Money: When lease means more

By Mary Holm

Forget the great debate on whether rental property is a good investment.

If an American trend catches on here, we won't even be owning our own houses.

Forecaster and strategist Phillip Ruthven says a growing number of Americans are finding that avoiding home ownership is a good investment strategy.

And the way the US market is developing, many of the usual objections to renting as opposed to buying are no longer relevant.

There's no good reason, he says, why similar developments couldn't take place in New Zealand.

Ruthven, who is executive chairman of the IBIS Group, an Australian business information, forecasting and strategic consulting corporation, was in Auckland this week to address the first conference of the newly formed Financial Planners and Insurance Advisers Association (FPIA).

"People are moving to home leasing instead of ownership, which never made any sense," he said. "In the US now, people are doing three-plus-two leases or five-plus-five leases, just like office blocks. And they're putting their money into shares."

Under a three-plus-two lease, the contract lasts three years and then you have the option to renew it for another two years.

Typically, rent for the whole period will be agreed in advance, often with increases to allow for inflation, Ruthven said.

If you want to leave during the course of a lease, it's common to sublease, said Ruthven. "It's more flexible than people think."

It's also common for people on leases to decorate their homes and settle into them more permanently than do most tenants.

Even so, people think leasing lacks the permanency of owning a home.

Ruthven responds that leases often run for longer than home ownership, which lasts an average of about seven-and-a-half years. And it's much easier to move out of a leased property than to sell one.

Most of the leased properties in the US belong to big residential property trusts, he says. In many cases, the trust owns large complexes of apartment buildings or townhouses. "Some of them are leasing out whole suburbs."

He hopes New Zealand financial institutions will set up similar residential property trusts. It makes sense, he says. "The value of houses and their land in New Zealand is twice the value of all business and commercial property."

People who don't want to wait for residential property trusts to develop can sometimes get long-term leases from landlords, or people going overseas for a period.

But why avoid home ownership?

"Your home is a passive investment. You're not producing wealth from it," says Ruthven. And he doesn't think fixed interest investments, rental or commercial property - or, for that matter, residential property trusts like the US ones - are much better investments.

Shares, or your own business, are the dynamic investments. "They're usually growing and, hopefully, becoming more profitable. The trick is good management.

"Nothing will ever beat the return on shares. You might have a few years (when alternatives do better), but not long term."

Ruthven suggests taking an international approach to share investment, and he favours share index funds.

On another topic, Ruthven says that adults often encourage children to go into law or medicine, but it's not a good idea. "They're driving by their rear vision mirror."

The growth is now in information technology, telecommunications and the service industries - including health, tourism and entertainment. "You can now make more money in the hospitality industry, for example."

To the older generations, he says: Don't retire too soon. Work part-time until you're about 75. "Otherwise you'll get bored and boring."

And he encourages everyone to have lazy weekends. When people cook their own dinners or mow their own lawns, they're causing unemployment.

"More people are outsourcing household services or chores. That's creating more jobs than manufacturing ever thought of in the industrial age."

He adds that while technology might be making some jobs redundant, it creates other work.

The negative impact on employment has been nothing like that of the tractor and fertiliser. "They wiped out 90 per cent of the jobs on farms."

* Mary Holm is a freelance writer who specialises in investment and personal finance issues.