Mary Holm: Long way from blackboard jungle

I write in response to your comment last week that property has risen from 54 per cent to 75 per cent of domestic savings since 1986, and you ask why.

Well, to anyone who lost their savings in 1987 or the other crashes since then, it is obvious - we simply do not believe the New Zealand market is operating in our interest and do not trust the people running it.

We see a self-serving clique of directors continuing to live comfortably or even lavishly while ordinary savers are left with empty promises and worthless bits of paper, and we wonder why the New Zealand regulating authorities protect them rather than the victims.

Most people who feel ripped off also have families and associates who know the story and will never hand money into "tainted" boards or shares in general, so that 25 per cent of savings is likely to get less as the children grow and earn.

On the other hand, with property I actually own something that has value. And over the past 15 years has done very well.

Now, back to your question. You want me to buy what?

I don't particularly want you to buy anything. But I worry that you might be missing out - and taking unnecessary risks - if you concentrate only on property.

I'm not going to revisit the debate on diversified share returns versus property returns now. We've done that enough times in this column. Let's just say that both generally turn out to be pretty good long-term investments. Clearly, though, you don't see shares in that way.

Your objections seem to be mainly around the people who run New Zealand companies. Certainly there have been some crooks. It would be good to see more of them punished, and promptly. New Zealand would do well to copy the United States' speedy handling of swindler Bernard Madoff.

But you're overlooking all the solid companies out there getting on with providing many of the goods and services you and I use every day.

One of the big advantages of shares is that it's easy to invest in a wide range of companies via a share fund. And most of the companies do well most of the time. If they didn't, our whole system would collapse.

Harking back to the 1987 crash isn't very enlightening. At that time, New Zealanders got so caught up in share fever that many borrowed to invest in companies that, in turn, borrowed to invest in other companies. With such heavy gearing, when things went wrong they went horribly wrong.

These days there's far less gearing into shares and therefore far less potential for financial disaster. But that's not true of your beloved property.

More than a few property investors who have been forced to sell recently have found that not only do they no longer "actually own something that has value" but they are left with something much worse than worthless paper - a debt to the bank and nothing to show for it.

Neither shares nor property always go well - and that's the point. I'm not advocating avoiding property. But given that most people own their own homes, it's a really good idea not to put all the rest of your investment dollars in the same type of asset.

Tell you what - if you can't bring yourself to invest in New Zealand shares, how about an international share fund? That gives you better diversification anyway.

In response to your Q&A on house ownership levels in last Saturday's column, I have three main comments:

International comparisons are incredibly difficult and have to be really heavily qualified. I think that should have had greater prominence.

On home ownership levels, you say that the 68 per cent New Zealand level "doesn't include homes owned by family trusts. But presumably there are similar distortions in other countries."

First, the 2006 Census did try to separate the directly owned from family trust ownership - of the 66.8 per cent "owner-occupied", 12.3 per cent were owned by a family trust (179,000 homes). However, because of a gap in the 2006 Census question, the actual total ownership and the proportion owned by family trusts is likely to be a bit higher - not much, but enough to be noticed. We will hopefully have more complete data in the 2011 Census if the question is more accurately worded.

Next, it's not correct to assume that other countries have "similar distortions". The concept of a trust isn't recognised by a number of countries that your graphic compared (France, Italy, Germany, Japan). The main reason why New Zealand has such a high proportion of indirectly owned homes is seemingly to do with the set-up of one aspect of our welfare system - residential care costs - but we don't really know.

I don't know where the OECD got its data about New Zealand wealth ownership, but I suspect that it's deficient. For example, you say it says that "since 1986 property has grown from 54 per cent to 75 per cent of household savings in New Zealand". I suspect those numbers are derived from the Reserve Bank's annual surveys.

If that is the ultimate source, the number you have cited is wrong because it doesn't count all the assets owned by households.

