Mary Holm: It really is houses for courses

If you intend to keep renting, assume you will live a lot longer than the average life expectancy if you want to avoid the poorhouse. Photo / Chris Skelton

Regarding a recent column of yours:

1. Who is going to supply the rental properties for the people who you are advising to rent rather than buy? The Government is very actively discouraging property as a form of investment for the average investor.

In countries like Germany where there is a significant number of rent-for-life people, the state and large companies provide rental properties at a reasonable return giving security of tenure to tenants. I see no movement like that in New Zealand.

2. What if you plan to rent for life here and your estimate of your life expectancy is incorrect and you live to 95 instead of 85, and run out of money. Will the state revive poorhouses for these unfortunate people?

3. You talk about houses depreciating. We still have inflation, which ranges from food and petrol to electricity and everything in between. Why do you seem to be so sure that there will not also be inflation on property, if not at the moment, in the long term?

4. If you rent you live with the insecurity of living in a house that can be sold over your head at any time, and you will need to find something else suitable.

This trend can make communities transient. Not ideal for children. Forced changes of schools, etc, leading to lack of community spirit.

Finally, before you give people this advice do you not think we should have some improvements in these areas?

Let's take a step back, here. I've never intended to suggest that renting is always - or even usually - better than buying a home. All I've said is that it is a viable alternative - provided you save enough during your earning life to pay for accommodation when you retire.

There are pros and cons to renting and home ownership, as listed in my January 29 column. Many people - possibly even you? - can't see past home ownership. I just want to give people choices.

As it happens, in the past two weeks - since you wrote to me - I've led this column with advice to a 55-year-old woman to try to buy a home rather than rent, and to a young couple not to sell their home and move into a rental. And, I hasten to add, that wasn't because of your letter! To bend a cliche, it's houses for courses.

Okay, now my comments on your questions:

1. We have a relatively free housing market. Where there's demand for rental property, somebody will make a buck by supplying it.

True, if the Government makes investment in rentals less attractive, landlords will want higher rents. This may encourage more people into home ownership. That's fine.

Likewise, market forces might move towards longer-term rental agreements. If a tenant would like a 10-year lease, they should ask would-be landlords. Some would probably be pleased to oblige.

More regulation is the fashion these days. But I wouldn't like to see the Government meddling in the rental property market - beyond what it does already for those on low incomes. It's one market that tends to sort itself out.

2. I've pointed out quite often that people who prefer renting and saving to buying a home might be wise to use their savings to buy when they reach retirement.

If they would rather keep renting, I suggest they assume they will live considerably longer than the average life expectancy, as a buffer. Beyond that, New Zealanders are blessed with the relatively generous NZ Superannuation. While it may not be much for a 66-year-old, people in their 80s and 90s often say it's enough to live comfortably at that stage of their lives.

3. I'm not "sure" about any house price forecasting. I've said only that house prices may fall - they are already 10 per cent below their peak - or perhaps rise only gradually for some time. That could be wrong. We could see another boom, but it seems unlikely in the short term.

That's because house prices from early 2000 to late 2007 rose way faster than food, transport and so on. According to the Reserve Bank's inflation calculator, on www.rbnz.govt.nz, clothing rose just 3 per cent, transport rose 21 per cent, and food rose 23 per cent. Meanwhile, house prices considerably more than doubled, growing 118 per cent.

In that same period, hourly wages grew 31 per cent - much more slowly than house prices.

How about an international comparison? The Economist recently reported that, from 1991 to 2010, New Zealand house prices rose 2.3 times as fast as average incomes.

That compares with: Australia 1.8 times; UK 1.4 times; Canada 1.1 times, and the US 1.0 times. Of seven other European countries, only Belgium equalled us, with the others ranging from 1.8 in the Netherlands down to 0.7 in Switzerland - which means Swiss incomes grew faster than house prices. The Economist also listed Japan, at 1.8 times, and Singapore, at 1.1 times.

It's this comparison with incomes that's particularly interesting. Logic tells us that, in the end, house prices can't get too far out of whack with incomes.

