Mary Holm: Climbing the property ladder — but where to?

Photo / 123RF

OPINION:

Q: I'm currently reading your latest book, A Richer You, and am a follower of your column in the Herald. I am rather intrigued by a phrase you use. It does not seem to sit well with other things you say.

It is a very common phrase: "get on the property ladder". Words have power, and it encapsulates an idea that one must always want more, better, nicer, etc.

I've noticed that some people no longer talk about buying a home — they make an investment, and banks no longer lend money, they provide financing. These are not just words that mean the same, they have entirely different meanings.

Elsewhere in your writings, you note that more money does not necessarily lead to happiness, and in fact research shows that beyond a certain point, often more money lessens happiness. Yet you seem to buy into the idea that you do not buy somewhere to live, just somewhere to park until you can afford to borrow more to move up the "property ladder".

I'd like the phrase "property ladder" to be banned. I'm not against people buying a home, and at some stage a newer, possibly larger home when needed. However, I'd like the emphasis to be on the word "home". I'm hoping you can be a part of this movement!

A: I'm afraid you won't recruit me. While I agree with most of what you say, I don't like the idea of banning even deeply offensive words — let alone harmless little "property ladder". In any case, mea not culpa. Well hardly culpa.

I checked on my website, and found the phrase appeared in my columns 10 times in the last 10 years — interestingly, half of them in 2016-17, right after big price rises. But only once in that decade was I the one using the term. Every other time it was in a reader's letter.

The one time was in August last year, when I was writing about government assistance to buy a first home. I wrote, "I often hear people dismiss this assistance: 'The only places you can buy — because of the house price caps — are horrible, or in bad neighbourhoods, or too far from work.'"

"But we're talking about first homes here. They're not meant to be perfect. Once you're in the market — on the ladder — you can move up."

Is that such a bad use of the term? I agree that we don't need to keep moving to bigger and better homes throughout our lives. There's much to be said for staying put. But — as you yourself say — it's reasonable to start with a modest first home and then to move up at least once, perhaps when your family expands.

Still, just for you, I'll try to keep away from "property ladder" in future. But I don't plan to censor readers' letters!

When the bank says no

Q: In your last column you completely misjudged the reality of NZ banks today when you gave (poor) advice to the person who has $300,000 to invest.

You strongly imply mortgage lenders' rates of 7 per cent are much more risky than bank rates — which "lend" at 2 to 4 per cent.

No — I am afraid they don't.

We have just been stiffed by our bank, who for several months all but promised to lend us $1.5 million but reversed at the "eleven and a halfth" hour and rejected our application. So we had to go to a second-tier mortgage lender at 6.09 per cent instead of the bank's (fake) offer of 2.59 per cent — both for two years.

Our sin — we had only $3 million in two houses as valued by the bank, and we agreed to give it two years' interest in advance, and we had $2 million in liquid assets and $600,000 in a forest asset, and are on track to earn more than $3 million this year, and had an unblemished 50-year banking record.

The bank is considering a settlement offer now — in lieu of being sued.

Instead of trashing second-tier mortgage lenders as you did, you should be trashing the big four banks for predatory practices and treating loyal and reliable NZ customers as common criminals.

A: First, I've removed the name of your bank. This is not because I want to protect them, but if the bank is named I've got to get their side of the story. And I don't think it would be helpful or interesting to other readers for me to wade into this fight. Nor does it seem you need my help, as you've obviously taken legal advice.

Another point: you're looking from the perspective of a borrower. Last week's reader is an investor.

But I'm publishing your letter because I didn't mean to imply, last week, that there is anything wrong with the work of non-bank mortgage lenders. They clearly fulfil an important role, lending to people who can't borrow from banks — presumably because of worries about their ability to repay, or the quality of the property or other security being offered.

In your case, the bank may well have got it wrong. And in fact most of the time second-tier borrowers must repay loans, or the mortgage lender would go out of business. That means most people who invest with a non-bank mortgage lender will get their money back, plus a nice return. But it's far from guaranteed.

All I was saying last week is that you don't get a 7 per cent return without taking a fair bit of risk. And for someone with their savings in a bank term deposit — which suggests they dislike risk — a mortgage investment doesn't seem appropriate.

Too many people these days, sick of pathetic interest rates, are jumping from term deposits to playing in the share or property markets or other fairly risky or volatile investments. It's not from the frying pan into the fire, it's from the comfortable kitchen bench.

Spreading the risk

Q: Regarding first mortgage lending for a 7 per cent return, these funds are often lent to developers with the associated risks.

