Mary Holm is a personal finance columnist for the NZ Herald.

# Mary Holm: Inflating those rosy memories

Your page the other week was most interesting about house prices. You may be interested in what it cost for our family to build a new house in 1958.

It was a brick base and wood house with three double bedrooms and all the normal facilities of the day. Cost of the land in 1957 was £1250. The section was in Riddell Rd, St Heliers, with views at the time towards the city and Bastion Point. Our new house, built early 1958, cost £3577, making the total £4827.

And - the interest rate for a mortgage at the time was 4 per cent for 30 years with the Government (State Advances Corporation). Also once you had your mortgage granted, the rate did not change for the 30-year duration of the loan.

I have the original quote from the builder still.

Have you ever noticed that whenever someone talks about the price of something or somebody's income a long time ago they say, "the princely sum of ...", with a touch of irony?

"Hang on a minute," I often think. "It's just inflation that has made that chicken so cheap or that pay so paltry."

And if I'm near a computer, I might reach for a favourite internet tool, the Reserve Bank's CPI inflation calculator. You'll find it under Quicklinks on the right side of the home page of www.rbnz.govt.nz, and it copes just fine with the change from pounds to dollars in 1967.

To keep things simple, let's average out your timing to make the land and house purchases in the last quarter of 1957. That's near enough.

The calculator shows that, adjusted by the Consumer Price Index, the £4827 would equal about \$215,600 today.

Clearly that's way lower than the current value of a dwelling such as yours. House prices have risen much more than most other prices.

But wait. The calculator includes food, clothing, housing, wages and transport indexes. The housing index is from Quotable Value. The only trouble is that while the CPI goes all the way back to 1862, the housing index starts in 1962.

To get around that, we'll use the CPI for the first few years, and the housing index from 1962 on. The result: your £4827 grows to a little more than \$593,000.

That's a bit more like it, although it still falls short. Apparently, Riddell Rd houses have risen faster than average New Zealand houses in the past 50 or so years. Surprised, anyone? Mind you, the average house on that road is probably now much bigger and grander than yours was.

On the mortgage front, lucky you for getting a low-rate loan for a full 30 years. The only worry is that, as rates rose, it might have made you reluctant to move out of the place, even if it became unsuitable.

CPI hikes eat up savings

In many of the advisory messages I read regarding the savings requirement for retirement, I am surprised to so seldom see any mention at all of the impact of inflation.

Having been out of gainful employment now for the better part of 25 years, I am acutely conscious of the fact that the provision I believed I had made for more comfortable living in my later years was less generous than I had anticipated.

Would that I had kept adequate records to illustrate the effect of inflation on my living costs, but over the past decade, my rates have increased by 67 per cent, electricity by 77 per cent, and I suspect that examination of the CPI would confirm that the past decade was below the average rate of price/cost increases for the past quarter century.

So bless all central bankers who endeavour to limit inflation to 2 per cent or less.

Inflation can indeed be crippling for retirees. That's why it's best for a retiree to invest at least a portion of the savings they expect to spend more than a decade later in shares and property. Those investments are more likely to keep pace with inflation.

However, it sounds as if that advice might be a bit late for you, unless you retired young or plan to live well past a century - and good on you if that's the case.

Looking at inflation over the past decade, the Reserve Bank calculator mentioned above tells us that the prices of the goods and services in the CPI have risen about 32 per cent. So it's not as bad as your rates and electricity picture suggests.

If we look at the different sectors, housing has risen 108 per cent, food 38 per cent, transport 31 per cent and clothing just 2 per cent.

Given that you pay rates, I assume you own your home - hopefully without a mortgage - so you haven't been affected by the worst inflation, except in your rates. On the other hand, you may not spend heaps on clothes, so you haven't been helped in that direction.

Over all, you're quite right. In the past decade inflation has averaged 2.8 per cent a year, somewhat less than the 3.5 per cent of the past 25 years.

But the difference would be much bigger if we went back further.

