Mary Holm

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm: Long-term renting can have pitfalls

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For people who want to own at some stage, the low-risk strategy is to get into the housing market now

Renting is an option but buying can solve many problems. Photo / Getty Images
Renting is an option but buying can solve many problems. Photo / Getty Images

My husband and I have just moved back to New Zealand after five years in Perth. We've come home with a substantial deposit saved, but I'm concerned about investing in property here.

New Zealanders have a lot of money tied up in property and I'm worried that the baby boomers who are almost hitting retirement age now will want to sell their rental properties, downsize their own homes and/or move into retirement villages.

Property prices continue to rise and rise, particularly in Auckland, but I'm concerned we may be at the end of the cycle and the returns in the future won't be anywhere near those of the past.

We have recently spent some time in Europe where "renting for life" is common and are wondering if we should look at other options. I'm leaning towards placing everything into index funds and then trying to forget about it for 10 years. Everyone we speak to though thinks we are crazy not to just buy a house.

I quite agree that forecasts for Auckland house prices are worrying. But I'm not sure baby-boomer trends will have a dominant effect on prices.

Boomers are usually said to be born between 1946 and 1964 - a full 18 years. Furthermore, they won't all sell their rental properties and homes when they first retire, but over several decades - some perhaps in their 80s or 90s. From when someone born in 1946 turned 65, in 2011, to when someone born in 1964 turns 90, in 2054, there's a span of 43 years over which boomers might be selling property.

Sure, there are a lot of boomers. So their selling will put some downward pressure on prices. But there are so many other influences, such as the supply of new homes and the pace of immigration. It all adds up to anybody's guess - and perhaps not a good enough reason to sit on the housing sideline.

I suggest you think hard about "renting for life" in New Zealand. Unlike in Europe, we don't usually have long-term leases and the expectation that tenants will stay in one property for decades. It's not uncommon for tenants here to be booted out when the landlord wants to sell.

Still, there seem to be more New Zealanders planning to rent for life or at least to retirement - and not always because they can't afford to buy. Some want the flexibility and lack of responsibility that come with renting. And that's fine, as long as they will retire with enough to either cover rent for the rest of their lives or buy them a house at that stage.

If you prefer the latter - and most people in retirement do like the security of home ownership - the risk is that your savings through your working years don't grow as fast as house prices. You're clearly thinking it's the opposite, that your savings might grow more than houses. And that's also a possibility.

However, if you do want to own your own home at some stage, the low-risk strategy is to get into the housing market now. While prices might fall in future, that probably won't matter much as long as you either stay put or sell and buy in the same market.

Even if you think you might move into another housing market at some point, there's more to life than optimising house purchases. I reckon that if you want to own your own place, buy one. Sometimes it will turn out well, sometimes not, and life goes on.

As an example of this, let's dip into the history of someone I know well. She once bought a house in St Heliers for $380,000 and sold it a couple of years later for about $265,000 - a 30 per cent drop. On another house in Birkenhead, she spent $150,000 doing it up and recouped none of that when selling. On the other hand, she's also made some great gains, including a house price that almost doubled in two years in Sydney.

It all comes out in the wash over the years.

Capital gains

Why are we now discussing capital gains tax on private homes? Am I reading into David Parker's comments on capital gains valuations that Labour is planning that these will apply to our private homes if they win the next election?

No. I'm not sure how you got that impression. Sorry to alarm you.

"Primary homes are exempt," says Parker, who is Labour's finance spokesman. "Second homes and baches are not exempt, but carry-over provisions for inherited property including baches means capital gains tax is not triggered by death/inheritances."

So you don't need to worry that when you inherit the family bach and don't plan to sell it, you'll have to pay tax.

Explaining investments

The general investing public has been exhorted to support the local stock exchange and so diversify away from an unhealthy emphasis on property. This was particularly so with the Mighty River Power share issue, with the aim of achieving a significant and widespread local shareholding.

