Q. I am looking for some general financial advice. I am a 25-year-old male who has just finished his Auckland University degree and entered into the professional work force after six long years of study (three years part-time and three years full-time).
Roughly a year-and-a-half ago my mother passed away, and my sister and I unexpectedly inherited a portion of the family home. We have put it up for sale and it looks like we will be coming into around $200,000 each.
My question is that I am not entirely sure what to do with this newfound money. I have the option of a reasonable deposit on an average property somewhere on the outskirts of Auckland. However, I am quite certain that within a few years I would like to travel.
Do I put this money into property now? Or do I simply put it into my savings account or term deposits at 4 per cent a year and buy a property in the future?
I have about $30,000 savings already. I am in a relatively junior position at the company although I get $55,000 a year, so I feel that with flatmates in the house I should be able to service a $250,000 to $300,000 mortgage.
What general advice would you recommend to someone in my position?
A. Whatever you do, there are risks. Let's say you buy a house now. The risks include:
• If you sell the house before you travel, house prices might have fallen or not risen much. You would have been better off leaving the money elsewhere.
• If you keep the house while you travel and rent it out, possible problems include: troublesome tenants; you find you can't get tenants because there's a glut of rental property; or mortgage interest rates rise a lot. Monthly payments on a $250,000 30-year mortgage at 6 per cent are $1499. But at 10 per cent you'd have to pay $2194, and rental income might not cover that plus all expenses. These things happen and they're much harder to deal with if you're not in the country.
• You decide you want to stay overseas - perhaps with a partner from another country. So you sell your house, and prices have fallen or not risen much.
On the other hand, if you don't buy a house now, local house prices might grow faster than your savings. When you return to New Zealand you might not be able to buy such a good house.
A lot of this boils down to one question: what will happen to house prices? If you were certain you would stay in New Zealand, that wouldn't really matter. It would be best to just get into the housing market.
But in your case it does matter. And there are many factors - such as unpredictable immigration rates - that affect house price movements, making them impossible to forecast.
The best we can do is look at longer-term trends. And we're helped here by a recent report from the Organisation for Economic Co-operation and Development.
"In a chapter on potential financial vulnerabilities, [the report] cites in New Zealand's case the 88 per cent rise in real house prices since the start of 2000 - the biggest increase in the OECD," writes Herald economics reporter Brian Fallow. "It lists New Zealand among the countries at risk of a fall in house prices, especially with borrowing costs now rising."
Looking at house prices relative to income, the OECD said New Zealand's ratio is 26 per cent above its long-term average. For the OECD as a whole, it's 5 per cent below the long-term average.
Need more convincing? How about house prices relative to rents? By that measure, New Zealand is 66 per cent above the long-term average. For the OECD overall, it's 5 per cent above.
When economic measures like these stray well away from long-term trends, they almost always move back. Trouble is we don't know when. They might move even further away before they come back. But I would hate to be counting on house prices continuing to rise at the pace they have in recent years.
At this point I start to get nervous. I don't want an angry letter from you 10 years from now saying I got this dead wrong. So let's just say that if I were in your situation, I wouldn't buy a house until after my overseas travel. It certainly makes life less complicated, and there's a good chance it will also be financially right.
Therein lies another problem: which term do you go for? Currently, interest rates tend to be higher for longer-term deposits. But with interest rates expected to rise, current long-term rates might look low in a year or two.
Probably the best strategy is to put half your money in the highest long-term rate, and leave half shorter term, so it can benefit from higher rates later.
Whatever you do - buying or not buying a house, investing your savings long-term or short-term - I don't think you should worry too much. The fact that you already have $30,000 in savings suggests you've got your act together. Regardless of house prices, mortgage rates, tenant behaviour - or even overseas love affairs - I reckon you'll be fine financially.
Q. Rent v mortgage
I've sold my house and don't want to buy another at the moment. I couldn't afford a big mortgage. I'm in my 40s and don't have other assets.
I have the money in the bank at the moment, but where to start? I'm risk averse!
