Mary Holm 's Opinion

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

Mary Holm: Sticky patches the downside of risk

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Investments can have drawbacks — but if you've never had a bad stretch, you've invested too conservatively

George Stigler's comment, 'If you've never missed a plane, you've wasted too much time in airports' can be extended to apply to the risks of investment.
George Stigler's comment, 'If you've never missed a plane, you've wasted too much time in airports' can be extended to apply to the risks of investment.

Q: We bought an investment property in Hamilton for $395,000 five years ago. We are having to top up the mortgage by $100 a week as the rent doesn't cover mortgage payments.

If we sold now we would be lucky to get $350,000. But are we better to cut our losses and get rid of it? We still owe about $350,000 on our home mortgage in Auckland.

A: Nobel-winning economist George Stigler is said to have once observed, "If you've never missed a plane, you've wasted too much time in airports." Similarly, if you've never had a bad investment, you've invested too conservatively.

Some people go through life "investing" only in bank term deposits or the like. But they will probably end up with less than those who take a few calculated risks - often in property, shares or share funds.

The price of probably ending up better off is some aggravation along the way, when an investment doesn't turn out well.

You've struck one of those - in a scenario that people don't foresee when they enthusiastically get into rental property investment. Such scenarios are not happening in Auckland these days, with house prices rising, but they are happening elsewhere. And Auckland may well get its turn - possibly with a vengeance.

What should you do now? If we knew Hamilton house prices would rise considerably soon, clearly it would be better to stick with the rental. But nobody knows.

Often in these situations it's best to get out. Financially that might or might not turn out to be the best move, but psychologically it's obviously better. And that matters.

If you sell, you'll then have $100 a week extra to attack your home mortgage. There's a lot to be said for concentrating on paying that down to zero. After that, you'll be in a stronger position to take on riskier investments - maybe another rental or perhaps a share fund.


Investing in currency

Q: I have been watching the New Zealand dollar/Australian dollar exchange rate. Currently I can buy about A87c with $1.

If it heads up towards A95c, I thought I might buy some - with money put aside for a property.

Do you think this is a good idea? It seems quite a safe investment to me but I could be wrong.

With $200,000, how should I proceed to purchase - four lots of $50,000, say? Do I have to pay tax on any gain?

A: I said above that taking on some risk can be a good thing. But not this sort of risk - in which you're more likely to end up worse off than better off.

Investing or trading in foreign exchange is what's sometimes called a zero sum game. For every person who gains a dollar someone else loses a dollar. And that's before taking into account transaction costs, which can be considerable.

Unlike investing in shares or property, you're not putting your money into something that will probably generate income and grow at least with inflation if not faster. With foreign exchange, you're simply hoping that the value of one currency will increase relative to another currency. It can just as easily decrease. As I said last week, a huge number of factors - many of them unforeseeable - feed into foreign exchange movements.

Last week's reader hasn't got any choice in that he has money in the UK and wants to spend it in New Zealand. He has to convert pounds to dollars at some point. However, assuming you want to use your money to buy property in New Zealand, you don't need to take on currency risk or costs for quite possibly a negative reward. And if it's positive, you may need to add tax to the costs.

Says an Inland Revenue spokesperson, "As we don't have a lot of background information we can't go into much detail.

"However, exchange rate gains can be taxable, depending on the circumstances of the person. The tax consequences may depend on the intention of the person, including whether they have a history of such arrangements.

"Generally where a person buys something [in this case foreign currency] with the intention of selling for a profit (bringing it back to New Zealand when the exchange rate is more favourable), then any gain would be taxable."

If you insist despite all this - which really makes you a gambler - I agree that it's better to split up the money so you don't move it all at what turns out to be a bad rate.

Keep costs in mind though. Breaking the money up too much might end up costing more.

And good luck. You'll need it.


UK banking woes

Q: Your correspondent with the UK bank account struck a chord with my wife and me.

We have a considerably smaller account in the UK, which we call upon from to time. In the good old days we just wrote care of the bank manager, and a few days later the requested amount would be deposited in our New Zealand bank account.

However, the last time we followed the same procedure - nothing, no explanation, no comment, no money. We wrote to the head office and to its offshore offices, again without receiving any acknowledgement at all.

A large number of phone calls to England in the middle of the night finally elicited that the real reason for their concern was about "money laundering". This was for less than £10,000, even after we had complied with all the necessary identification requests and an authorised substantiation from a representative from our New Zealand bank.