But the information that investors were encouraged to read about the company before making a decision was contained in a 256-page combined investment statement and prospectus. Apart from the inordinate length, this was so full of complexities and cross references as to be unreadable by the public at large.

The situation was worsened by closing off applications for shares one week before the price for them was set in a book build process. Investors were thus asked to subscribe for shares before they knew the price they would be paying for them.

The Mighty River issue has been followed by Synlait Milk, this time with a combined investment statement and prospectus of 202 pages. At least the share price was known before applications closed, but the same comments about readability and lack of communication apply.

Surely if investors are to take an increased interest in the sharemarket, it is up to the financial sector to come up with shorter offer documents in plain English that we can all understand.

I was also disappointed to see the length of the Mighty River Power offer document. But there's hope.

The Government is working on changes that will include two-part offer documents, called product disclosure statements, for all financial products including shares. At the front will be a summary of key information on one or two pages which hopefully will give less sophisticated investors at least the main information they need to know. Behind that will be more in-depth info. The law will require the whole document to be "clear, concise and effective".

The law setting this up has just been passed. And the simplified disclosure documents will start to be used from December next year.

Meanwhile, though, we're stuck with the old rules. And Treasury is unapologetic about the length and complexity of the MRP document, which it helped to draft.

In initial public offerings, the company has to disclose everything "material to potential investors", says a Treasury spokesman. "In the case of the Government's share offer programme, the companies involved are multibillion-dollar organisations.

"Describing them in full detail requires extensive and prudent disclosure."

He adds that the MRP document had to meet the needs of different groups, "including retail investors, institutional investors, the news media and financial advisers ... for example, the information required by a retail investor buying $1000 worth of shares may be different from that of an institutional investor, such as a KiwiSaver fund, which is buying millions of dollars worth of shares on behalf of other people."

Treasury was reluctant to give retail investors a lower level of information than other audiences, he says.

"However, significant effort was made to ensure that it was clearly segmented and included sections at the front of the document which summarised the investment opportunity and the investment risks, and provided more detailed analysis and comprehensive financial statements further through the document for those investors requiring more information.

"In other media reporting the MRP offer document's comprehensiveness and clarity was described as 'gold standard'."

Okay, so opinions differed. But how about next time?

Asked if the documents for other mixed ownership model shares sales are expected to be shorter and easier to understand, the spokesman said, "The Meridian share offer document will be a thorough and comprehensive document. It will be clearly separated into key sections so investors can navigate it easily.

"The quality of an offer document should be assessed on the comprehensiveness of the investment proposition being put forward, not its length."

Well, yes, but short and read has got to be better than long and glanced-through.

What about price? Will investors be asked to subscribe before they know the price in the other asset sales?

"The Government has announced that Meridian shares will be purchased via two instalment payments over 18 months," said the spokesman.

"The Government has also confirmed a retail price cap will be used to provide greater price certainty."

The first instalment payment will be at a fixed price, expected to be around 60 per cent of the share price. The final instalment price will be within a range, with the price fixed at the conclusion of the share offer.

That means that retail investors - you and I - will at least know the most we'll have to pay, although institutions may pay a higher price. For more on the instalment payments, see governmentshareoffers.govt.nz

The spokesman added that it's a good idea to seek advice before buying shares, "using the services of a share broker or authorised financial adviser".

Fair enough. But are people planning to buy just $1000 worth of shares going to do that? Roll on the new documents, which I hope will make it easy for those people to inform themselves adequately.

Oh, and by the way, what I've said here is my own personal view. It has nothing to do with my role on the board of the Financial Markets Authority.

Money Week

Starting tomorrow and running until next Saturday, all sorts of organisations are putting on events as part of Money Week, which is run by the Commission for Financial Literacy and Retirement Income.

You might want to check out moneyweek.org.nz to see if there are local events or other activities that would be helpful to you.

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 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 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.

- NZ Herald

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