Mary Holm: Sitting out seems contrary, Mary

Is that really you Mary? Come on, own up if you are merely filling in while she is away on holiday!

I cannot believe that the answer given last week to the couple with a $120,000 deposit for a house and a $110,000 income was to sit on the sideline and rent for three years.

The banks are afraid to predict mortgage interest rates in three years, and we are only building 10,000 houses a year when we need at least 26,000 just to replace housing stock.

When immigration is positive and those leaving the country have dried up - creating more demand on housing in an undersupplied market - I found it amazing that the Mary I thought I knew, who always told people not to try to predict what markets will do, suggested sitting out the next three years of the housing market and, worse, claimed experts predict declining house prices!

In case you have not been reading your fellow financial columnists, even the negative-on-housing guy who writes in the Herald on Sunday has eaten humble pie and said it now appears the housing market will not devalue by the amount he had predicted. Amazing stuff from you, Mary.

At least you're not accusing me of a columnist's worst crime - being boring. But I'm not quite sure what you are accusing me of. I didn't predict anything. On the contrary, I said any capital gain on property in the next three years is "a big unknown".

I added, "But you would struggle to find an unbiased expert who thinks property values will grow fast over the next three years. It's still quite feasible that they will decline." That's hardly claiming that experts predict price falls.

Yes, I do read other columnists, and data on house construction, immigration and so on. I have also read that New Zealand's house price growth this decade was faster, relative to income growth, than in 18 other countries studied by the OECD. And since then our prices haven't fallen as far as many others. All of this strengthens my reluctance to forecast house price growth.

In the absence of a crystal ball, it makes sense to take in other considerations. In last week's column these included the following:

* Rent these days is usually less than mortgage interest, rates, insurance and maintenance on a similar house. If the couple keeps renting they can save more.

* If they buy now, they plan to sell and buy a better house after three years. Real estate commissions and legal fees might knock them back $15,000 to $20,000 or more.

* If they delay their purchase and join KiwiSaver they could be $7000 better off, and perhaps $13,000 better off if they use salary sacrifice, as suggested below.

All of this could total many thousands of dollars if the couple postpone buying. It's possible that house price growth over the next three years could exceed that. But - given that the couple has to take a gamble either way - my bet would be against such fast growth.

By the way, the possibility of high mortgage rates in three years is probably more of a reason not to commit to home ownership now, rather than the opposite.

Now, about that holiday ...

I note in your last column that to qualify for the KiwiSaver first home deposit subsidy, you must have total household income less than $100,000. Many people may be just over this threshold.

However, all is not lost. They could ask their employer to salary sacrifice part of their income. For example, if they earn $110,000 a year and are saving to buy a house they could ask their employer to reduce their income to $90,000 and pay the other $20,000 as an extra KiwiSaver employer contribution. The advantages are:

* The tax on the $20,000 will reduce from 38 per cent to 33 per cent because the money is going into a retirement savings scheme, giving them $1000 a year more towards their home.

* Their income will qualify for the first home subsidy.

* They can take out the $20,000 - plus their own and their
employer's other KiwiSaver contributions - and put it into their first home.

The $20,000 (less tax) need not be paid to KiwiSaver. The employer could pay it to any superannuation scheme that is not locked up, but KiwiSaver would probably be best. They will also save a little in ACC premiums but have reduced ACC coverage.

Good idea, provided you can get by with less money in the hand. This would actually force you to save for your house. And you wouldn't have to go all the way down to $90,000 in salary, but perhaps stop at $99,500.

Housing New Zealand, which runs the subsidy, says: "The income cap is based on the applicant's gross taxable income. Applicants applying for the deposit subsidy will be required to provide evidence of gross income." But salary sacrificed money would not be included in gross taxable income.

The subsidy is $3000 after three years rising to $5000 after five years, and double that for eligible couples - well worth getting.

