Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald March 8 2008
Q&As: A landlord's threats are perhaps a little hasty - but he has a point.
A KiwiSaver misunderstands the ups and downs of the market.
Are property shares a good option for young man saving to buy his first home?
Question: Though your low opinion of residential rental investments is a matter of record, would you do the Government and the wide world of tenants a favour and let me explain what would happen if the Government ring-fences losses to properties, as has been hinted by that great history teacher and part-time economist Michael Cullen?
I own two properties as part of a diverse portfolio that includes term deposits and shares.
The day after such a move is confirmed, the rent on my properties goes up to reflect the cost to my income stream. At every subsequent opportunity provided by the Act, rent gets reviewed upward.
The same day, a new maintenance regime goes into place on my properties called "benign neglect" - something similar to how Housing NZ manages its portfolio, especially here in Papakura. Nothing except the urgent and essential gets done because there's now no reason to maintain these properties in pristine condition.
I suspect I would not be the only landlord to adopt these measures.
The Housing Minister is fond of sabre-rattling about insulation and forcing us evil landlords to make houses comfy for the blameless masses who rent. I wish the Government great fortune setting any such regulation in place. Landlords vote too.
Answer: There now - I've not only run your letter but given it top billing. Spleen vented?
For those not following this issue, the government and the Reserve Bank have talked of ring-fencing losses on investment properties, so the losses couldn't be deducted against other income.
The losses could still be carried forward and deducted against future profits on the property. But these days rental profits sometimes don't ever happen, because mortgage interest and other costs exceed rent.
The only profit is when the property is sold. And given that most people don't pay tax on their sale proceeds, some landlords would never be able to use the tax losses.
Such a change would certainly make rental property less attractive. And some landlords would no doubt raise rents, or simply sell their properties.
Note, though, that many landlords with small or no mortgages, who make annual profits, would not be affected by the change. They could afford to keep their rents the same. So if ring-fencing victims raised their rents too abruptly, and neglected maintenance, they might lose their tenants.
Also, benign neglect would hardly serve you well when it comes time to sell your properties.
As for voting, I suspect landlords might be outnumbered by other New Zealanders envious of their recent returns - and happy to see landlords lose a tax break that could be viewed as a subsidy from other taxpayers. Ring fencing might be a vote winner for the government.
I hasten to add, though, that I'm not one of the envious ones. I don't like the idea of ring fencing, partly because it would complicate our tax system, and also because of points made in a Reserve Bank report back in February 2006. It says ring fencing could:
· Reduce the supply of rental properties and therefore raise rents, "affecting lower income groups more heavily".
· "Discriminate in an arbitrary way against a particular form of investment." And sophisticated investors would find ways around it.
· Perhaps not greatly affect the house price cycle anyway. In countries that do ring fencing - including Canada, France, Germany, the Netherlands, Sweden, United States and United Kingdom - the cycles don't seem to be less marked than elsewhere.
The report adds that New Zealanders are more into investment properties, so things might be different here. But that might not be quite as true two years down the track. In fact, the property market may now be slowing enough that the government no longer feels it needs to dampen it.
Speaking of which, it's wrong to say I have a low opinion of rental property. It can work really well. My concern has always been that it's riskier than many people realise - a cry in the wilderness over the last few years, but perhaps not for much longer.
And the risks aren't limited to higher mortgage rates and falling house prices. Your letter points out another risk - that the government can always change the rules, especially around what many people view as a tax-favoured investment.
Question: I have a query regarding my KiwiSaver account. I have followed all your articles and thought I knew everything.
I joined KiwiSaver when it first started and I am in the ASB conservative fund.
I realize that there are ups and downs, but thought that these would only be with the member and employer contributions and not the crown contribution. I was under the impression that the $1043 the crown gave each year would not be touched.
My crown contribution has gone from $1,001.50 last week to $991.88 this week. I have checked with the bank and they advise that this is correct.
I don't remember reading this would happen in any of your articles in the Herald.
Answer: I've often said that KiwiSaver account balances will go up and down - although conservative funds much less than others. But it never occurred to me to spell out that that would happen to all the money in the accounts. Sorry if you feel misled.
You seem to be a bit confused on another point, too. That $1,000-odd in your account is the government's $1000 one-off kick-start. The first of the annual tax credits won't be paid until some time after June 30 this year.
The kick-start and maximum tax credits will be the exact $1000 and $1043 when the money goes in. But from then on, that money is just part of your total investment. And that's great. Over the years, you can be confident that the money from the government - along with the other contributions - will grow.
Question: A recent letter to your column asked if a man returning to New Zealand with $20,000 - $25,000 should invest in property. You discussed the housing market and recommended putting his money in the bank.
Property has many sectors - all significantly different. I suggest he would be far better off investing in say three of the major listed commercial property companies. That would mean:
· He has the opportunity (no guarantee) to achieve capital appreciation.
· He will achieve a higher return on his capital.
· He can choose three entities with different sectors (e.g. retail, industrial, medical) to provide diversification.
The timing is right with the good listed companies being savaged by the short-term market (along with the weak ones). The current fundamentals are brilliant.
Also, the Herald article on the same day "Property paucity pushing prices" states "robustness of business activity shows no signs of weakening". It is business activity that underpins commercial property.
He can choose when he withdraws from the market (when listed property unit prices move back up?) or take out smaller amounts as his needs dictate.
His investment is well managed - hands-off and trouble free - plus he benefits from the reporting transparency of listed entities.
Answer: You've given us all the pluses of investing in property shares and none of the minuses. But before we look at that, let's address the broader issue - whether the young man should invest in any sort of shares.
I assumed, when reading his mother's letter, that he plans to buy a house when he finishes his master's degree, in a few years. If that's correct, I stick by my recommendation that he parks his savings in bank term deposits. Over such a short period, it's too risky to put his money into something as volatile as shares.
However, let's say he doesn't plan to buy a home for ten years or more. In that case, investing in shares for the next few years - and gradually moving to more conservative investments from when he is within, say, seven or eight years of his expected purchase date - might work well. As you say, shares give him a chance at capital appreciation and higher total returns.
But why concentrate on property shares? While he could indeed go for several different types of property, he would still be taking unnecessary risk by investing in the one broad industry.
Maybe the timing is right for buying property shares, but I have never subscribed to timing the market for any industry. So often the "experts" get it wrong.
Same goes for your idea of selling when unit prices move back up. It sounds great. But nobody knows when "up" is as high as the price will get. Some people bail out too soon. Others hang in through a few dips - expecting the upward trend to return - only to end up riding the price all the way back down again.
Having said that, I agree that advantages of shares - in all industries - include hands-off management, transparency, and the ability to sell small amounts.
If the young man does have more than ten years in hand, he might well invest in shares. But with $20,000 to $25,000, he can't get a wide enough range of shares by direct investment. I would suggest he goes for a low-fee broadly diversified share fund.
Another point, which I should have made before, is that the young man should also join KiwiSaver.
When he wants to buy his house, he can withdraw his own contributions plus any employer contributions and returns earned on all his KiwiSaver money, to boost his deposit. And he will probably also qualify for a subsidy of $3,000 to $5,000 towards the property.
I wouldn't recommend he put all his savings into KiwiSaver - in case he decides later against home ownership and wants access to the money for something else. But he should contribute $1,043 a year to KiwiSaver, to make the most of the tax credit.
* Mary Holm is a seminar presenter and author. 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 firstname.lastname@example.org 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.