Having said that, yes, in the really long term house prices will rise - but maybe not much for a while.

4. No argument there. My January 29 column included the comment, "with a baby in the home, the security of home ownership tends to matter more". And in the pros and cons list in that column, the cons of renting included: can be kicked out; exposed to rent increases. Among the pros of home ownership were: you decide when you'll leave; pride of ownership; security.

Who owns your house?

I am surprised that you did not spot the oxymoron in the letter to your column last week: "We own our own home and our mortgage is $291,000."

These people do not own their own home - the bank does.

With woolly thinking such as this, it is no wonder people are in financial difficulty. Do these people realise that they will pay some $500,000 to pay off their mortgage?

With "mort" being French for death, and "gage" old French for "risk, wager, guarantee" - we can see that a "mortgage" is a possibly deadly risk!

Indeed a mortgage can be risky. But seriously risky only if you are unable to make repayments and are forced to sell the house when it's worth less than the mortgage. Usually, if you make a considerable deposit on a home and are comfortably able to make the repayments, you'll be fine.

You are correct that it's common to repay twice as much as you borrowed, or more. Interest payments add up fast. But still, many more people have benefited than have been hurt by having a mortgage.

When you borrow to invest in a property or anything else, and its value grows, you gain from the growth on the lender's share of the property as well as your own.

An example: You buy a $400,000 house with a $100,000 deposit and $300,000 mortgage - paying interest only, to keep the example simple.

After some years, you sell the house for $440,000. You repay the $300,000 and are left with $140,000. While the house price has risen just 10 per cent, your money has risen 40 per cent.

I know, I know - I said in the previous Q&A that house prices seem unlikely to grow much in the near future. And if the opposite happened, and they fell 10 per cent in our example, you would sell the house for $360,000, and be left with just $60,000 after repaying the mortgage.

But your next house would probably also be cheaper than before. And in any case, a long-term decline in house prices seems unlikely.

Still, caution and a large deposit seem wise in the current environment.

On your first point - that if you have a mortgage the lender owns the house - you're more than a century out of date.

"Under our system on mortgages, you give the bank only a charge encumbering the legal ownership," says University of Auckland law professor Peter Watts.

"Technically in law the home owner still owns the property.

"Under old common law it was the other way around. You effectively transferred ownership to the mortgagee [lender]. But in New Zealand since the late 1800s you can take out a mortgage without transferring ownership - even though your ownership rights become constrained."

The constraints include that you can't sell the property without the mortgage - which in most cases means that when you sell the property, you repay the mortgage.

Most lenders would probably also include conditions aimed at preventing you from changing the property in ways that would reduce its value.

Basically, though, your home is still your castle - even if the bank has helped you to buy it.

Shares or property

Our friends have invested in residential property to support their retirement. They intend to live off the income confident that both income and capital values will tend to increase with inflation.

On the face of it, the same can be said of the dividends from a broad portfolio of suitably chosen shares. In your view, would this be an equally sensible approach to retirement?

Yes - and in some ways a better one.

I should say first that it's generally better to invest the money you plan to spend within the next 10 years in diversified high-quality bonds, as they are less risky.

You know exactly how much interest you will receive, and always get your money back in full - unless there is a default, which is unlikely if you go for quality.

But bond investing may not be necessary if you could get by comfortably if rents decreased or disappeared for a while, or if dividends decreased. In any case, it's good to have your longer-term money in property or diversified shares, as the returns tend to be higher.

Some advantages of a broad share portfolio over a rental are:

* Diversification. If a few companies stumble, it doesn't matter much. But if your one or two properties turn out to be leaky or something, it's bad news.

* You can easily sell part of a share portfolio if you need more income - or you could plan to gradually sell the lot over the years.

* Rental property can bring hassles and worries, with bad tenants, changing neighbourhoods or property deterioration.

On the plus side for rentals, they work well for people who enjoy doing maintenance and improvements.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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 mary@maryholm.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.