However, if the total loan is kept at or below say 65 per cent of a registered valuation of the property, surely that should be safe, provided reasonable due diligence is undertaken, e.g. not clifftop or flood-prone sections.

This assumes a first mortgage security in place, and to reduce the risk the total loan money is provided by a number of investors. For example, if it's $1 million, then say 20 investors in lots of $50,000 each.

With $300,000 one could invest across six properties, so not all eggs in one basket. If a project did go wrong, the worst outcome should be the time needed to sell the property and extricate the funds, as the chance of a 35 per cent property correction are pretty much zero.

A: True, the property market is highly unlikely to drop 35 per cent. But the value of an individual commercial property can fall further than that, perhaps in an economic downturn, or when tenants leave and new ones can't be found because newer and better buildings have been built nearby.

"Property syndicates are often advertised as providing regular income, with attractive returns quoted," says the Financial Markets Authority on its website.

"However, syndicate structures can be complex, there are risks to be aware of, returns are only estimates, and you may struggle to get your money out." It goes on to say, "Forecasts for returns are based on various assumptions, which can be impacted by a wide variety of factors or risks:

• Tenants move out of the property and there is a delay finding new ones
• Tenants can't afford to pay their rent and outgoings
• The property manager or others involved in the syndicate increase their fees
• Interest rates change and this affects the syndicate's mortgage payments
• The property needs repairs or maintenance
• Increases in insurance premiums
• Possible capital gains or losses if the property is sold
• A loss in property value increases the gearing of the property, meaning it cannot pay distributions as it needs to reduce borrowings."

That's quite a list.

Another common problem is that investors have difficulties getting their money out. Often, another investor must be found to replace you. And while the managers may help you find one, the new investor may be willing to pay you a lot less than your initial investment.

I strongly advise anyone interested in this type of investment to read the FMA's comments here: tinyurl.com/FMAprop.

Pity the renters

Q: In a letter last week, someone said, "how about the poor renters who are paying off other people's mortgages?" With investors leaving the rental industry because they can't afford to hold, and new investors not interested in buying second-hand property because of recent changes, there will likely be a massive shortage of affordable rental accommodation.

On average, a tenanted property houses more people than an owner-occupied property. When a rental is sold to an owner-occupier, on average, more renters are displaced than owners housed.

New builds are too expensive for most tenants, so they won't fill the gap for a huge chunk of these people.

This leaving of the market by investors had begun slowly as a result of the raft of legislation by this Government. It has been disguised lately as a lot of newcomers jumped in, taking advantage of ultra-low interest rates. They won't last.

The number of Christchurch properties for rent on Trade Me is 1028. A year ago it was between 1250 and 1400. Watch that number continue to drop if these policies and more to come are enacted.

Shortly, renters and possibly even this Government are going to understand the essential role private property investors play in the housing of our population. If there are more landlords that actually suppresses rents, it doesn't cause them to rise. Shortages of properties do that.

A: Some counterarguments: Houses don't disappear. If lots of landlords sell, that will suppress price rises and possibly lead to price falls, and more tenants will be able to buy.

While tenanted properties tend to house more people, perhaps we'll see more first home buyers — and retired empty nesters — taking in boarders or flatmates. It's a great way to help make ends meet.

The trend is towards cheaper new builds that tenants can afford, such as townhouses.

And the new $3.8 billion infrastructure money will surely help with this.

It's not easy to predict how markets will adjust. But if the changes lead to fewer landlords and tenants and more homeowners, most New Zealanders will be happy.

Deducting interest

Q: Why did previous governments allow landlords to deduct interest from the amount of tax they had to pay?

It also got me wondering if this increased tax input — now that the deduction is being phased out — is really for the $3.8 billion infrastructure money, as it is going to take time for this type of work to be carried out. What do you think?

A: I don't think the Government said, "Gosh, we've got to get this $3.8 billion from somewhere. Let's remove mortgage interest deductions." But I'm sure they didn't mind that some of their proposals would bring in revenue.

On why interest was deductible in the first place, it's because paying interest is a business expense, just like insurance, or rates, or maintenance.

Generally, I think the only fair way to tax a business is on its profit after subtracting all expenses. So I can understand landlords' anger over the change.

On the other hand, many landlords have been making huge tax-free capital gains, while cleaners with two jobs pay full tax on their income. If the Government won't introduce a comprehensive capital gains tax — and I wish they would — I suppose the loss of mortgage interest deductions on all but new-built properties sort of makes up for that.

- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.