Mary Holm: Property dominates NZ savings

Q. I frequently hear and read commentators saying, usually with a degree of disapproval, that collectively New Zealanders invest too much in residential property, have a love affair with rental property investments, etc.

I also understand that more New Zealanders own their own home than in many other countries. From this I assume that, proportionately, New Zealand has a smaller stock of rental housing than, say, in European countries.

Is this correct and, if so, how are these two statements compatible? And how do other countries manage to have more rental properties without "investing too much" in residential property?

A. Let's look first at the facts on home ownership versus renting. The data are a bit dicey, as different countries calculate this differently. The best numbers I could get show that, in 2006, 68 per cent of New Zealand homes were owner-occupied.

That number doesn't include homes owned by family trusts. But presumably there are similar distortions in other countries.

Spain has a much higher rate, at 85 per cent. Others with slightly higher numbers than New Zealand are: Australia, 71 per cent; Britain, 70 per cent; and United States, 69 per cent.

Then there's a drop to Sweden at 60 per cent, France at 57 per cent and Germany at 43 per cent.

So we're about in the middle - when compared with the usual suspects - on home ownership. And that must mean we're also about in the middle on the proportion of properties that are rented out.

Note, though, that many European countries tend to have a wider range of rental housing providers - such as central and local governments, not-for-profit organisations and also institutional investors. Rental property in those countries is less likely to be owned by Joe and Joanne Blow.

It seems, therefore, that we are at the high end in terms of households investing in rental property. Still, that shouldn't affect overall property ownership. If Joanne owns her own home plus a rental property, which she rents out to Joe, total property holdings aren't any higher than if each one owned just their own home.

What, then, is the basis for the "too much property" statements? Almost certainly it's the data on the composition of household savings.

About three-quarters of New Zealanders' household savings are invested in property - including owner-occupied houses and rental properties. Shares make up less than 3 per cent and the rest is in other financial assets.

The dominance of property is much stronger here than elsewhere. Out of nine other countries, France is the closest to us, with about two-thirds of household savings in property, according to OECD data.

Then come Italy, the UK, Australia and Germany, all at about half property. Canada, Japan and the United States have only about one-third of their household savings in property.

It was not always that way. In the late 1980s France, Japan and the UK all had a larger proportion of their household savings in property than we did. And Australia, Canada and Italy were about on a par with New Zealand. Only the United States had markedly less in property.

But since 1986, property has grown from 54 per cent to 75 per cent of household savings in New Zealand.

That's a pretty fundamental shift. And nobody can deny that it means we are hugely exposed to property booms and busts.

But hang on a minute. Given that every country must house its citizens, how come they make up so much more of our savings than in other countries? There are several possible explanations:

* New Zealand has fewer people per house than elsewhere. But this doesn't seem likely, given the housing shortages reported in some areas.

* We have bigger houses than elsewhere. The data don't back this up. According to a recent Cairns Lockie newsletter, the United States and Australia have bigger average houses than we do, and Canadian houses are not much smaller. And those three countries all have much smaller proportions of their savings in property.

* We are more likely than the other countries to own baches and other second homes. I couldn't find data on this.

* We have lower total household savings, so that our homes make up a bigger proportion of savings. This may be true. International comparisons in these areas are horribly difficult. More on this in the next Q&A.

* Our houses are "over-valued", relative to our other savings in financial assets. I've put that in quotes, because generally I believe that anything is worth what someone is willing to pay for it. But when you look at current rental yields compared with house prices, or at the rapid growth of house prices versus incomes in recent years - at a faster rate than in any of the other 18 countries studied by the OECD - it does suggest house prices are still "too high". That's why you won't catch me investing in property any time soon.

A related issue is what New Zealanders are not investing in, namely shares. Not only do we have only 25 per cent of our savings in financial assets, but only one-eighth of that - less than 3 per cent of total savings - is in shares. This is way lower than all of the above countries, in particular Australia, where the comparable figure is more than 30 per cent in shares.

Given that over the long term widely diversified shares tend to be the best performing investments - and they are easier to invest in than property - we need to think about what we are missing out on.

Q. We should stop saying that New Zealanders have too much of their wealth in property. I suspect that we do not when you take into account total assets, including the value of NZ Super. That is really the government saving for us (that is, it taxes us to pay today's pensioners, and will tax future workers to pay for ours). And the government builds up infrastructure/KiwiBank, etc, in the meantime.

A. You're quite right that we need to look beyond just what households are doing. In a way we are all "investing" in NZ Super.

When you compare us with Australia, for example, their state pension is considerably lower than ours, and it's means-tested.

On the other hand, Australia has compulsion and strong tax incentives for people to do their own saving. The government saves less; individuals save more. Arguably, it all comes out in the wash.

Still, that doesn't get around the fact that New Zealanders under-invest in both local and international shares - and we probably end up poorer than we could be because of that.

Q. I was really concerned about the teacher who wrote to you two weeks ago who couldn't afford to buy a home for his family - and some aspects of your advice given the couple's age.

If they wait five years before buying their first home they will be around 50, and hence 75 before they pay off a 25-year mortgage.

I think they need to sit down with a financial adviser/mortgage broker with all the details, which I'm sure you weren't given, and talk through some hard options; that is, what is their deposit?

And they either need to increase their family income by the wife getting paid employment, or taking in a boarder, or the husband applying for a teaching job in a cheaper location.

Or they need to accept that they will never own their own home as they will not have enough working years to pay it off.

A. While 50 is not an ideal age to take on a mortgage, I don't think it's too old.

The mortgage term can be shorter than 25 years without the payments being excessive.

Let's say the couple buys a $300,000 house. If they follow my suggestions two weeks go, they will be able to line up a deposit of around $63,000 in five years. So their mortgage might be around $237,000. On a 25-year 6.5 per cent mortgage of that size, monthly payments would be $1600.

On a 15-year mortgage they would be $2065 - not hugely different, and not all that much higher than the $1560 a month they are paying in rent.

As everyone, knows, though, home ownership costs more than just mortgage payments.

It might be best, therefore, for the couple to start out with a more modest $250,000 house, with a mortgage of $187,000. Monthly payments on a 6.5 per cent 15-year mortgage would then be $1629. That's just $16 more a week than their rent.

A great advantage of repaying faster is the huge interest savings. On the $187,000 mortgage, the couple would pay $106,000 in interest over 15 years, compared with $192,000 - approaching twice as much - over 25 years.

Of course bad stuff could happen, such as a rise in mortgage interest rates. But in eight or 10 years their children will hopefully be financially independent, reducing expenses.

And, as you suggest, the wife might work full-time - as opposed to part-time as I suggested.

Also, as you say, there are other ways of boosting income or reducing costs. They can do it if they really want to.

We should acknowledge that a $250,000 home probably won't be as flash as their current rental property. But, given that many people find themselves better off in their 50s and 60s, I wouldn't be surprised if they find they can trade up later on.

Even if they can't, approaching retirement in their own mortgage-free home, be it ever so humble, has got to beat approaching retirement in a rental with just modest savings. NZ Super is generous by world standards, but it doesn't go far if there's rent to pay.

Mary Holm is a seminar presenter, part-time university lecturer 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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.