In reading your column last week about the couple wondering whether to wait before buying their first home so they got the KiwiSaver benefits, a thought crossed my mind. Why would a person not rent to buy so they can take advantage of KiwiSaver?

I could enter into a rental agreement today in which I pay $X a week rent and have the right to buy the house in three to five years for $Z. I could then join KiwiSaver and save in it for three to five years, knowing that at the end I could withdraw my money plus my employer's money and all the returns earned in my account. And if my income and the house price were low enough, I would qualify for the first home deposit subsidy.

While an option to buy would be the simplest way, I could be required to buy the house in five years' time.

From the owner's perspective they get a regular income and known capital in five years. This might suit older people looking to convert rental properties into income, and give them an exit strategy.

Another good idea, and it just might work. Housing NZ says it "will determine the eligibility of rent-to-buy schemes on a case-by-case basis. Anyone in a rent-to-buy scheme or considering one, please contact Housing New Zealand before applying for the deposit subsidy." You can email them at deposit@hnzc.co.nz or phone 0800 801 601.

While Housing NZ administers the first home subsidy, the other KiwiSaver first home assistance - the right to withdraw money as you describe - is administered by the KiwiSaver provider.

Before committing to a rent-to-buy scheme, I suggest readers contact Housing NZ to get its approval of the scheme in writing.

Then approach your provider - perhaps sending a copy of the Housing NZ approval - and also get your provider's written confirmation that it would approve a first home withdrawal.

Sorry, but I'm disappointed with your response to the reader's question two weeks ago about whether to sell a property in Mangere Bridge or Whangamata. Are either or both properties rented, and what are their net rental returns relative to capital value?

I agree that guessing which will have the greatest capital gain is like the toss of a coin, but one may be a safer holding option than the other from the point of view of rental return. I would expect Mangere Bridge to be safer.

On the other hand I have no idea as to the locations of these properties. One may be more saleable - attract a higher price on this market - than the other.

If both are of equal re-saleability, I would suggest putting both on the market at the price you want and, whichever sells first, keep the other. Also, we the readers don't know if there is any emotional attachment to Whangamata, etc.

Oh, no, first an amazed reader and now a disappointed one.

Thank goodness the next two correspondents were happier.

I think I did cover your last point, by suggesting the reader choose one property "simply because you like it better".

As for your main point, the reader didn't say the properties were rented, so I assumed she was asking which value was likely to grow faster.

If the houses are, in fact, rentals, I would have thought it would be pretty easy to tell which was better and she wouldn't have bothered to write to me. But if I'm wrong, you have now given her some guidance, so thanks for that.

Your idea of putting both properties on the market has merit, although if there are tenants involved it could backfire.

Even with a rent discount, if the tenants get sick of keeping the place tidy and accommodating open homes, they might leave and be hard to replace. I've seen that happen before.

I liked your advice on tossing a coin for your reader unable to decide between selling a Whangamata or Mangere Bridge house.

The fact your reader has "driven family and friends mad" with the question and still can't decide means that there is insufficient information to separate the choices. If there was, the decision would have made itself.

What's worked for me and my wife (running a business and personally) is to investigate carefully, talk it over, ask around, and if still not clear, toss for it. Usually while the coin is in the air we have a flash of, "I hope it comes out heads" or whatever, so we go with that. If not we go with the coin.

The gut often knows things that the head does not, and later you see that it was the right decision.

I've noticed that "flash" too. It's a great way to test gut feelings.

But our friend clearly hasn't resorted to coin tossing yet. Read on.

I'm the reader with too many choices re the Mangere Bridge and Whangamata houses.

Thank you for printing my story, and I look forward to what other readers have to say, if you get the chance to publish their letters.

In the meantime, I'm holding on to both properties and will buy Lotto from Manukau Pak'n Save!

That's another way of putting the decision in the lap of the gods.

But will that store continue to be one of New Zealand's luckiest Lotto outlets or will it stop, given the number of first division winning tickets it has sold - 13?

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 (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.