KEY POINTS:
Q. On the issue of rising house prices, we tend to overlook the more important issue of rental prices rising beyond the means of many households.
Those who have bought an overly expensive house, and are now struggling with the mortgage, took that load on willingly and with the "promise" of future financial gain. But what about the people who are subjected to continuing rental increases by landlords who are setting their rents to cover their now high repayments?
The Residential Tenancies Act tries to protect renters by defining market rent as " ... taking into consideration the general level of rents for comparable tenancies" but this just assumes that other rents are fair.
Rental prices can easily creep up under this system, especially when demand is high, such as in the past few years.
With accommodation being one of life's staples, surely some stronger form of regulation should be set on rents. We would not sit idly by if the price of bread climbed steadily higher due to a temporary increase in demand.
Regulation would also have the added effect of keeping house prices from soaring out of all reason because investor buyers would not be able to count on renters to bail them out of sticky financial situations.
A. If the price of bread did rise, I'm sure new bakers would enter the market promptly, offering a cheaper product.
In the same way, we must let market forces set rents. Rent control is another one of those nice ideas that does more harm than good.
"Economists are virtually unanimous in the conclusion that rent controls are destructive," says US economist Walter Block.
And it's not just right-wing economists. Block quotes Nobel laureate Gunnar Myrdal, a Swedish left-winger, as saying: "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by Governments lacking courage and vision."
Another Swedish economist and socialist, Assar Lindbeck, goes even further. "In many cases, rent control appears to be the most efficient technique presently known to destroy a city - except for bombing."
How come? If we limit the rent landlords can charge, fewer people will invest in rental property and there won't be enough rental housing to go around.
What's more, those who stay as landlords will feel less obliged - and less able - to maintain their properties.
In one study, 29 per cent of rent-controlled housing in the United States had deteriorated compared with 8 per cent of uncontrolled housing. The numbers are similar in England and France.
"Rent control has destroyed entire sections of sound housing in New York's South Bronx," says Block. "It has led to decay and abandonment throughout the entire five boroughs of the city."
Another point: in a typical rent control scheme, landlords can raise their rents when tenants leave.
They've got to cover their rising costs somehow. This leads to tenants staying in housing that no longer suits them.
Block writes of the "old lady effect". A large family may rent a house, then all the children grow up and leave and the husband dies. But the wife stays on, because the rent is cheap. What a waste, especially given the shortage of housing under rent control.
Other results include the politically connected benefiting, while others queue up for accommodation. Block said former New York Mayor Ed Koch at one point paid US$441 a week for an apartment worth about US$1200.
Ironically, the economist adds, if a Government wanted to help the poor and it insisted on using rent controls, it would do better to control only luxury units.
Builders would then concentrate on cheaper units, which would be more in demand from landlords because they were not controlled. This would boost the supply of cheaper units which, in turn, would lower rents.
Block concludes: "It may seem paradoxical to many people that the best way to help tenants is to grant economic freedom to landlords. But it's true."
If you want further evidence that trying to control prices doesn't work, look no further than our own history of wage-and-price controls under Sir Robert Muldoon's Government.
While there's no doubt the free market can be too harsh on some people, intervening generally doesn't work.
New Zealanders who can't afford to pay for their accommodation now get Government support. That may not always work as it should. But let's concentrate on fixing that and leave the market alone.
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Q. Are you on a retainer from the Reserve Bank to talk the housing market down or from the stock exchange to talk shares up (or both if you're really smart)?
You may have an effect, given the number of people who read your column.
We may be entering a cooling period in the housing market when it goes sideways or even down, as it did twice in the 90s, but overall can you argue that it'll change much from the 6 to 10 per cent annual average increase it's had over the past 30 years?
Your correspondents last week, in not buying that $300,000 home and renting instead, are throwing away average annual gains of around $30,000 - tax free.
If they buy now and the market drifts down, it's only if they have to sell and not rebuy on the same market that they'll lose.
Why not apply the same rationale you do to shares - don't try to time the market - buy and hold?
Most people won't save that money by renting.
A. First, there are no retainers. It might sound like a smart idea to you but it wouldn't do much for my credibility.
My opinions are based on what I've learned, not on who is paying.
On house price rises, note that for much of the 1970s and 80s, inflation was in the teens. So average house price rises in that period were much higher than they've been since then.
Generally, house price rises average 2 to 3 percentage points above inflation, so they might average around 5 or 6 per cent in future - if inflation stays constant.
But big ups and downs are sure to continue, and there's no knowing when they will start and stop.
The gains that last week's correspondent is missing out on, then, might be closer to $15,000 a year. But that's not the point.
We assumed the reader would save the difference between rent and the costs of owning a house - mortgage interest, maintenance, insurance, rates and so on.
So he might well accumulate more than $15,000 a year after tax - or even $30,000 - in his savings elsewhere.
It's true that some people don't have the self-discipline to save elsewhere and I acknowledged that last week.
But it's not that hard. All you do is setup an automatic transfer from yourbank account to, say, a low-fee sharefund. And don't touch it.
Your comment about timing the markets puzzles me. I agree that generally it's not wise to try to time any market - shares, property, bonds, foreign exchange, whatever.
But the correspondent was not trying to do that. He talked about renting for the rest of his life.
And if he does that, I would suggest that he uses the buy-and-hold strategy with his alternative savings.
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Q. Was I wrong about when to send money offshore for share investments in a letter of mine that you published a couple of weeks ago? I did say in that letter "in the past few months".
A point I made was that everyone agrees it's very hard to accurately predict the top or bottom of a cycle.
So why not wait until our currency is generally high - as it is now - to send your money offshore and generally low to bring it back?
If you sent some now (or a year ago when it was US60c) and our dollar went up to US80c - as it could easily do - you'd lose - but only if you returned it home at that rate.
A lot of the gains and losses investors make on overseas shares are actually currency related, so it makes sense to bring an element of timing into the picture. Far better than randomly sending it offshore.
If our currency never drops again? Well, I haven't lost over your approach and will probably still be a lot better off than people who sent offshore when it was below, say, US55c. They can only wait until it drops below that level again.
A. Or they can get on with their lives and simply bring their money back to New Zealand when they want to spend it.
You and I at least agree that it's hard - impossible actually - to predict the tops and bottoms of any investment cycle.
But you still think you can judge when our dollar is generally high or low.That judgment can be made based only on what has happened in the past, and how far back do we go?
In 1973, the dollar was worth US$1.48 - about double today's rate. True, that was before we floated our exchange rate in May 1985. But since then, our dollar, against the US dollar, has swung from US45c in 1985 to US70c in 1988 to US51c in 1993 to US71c in 1996 to US40c in 2000 and now to more than US70c.
Who knows what will come next - and, just as importantly, when?
Let's make a deal. You can move your money back and forth in line with your predictions, and good luck to you.
I will continue sending regular amounts offshore - via a New Zealand-based international share fund - as I save. Sometimes I'll get a bad deal on foreign exchange and sometimes I'll get a gooddeal.
But the bit I like best is that I don't spend any time watching currency movements and trying to predict them. I would rather read novels.
It's quite possible that you will do better than I. But - given all I've read about how hard it is to predict currency movements - I'm not convinced that your gain will be enough to justify all the monitoring.
