Money: Bricks and mortar may be too much

Q: My wife and I are in our mid 50s, semi-retired, own our house ($520,000) plus two rental properties ($500,000 grossing $33,000) mortgage-free, and are sitting on around $230,000 in short-term bank deposits. We feel comfortable with "bricks and mortar," but do we have too many bricks?

The real value of our cash reserves is declining in bank deposits, particularly if we spend the interest to reduce the need to work.

We are looking at managed schemes involving a mix of shares and bonds to invest, say $200,000, but are not sure if now is the right time, given the value of the New Zealand dollar.

Some financial advisers say now is always the best time, but is that marketing hype or, over the long term, true?

Meanwhile, our money continues to burn holes in our pockets.


A: Except in one important sense - you're millionaires - you two are typical Kiwis. Heaps of money in term deposits and even bigger heaps in real estate, and nothing else!

Of course you've got too much in bricks. And we don't have to look back far to see how that has hurt you.

In the last three or four years, most property values haven't gone anywhere much. Some have fallen. The return on your properties - rental plus capital gain - almost certainly wouldn't be as high as in a worldwide share fund.

If we were looking at a New Zealand share fund, that might not be true. But we're talking about diversification here. For me, that means a world fund.

I'm not saying world shares will always beat rental property. But over the long haul they tend to. And you greatly reduce your risk by having a wide range of asset types.

So where to from here? Ideally, I think you should sell both rental properties and put that money, plus your $200,000, into a managed fund that includes world shares. You've got half a million in housing. Isn't that enough?

If that's a bit much, how about selling just one of the rentals?

Whether or not you can part with those bricks, you should go ahead with investing in a managed fund. And do it now.

I, too, am wary of salespeople who say, "Now is the time to buy." They're not always right. The trouble is that we can't pick the good times until after we've had them.

On any given day, nobody knows what will happen tomorrow to share prices, interest rates, exchange rates - the whole mix of factors that make investments good or bad.

You might think our dollar is low now, but it's just as likely to go lower as higher.

So you might as well make a financial move whenever you realise you should.

After all, if you're going into the fund for the long haul - which you should be if you're getting into shares - research shows it doesn't end up making much difference what the market is like when you enter. Trends over subsequent years have much more impact.

As far as your choice of a managed fund goes, the mix of shares and bonds will depend partly on whether you can cope with seeing your balance fall sometimes.

If you have lots of shares, there will definitely be some falls. But in the long run your investment will probably grow bigger, possibly much bigger.

And don't worry if, by going into world shares, you don't get much of a dividend flow. If you need more income, just sell some units. The long-term capital growth should be strong enough that you can afford to do that.

One last point: If you're leaving $30,000 in term deposits, surely it doesn't all need to be short-term. You can get more interest if you tie up some of it for longer.

Q: I was surprised by your column two weeks ago. You were arguing for a uniform capital gains tax on the grounds that capital gains are made by people "sitting around and being lucky."

Surely capital gains are the reward for not spending, which the NZ economy is in dire need of, so that we rely less on foreign savers to prop up the stock exchange companies.

Taxing capital gains penalises and discourages the thrifty who have already paid income tax. Even inherited money is someone's saving or non-spending.

With the Government having trouble financing even a modest level of pension, it's especially important not to further discourage saving. The opposite policy is required, surely.


A: Didn't you read the bit where I said, "If capital gains were uniformly taxed, I would, of course, expect an offsetting drop in income tax."?

Under the present system, interest earned on savings is taxed, but capital gains on savings are often not.

If the two were taxed the same way, at lower than current income tax rates, that should encourage rather than discourage saving. Workers would have more after-tax money to save. As most new savers start with a bank account, they would keep more of the interest they earn.

Also, the current messy situation discourages some people from investing in shares and some share funds.

Given that these are investments with the best long-term growth prospects, discouraging them can't be good for the nation's saving.

You seem to resent my "sitting around being lucky" line. Maybe it was a bit harsh. Perhaps you're sitting around being frugal and clever.

But I still can't see why those who make money from working should contribute more to the Government's coffers than those who make capital gains.

There are lots of situations in which it's hard to distinguish between income and capital gain. That's why the current system is such a nightmare.

With a simpler system, we wouldn't have to pay lawyers, accountants and IRD officials to work out what's what. That, in itself, would leave us with more money.

P.S. After writing this I read that the OECD thinks New Zealand should tax capital gains. Why? To boost our record on investment and savings.

Q: I take issue with your comments in the Herald two weeks ago that homes should be included in capital gains as they are an investment.

This is wrong. I don't think any right-minded person would say a home is an investment. A home is something one buys to live in.

If it turns out that land prices rise by the time one pays off the mortgage - making the property worth more than when it was purchased - then so be it. That's life.

But it is rarely a commercial decision when the average family decide on a property.

The idea of people being taxed on the increased value of their home - just because outside market forces increase its value - is abhorrent.

The reason many people put more money into their homes is to keep them well-maintained and to reduce the mortgage. Surely, that is what every home-owner would like to do - have a pleasant home and as little a mortgage as possible.

Next you'll be suggesting the introduction of a window tax to stop people enjoying natural light.


A: Now there's an idea. After all, higher-income people tend to have bigger houses, and so more windows.

Under the current tax system, they pay a bigger percentage of their total income in taxes than do those on lower incomes. We could replace income tax with a window tax, with much the same effect.

The only trouble is that it might make rich people spend less on windows and more on other things.

That's what is happening now, in reverse. Rational people are spending more on their houses and less on investments with taxed returns.

It steers money away from its best use. And that makes everybody worse off.

It also means, I reckon, that many "right-minded" people do regard their homes as both shelter and investment.

Most, for instance, buy with an eye on resale value and would be foolish not to.

In any case, should we get into whether a purchase is an investment or not? How would we classify art or other collectibles?

One cause of the capital gains mess is that the IRD looks at people's intentions when they buy. Let's get rid of this mind-reading, and simply tax anything that gains in value.

I showed your letter to economist Gareth Morgan, of Infometrics, who favours taxing capital gains as well as income, and then cutting the tax rate so total taxes are unchanged.

He points out that, while the idea of people being taxed on the increased value of their homes may be abhorrent to you, it happens all the time. We all pay higher rates as the values of our properties rise.

"It is precisely because of the tax loophole that the value often does rise," says Morgan. "More and more folk like him run into this asset class because of the tax break it offers, both on living rent-free (the imputed rent argument) and because the capital gain is a tax-free way to increase wealth."

The imputed rent argument is that people who own their homes in effect get extra income because they don't have to pay rent. Some people argue that this "income" should be taxed. But we won't go further into that here.

Morgan goes on to say, "Your correspondent's argument that people plough money into home improvements and they shouldn't be taxed is correct, as ultimately those are consumed [worn out] by occupation." I agree.

He then says, "The same does not apply to unimproved land. Investing in and enjoying the occupation of unimproved land is a major tax loophole that favours the purchase of housing over and above its function as a shelter."

Got that? As Morgan says, we're getting pretty deep here. And I still think we should tax all capital gains.

* Mary Holm is a freelance journalist and author of the newly published Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.