Our suggestion to your writer is that they make certain they can transfer the sums quickly when they actually want to. Otherwise they could have a considerable delay during which the rate of exchange will fluctuate - and regrettably not necessarily in their favour.

A: You've come up against either New Zealand's cumbersomely named Anti-Money Laundering and Countering the Financing of Terrorism Act 2009 or the UK equivalent or both.

The New Zealand act, which came fully into effect on June 30, was passed "to ensure businesses take appropriate measures to guard against money laundering and terrorism financing. This enhances the reputation of individual businesses, and New Zealand as a safe place in which to do business", says the website of the Banking Ombudsman Scheme.

It goes on to say that the act "requires banks to gather more customer information to secure New Zealand against criminal use of our banking systems. This increase in information-gathering may cause customers some inconvenience, but is a legal requirement for banks, and non-compliance can result in prosecution".

Clearly, banks have no choice but to ask more questions than in the past. It seems, though, that you've also experienced poor service from your bank. The act is no excuse for not communicating with you.

Thanks for the warning to last week's correspondent and others.

For more on what banks must do under the act, and how customers are affected, see the Banking Ombudsman Scheme's Quick Guides at bankomb.org.nz.


Coping with exchange

Q: The questions raised last week about moving money from the UK are, as you say, far from unusual. But the writer made a common mistake in bemoaning the current strength of the kiwi dollar as opposed to many foreign currencies - not just the pound. Hindsight is wonderful, but one should just concentrate on the here and now.

We have been (and still are) in a similar situation with money still in the UK. Our approach has been to set "buy" orders at various points up to and over $2 to the pound, which kick in when (or sadly "if") the rates hit those parameters.

One major point that should also be borne in mind is the differential between interest rates. Your correspondent cited having the money earning 0.5% in an ANZ UK account. Our money is also languishing in a UK bank so-called high interest account earning 0.45%.

Here, 4.5% is easily achievable by shopping around. Putting this into the equation makes it a bit better.

A: Good point. If one country offers higher interest rates than another, theory says that it's not wise to move money just to get that higher interest. That's because - more likely than not - the value of that country's currency will subsequently fall.

This doesn't always work in practice, though. And the current UK-New Zealand difference in interest rates is big, as you say. At the least, that means that if you move money here and later wish you hadn't because the kiwi dollar falls, you know you've earned considerably higher interest on the money in the meantime.

On your strategy of buying if the exchange rate hits a certain point, that can work pretty well if you're in no rush for the money - and are prepared to adjust your target price as needed over time.


Capital loss rebate?

Q: There is a lot of talk about a capital gains tax, but what if you sell something for less than its original value? Surely you should be able to claim a rebate. The Government cannot have it both ways. Or can it?

A: Well, it's not planning to, if Labour wins the election and sets up a capital gains tax.

"Realised capital losses can be offset against capital gains or carried forward against future gains," says Labour finance spokesman David Parker.

A "realised" loss is a loss made real because you have sold for less than your purchase price.

Hopefully, under such a system, most people will make enough gains that they can make use of their losses.


Capital gains tax

Q: If a capital gains tax was introduced to New Zealand, how would it work in the situation of the owner wishing to draw some of his increased equity out of his rental property by increasing the mortgage on it?

This is quite common in times of property price appreciation, with the money borrowed spent on financing another property or on consumer goods.

If an owner did this, he might not have enough equity on eventual sale to pay the tax on the capital appreciation since he purchased the property.

I presume the outcome might be bankruptcy for the taxpayer and loss of revenue for the tax department, unless measures are in place to stop withdrawal of equity from a property or a tax on the amount withdrawn.

A: I don't like the idea of that degree of regulation. And it shouldn't be needed.

Says Parker: "This is theoretically possible but unlikely given that the CGT only applies at 15 per cent of the gain, not the total sale price, and it would be unusual for the property to be so highly geared."

To which I would add that the owner should be able to see this problem coming before borrowing so heavily.


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 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.

- NZ Herald

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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

Mary Holm

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

Mary Holm is a columnist, best-selling author and seminar presenter on personal finance. She is also a director of the Financial Markets Authority and the Banking Ombudsman Scheme, and holds an MBA in finance. Previously she was business editor of the Auckland Sun and Auckland Star, and has worked for the NZ Listener, Australian Financial Review and Chicago Tribune. She has been called “The nation’s favourite investment agony aunt.”

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