A. I'm guessing you're finding renting cheaper than a mortgage. As the OECD pointed out, house prices are currently really high relative to rents.
But despite this and the possibility of a house price fall, let me repeat what I said above: if you want to own a home in the long run and stay in New Zealand, you're probably best to get into - or in your case get back into - the housing market.
This is especially true if you're risk averse. Once you own a home, house price fluctuations don't usually affect you much. So my suggestion would be to buy again without a large mortgage.
Q. Gifts and KiwiSaver
My partner and I are wanting to buy our first home using the KiwiSaver first home subsidy. Under the new KiwiSaver rules, we have to have a 10 per cent deposit to get the subsidy. My father is willing to give me the 10 per cent as a gift, and I've read that that is allowed. But there's a complication.
My partner is receiving the student allowance. I'm unable to work because of sickness, and therefore I'm regarded as his dependent partner, and his allowance covers both of us.
I've heard that beneficiaries are not allowed to receive gifts while on the benefit, but I don't know if this applies to my situation. If I received this gift from dad, would it affect the allowance my partner and I receive, and if so, how?
A. Good news. Says a spokesperson for the Ministry of Social Development: "For people receiving a student allowance, lump sums, other than bursaries, grants and scholarships, are not counted as 'personal' or 'spousal' income.
"In this case, as the stated intention of the one-off lump sum is to assist with accessing the KiwiSaver first home subsidy, it could be excluded from being counted as personal income and it would not affect their student allowance.
"If the couple's circumstances were to change, however - that is, one of them picked up part-time work - then that may affect their entitlement."
While I was at it, I asked if the same would apply to people on benefits. The response: "For people receiving a benefit or some form of financial support from Work and Income, funds in a KiwiSaver account will generally have no impact on a person's benefit entitlement. This is because these funds are 'locked in' and the funds aren't generally 'readily realisable' assets for clients to draw on.
"If a beneficiary is gifted a one-off lump sum payment to put into the KiwiSaver fund for the purpose of purchasing a first home, this would generally not affect his or her benefit."
However, the spokesperson adds, "Depositing significant lump sum funds into KiwiSaver or other superannuation schemes and on a regular basis may have an effect on a person's benefit entitlement. In these cases, the individual circumstances of the client would need to be discussed and assessed on a case-by-case basis."
This is obviously to avoid abuses.
So go for it! Here's hoping your father's gift helps you two to get on your feet financially.
Q. Spec building liability
I was interested in the letter last week from the spec builder. Surely if his intent was to build and sell at a profit he should he liable for taxation.
At least he will be able to claim legitimate expenses as a deduction. But unfortunately his $50,000 will be a little less.
A. Oh dear. The guy was already disappointed in his profit. But you're quite right, he should be paying tax, unless he included tax in the "few other bits and bobs" of his expenses, which seems unlikely.
As you say, the key to whether an investment like that is taxable is whether you plan to sell it later for a profit. And it would be hard to argue against that on a spec home. More on this in the next letter.
Q. Capital gain clampdown
On the face of it the correspondent is liable to tax on the net gain, as a spec home obviously indicates intention to profit and there's been a "capital gains" tax for that situation for decades.
It's often overlooked or ignored - but the clear exposure is there. Prospectively there's further potential exposure to penalties for non-declaration. IRD has been clamping down on these and similar transactions (particularly in Central Otago and Auckland) in recent years.
A. Your use of quote marks around "capital gains" is obviously to indicate that it's not a capital gains tax as such. New Zealand doesn't have one - although Labour plans to change that if it wins the election. The thinking behind the current tax is that somebody building a spec home or similar is making income from that. So they should be taxed in the same way as everyone else earning income.
As you say, tax in this situation is often ignored. But ignorance is not bliss if Inland Revenue comes knocking. And the penalties can be tough. Our friend would be wise to pay up.
• Mary Holm is a freelance journalist, 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 opinions are personal, and 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 firstname.lastname@example.org 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.