggested I use "profit" instead of "income".
Still, I see your point. Next time, perhaps I should say that some landlords have no taxed income.
Question: We read your piece in a recent Monday's The Business magazine, which recommended the slow path to riches, including a point about share investing.
We have placed a toe in the market, by buying Vector shares, like many others.
However, we are not keen to invest in other companies. We would just be a small shareholder, with virtually no say, because institutional investors can use their "block" votes to support any potential "takeover/merger", leaving us who want a long-term investment (10-plus years), with no option but to sell.
This one fact puts us off investing in shares for the long term. The dynamic business environment of takeovers / mergers / management buyouts / privatisation (e.g. Warehouse, Feltex ) has removed our confidence of being able to hang on to our shares.
(Note: Rod Oram reported that there were 66 such deals in the first nine months on this year and 67 last year.)
Your alternative, of investing in index funds, would spread the risk, but after fees it would likely under-perform the indexes.
So currently our funds sit in the bank, earning the best interest rate they offer. At least it is secure.
Answer: It is indeed secure. But you can be almost certain you'll get lower returns, over the long term, than in a diversified investment in shares.
The very fact that shares are riskier than bank deposits suggests that they also bring in higher average returns. The market sets prices so that will happen. Otherwise, nobody would invest in shares.
There are two good ways to make share investments:
· Buy at least 20, preferably 50, shares.
· Invest in a share fund.
Note that I didn't include owning shares in a single company, because you could lose all of your investment. That doesn't seem likely with Vector. But Feltex looked pretty solid, too, a while back.
If you invest in any single share you are taking unnecessary risk. And it's a type of risk that is not rewarded by the market.
Looking at the two options above, each has its pros and cons.
To invest effectively in at least 20 shares you probably need at least $50,000, maybe $100,000.
Also, you're quite right that you will have virtually no say in how a company is run - although you could join the Shareholders Association, which represents small shareholders.
But I'm not sure I understand your concern over takeovers, which often bring big profits for many shareholders. Surely that can't be bad.
If you prefer to hold your shares for the long term, you can always reinvest your now-higher savings in another company.
Many people, though, can't be bothered with the hassle, don't know where to invest, or don't have $50,000. For them, an index fund or other share fund is the way to go.
As you say, such funds give you good diversification, but you do have to pay fees.
An index fund, which invests in all the shares in a market index, charges lower fees than other share funds, as it is cheaper to run. Still, the fees will generally pull its performance below the index it tracks.
That doesn't mean, though, that you should give up. Even after fees, index funds will generally do better over the long term - often much better - than term deposits.
Ups and downs are guaranteed. As I often say, picture your share fund investment halving over a year. If you would bail out, you're better to stick with term deposits and their steady but mediocre performance.
But those who keep their share investments through the bad times almost always end up glad they had the courage to rise above boring old banks.
* Mary Holm is a seminar presenter, author and publisher. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. 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.