The "missing" assets, as listed by the Reserve Bank, are: "equity in farms; equity in unincorporated businesses; shares in unlisted incorporated businesses; capitalisation of the New Zealand Alternative Market (NZAX), the 'second board' of the New Zealand Stock Exchange; direct ownership of assets such as forests; consumer durables; overseas property owned by New Zealand residents; non-equity overseas financial assets; notes and coin held by households".

The Reserve Bank also says that, "In addition, it is likely that direct ownership by NZ residents of overseas equities is underestimated in the series presented here."

The last full survey of household wealth was carried out in 2001 with the results published in 2002 - the Household Saving Survey. It seemed that only 43 per cent of the total assets of all New Zealand's "economic units" was in residential real estate of all kinds (homes, holiday homes, investment properties and time-share arrangements) so that doesn't seem too irrational.

Signed: Michael Littlewood, co-director, retirement policy and research centre, University of Auckland (who gave permission for his name to be published).

On your first point, I did say "the data are a bit dicey" last week, but you've convinced me that perhaps I should have said "very dicey".

What you say about family trusts suggests New Zealand might actually be second only to Spain in home ownership - all of which is interesting, although, as I said last week, it doesn't really affect our overall household investment in property. While a rented home is not an investment for the tenant, it is an investment for the landlord.

Of more relevance to the question of over-investment in property is the impressive list of assets missing from the Reserve Bank's list. Some items on the list might not amount to much, but there are so many items that the total is probably fairly high.

And your 2001 survey figure certainly suggests that perhaps, after all, New Zealanders don't invest as much in property as some other countries do. If - that is - the figures from other countries are accurate. It makes you wonder whether international comparisons mislead more than they enlighten. But how else do we gauge how well New Zealand is doing?

Thanks for giving us another perspective. Your letter probably raises more questions than it answers. But it's better to be uncertain than to be certain but perhaps wrong.

Regarding your comments on the assertion that we invest too heavily in residential property, there is another point worth making. Property may work well for the investor but does nothing for New Zealand - it just redistributes existing wealth. Growth of our economy will come from selling goods and services to people overseas, bringing wealth into our country.

The more that people invest in housing, the less they have available to invest (typically through shares) in the businesses that make things or provide services sold overseas. We grumble when foreigners buy up our best companies and take the profits away, but part of the reason they can do that is because there is such a limited investment pool in New Zealand - too much of our money is tied up in housing.

I suspect it is these factors that lead to concerns being expressed about excessive investment in property. People will naturally pursue their own perceived best interest when investing and not be too influenced by some altruistic sense of doing what is best for New Zealand. Housing will continue to be attractive to individual investors until the housing market collapses, or the Government levels the investment playing field.

It was encouraging to read in Brian Gaynor's column last week that foreign investors now own 39 per cent of New Zealand shares, down from 55 per cent 10 years ago, according to a Goldman Sachs JBWere survey.

However, 39 per cent is still pretty high. You're quite right that more individual investment in New Zealand shares would keep more corporate ownership in our hands.

How to encourage share investment? To the extent we over-invest in property - Michael Littlewood's letter raises doubt about that - it might be because the "investment playing field" is tilted. I'm not convinced that tax law favours housing, but it seems that many people think it does, and that perception is probably what matters. So maybe the Government does need to try to change that.

In the meantime, I'll keep pushing the same old message: diversification reduces risk.

The hopeless horseracing gambler who wrote to your column on August 1 possibly needs help from people who can deal with gambling addiction.

It is well recognised that many with this addiction often have undiagnosed depression, and this can help if also treated at the same time.

This is getting well beyond the range of a Money column, but thanks for writing, and I'm happy to pass on your message.

People with gambling problems can ring the Gambling Helpline, 0800 654 655. According to its website, the Ministry of Health manages the funding of the service, with the money coming from a levy on the gambling industry - which seems fair enough.

Mary Holm is a seminar presenter, part-time university lecturer and best-selling 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.