From the early 1970s to the mid-1980s the CPI almost always stayed above 10 per cent a year, and at times topped 18 per cent. It must have been terrible for retirees back then.

The inflation plunge in the late 1980s came under Don Brash's term as governor of the Reserve Bank. Whether or not you like his politics, it makes sense to appreciate what he and his team did then, and what Alan Bollard and co have done since to keep inflation down.

Big question

I read your recent article and follow-up letters. The Big Question I am asking myself is, "Is it worth it to continue to live in New Zealand, buying second-hand goods, scrounging for basic necessities, tightening up your belt, buying expired-date items, and living in constant uncertainty?

"Or move to some other country and try out once and for all?"

Only you can answer that. New Zealand hasn't got the highest living standards, but it has got other pluses that some of us love - such as wonderful wilderness and coastlines, a unique culture, and all the advantages of being quite sparsely populated.

If the total package doesn't add up to much for you, there are a couple of good options:

* Try to change things for the better.

* Move to another country.

Whingeing is not a good option. Your choice.

Trust a nuisance

When our son was born 13 years ago, a financial planner recommended we set up a family trust. Our only asset is the equity in our home and we are both employed, paying PAYE.

We are both too honest to try using the trust as a way to get benefits such as Working for Families, or to get around the system in any other way.

We never really did quite understood how a trust might benefit us particularly, but everyone seemed to be doing it at the time.

All that's happened is that it's become very stressful, as Public Trust is constantly writing to ask us to come and do complex and convoluted paperwork - for a large fee. It's also tricky with regard to personal loans and overdrafts as, of course, the house is owned by the trust.

Is it possible to dissolve the trust? Or can we simply "park" it and choose not to proceed with all the gifting?

Sorry, but there might be a bit more paperwork and fees ahead of you. But there's an end in sight.

I suspect you are far from the only ones to have leapt on the family trust bandwagon without fully understanding why you were doing it. Comments John Bassett, a specialist in trusts at Bell Gully: "In recommending the trust it is likely that the financial planner wished to ring-fence family assets from potential claims by creditors.

"The financial planner may also have had an eye on assisting with state benefit eligibility, a widespread goal through the 1990s.

"It now appears that the intended advantages have not occurred. To continue to work as employees has not created creditor exposures. Nor is benefit eligibility assisted by the presence of the trust."

Even if it were, you say you're not interested, and I applaud you for that. It's a topic that causes lots of arguments among friends, but I don't like seeing people using trusts to pay less tax, get extra from the Government, or wriggle out of paying their way if they end up in a rest home.

I know there are other, legitimate, reasons for trusts. Some years ago we had many letters in this column on the topic.

But nobody can deny that at least some people use trusts to "get around the system", as you put it.

Now that you want out, how should you go about it?

"To simply park the trust is a less attractive option," says Bassett. "Parking would probably result in the trust ceasing to exist. A legal vacuum would be created as to who, legally, owns the assets previously owned by the now defunct trust. The status of existing banking arrangements would become uncertain."

Sounds too iffy. Bassett is happier with the dissolution idea. "There will almost certainly be a winding up clause in the Deed of Trust," he says.

Predictably, perhaps, he recommends you see a lawyer or other independent adviser to review "the appropriate ownership structure for family assets". But given the complexity of these animals - as you have found - his suggestion makes sense.

The lawyer could tell you the best way to eliminate the trust. And he or she "might add that family wills may need re-doing if the wills had anticipated the involvement of the trust to own family assets. Wills often provide for assets to pass to the family trust," says Bassett.

The lesson in all this? There's a lot to be said for KISS - keep it simple, stupid. Don't add complexity to your finances unless the advantages are clear to you.

Adds Bassett, "For the present correspondent, and no doubt many others, advisers in the past often took a boiler-plate approach and recommended structures that were probably unsuitable, to only end up bewildering the client. Touch wood, but I think today people are becoming knowledgeable about these sorts of matters and so possibly less likely to get into this kind of predicament."

Hope so.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter 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.

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