Q: My brother purchased a section in a desirable subdivision some 8 or 9 years ago for around $180,000. It was specifically bought as an investment. He stupidly purchased at the top of the market and after a short time realised no great gain was to be made so hung on to the section.

Since then the section has cost him around $25,000 in rates and other expenses and has just recently sold for ... yes $180,000.

Now if my brother had put that money in an investment and made a $25,000 loss, he would be spitting! Yet he seems able to mitigate the loss in his mind because it was property.

The real loss of course is not just the expenses but also the loss of any potential return on alternative investments.

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I hope those purchasing Auckland property — possibly using mortgages over their family home — realise the potential loss if there is a cooling of the housing market. It is a shame they do not seek the advice of a suitably qualified professional rather than just heading to the mortgage broker, who will be keen to see them mortgaged to the hilt.

A: I wouldn't call your brother stupid for buying when he did. Nobody always gets the timing right — either with property or shares. Let's just say he had bad luck.

But your story raises some important points:

• Sections are riskier speculative investments than houses, because you can't rent them out while you wait for prices to rise.

• Property investors often overlook the money they have spent during the course of the investment, concentrating just on the buy and sell prices.

• I agree that it's risky to use a family home as security for buying investment property, especially in the current Auckland market.

I would urge every would-be property investor to first work through a scenario in which any two or more of the following happen: mortgage rates rise, rents fall or don't rise much, tenants don't pay or do damage, major maintenance work looms, or your non-property income falls — perhaps because of a job loss. If you find yourself forced to sell amidst falling house prices, you could lose heaps, in some cases even the family home.

As our correspondent suggests, it's wise to discuss your situation with an authorised financial adviser before buying a property.

Footnote: This Q&A will no doubt add to the "anti-property" reputation I'm told I have among property investors. Let me repeat: many people get rich through property. But any investment that can make people rich can also make people poor. New Zealanders tend to underplay property investment risk.

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Property investment conundrum

Q: Hopefully you can answer a conundrum I have on why people invest in the housing market. I'm not talking about people buying houses to flick on a couple of weeks later, avoiding tax by telling the IR, "My circumstances changed". No, it's the person who buys one house to live in and another as a long-term investment to rent out.

Maybe rents will pay the outgoings in mortgage, maintenance and rates etc, so the investors may break even, with long-term capital gain on both properties to fund retirement.

But why don't the investors put the money into buying a more expensive house to live in, and forget the rental? They would get a capital gain on their home equivalent to the gain on the two cheaper properties without the hassle of finding good tenants, repairs etc, plus they will live in a nicer home.

The question arose because my daughter-in-law recently received an inheritance and asked me whether they should use it as a deposit on a "renter" or sell their modest home and buy something more upmarket.

A: I can see several advantages to owning a cheaper home and a rental property:

• In some circumstances, the rental income exceeds the expenses - especially once you've paid off the mortgage.

• If you own two properties in different areas, you've got a better spread if house prices fall, as they tend to fall more in some places than in others.

• It's easier to get your money out to spend it in retirement — by selling the renter.

On the other hand, as you say, if you put all your money into your home, there's less hassle, plus the comfort of living in a flasher place.

Another good option for your daughter-in-law is to invest in a low-fee share fund — which would give her better diversification and no hassle.

Pensions

Q: I entered the workforce in 1956 at the age of 15. The then-Sidney Holland-led National Government made a solemn promise that if I worked for the next fifty years in New Zealand, I would receive a non-means tested pension for the rest of my life.

I kept my part of the contract, and it is to the credit of the Helen Clark and John Key-led Governments that they upheld their part of the bargain.

I feel no shame in accepting the payments made to my wife and me, and I expect the status quo to continue for the rest of our lives.

A: Did Sid Holland really commit governments for 50 years? If so, that was rash.

Imagine John Key committing the government of 2065. In the decades to come, New Zealand could be operating under a hugely different set of priorities. Nobody should ever count on politicians' long-term promises.

That's not to say we're totally in the dark about the future of superannuation. In a democracy, a government is unlikely to make really unpopular changes — unless it's clear to most people that such changes are necessary. That's why Clark and Key have stuck to the script.

And at least every four years Treasury puts out a statement on what it expects to happen to the government's income and spending over the next 40 years, taking into account such issues as the ageing population.

The latest report, published in 2013, reassures us that NZ Super isn't in danger of disappearing. But some modifications are likely. For a brief and readable summary of some of the options New Zealand is likely to consider, see here.

Pensions II

Q: I think it very strange that when I was in my teens, 20, 30, 40, 50, it never ever occurred to me to criticise the retired people for receiving a state pension. Now it seems commonplace.

To my knowledge, some of my pension money comes from the UK, as does my wife's. How much I do not know, but I am sure we are not alone. I also inherited money from the UK.

All of our money is spent in New Zealand, a lot of this on tax etc. How many others are like us? There must be quite a few of us.

Perhaps we need to start our own political party to look after our interests. We can no longer rely on Winston as he has other bridges to cross, and the Labour Party has completely forgotten what its purpose is and what it was set up for.

As for the young people that criticise us today, think what the babies being born now will think of them.

A: When you and I were young, we weren't facing the ageing population problem.

A few numbers to consider: The population aged 15 to 64 is expected to fall from about 66 per cent of the total population now to about 58 per cent in 2061. That doesn't sound dire, but at the same time, the proportion aged 65-plus is expected to roughly double, from 14 per cent to between 22 and 30 per cent.

These days, there are almost five people of working age to support each older person. That will change to not much more than two. Can we blame the young for being concerned?

Furthermore, politicians seem particularly reluctant to take anything away from the current and nearly retired. Older people are keen voters. So the worst you're likely to see is, perhaps, a slowing of the rate NZ Super increases — maybe adjusting it to match inflation rather than wage growth, which usually rises faster. But for the young, changes might be more drastic.

While sniping between generations doesn't get anyone anywhere, we all need to be asking questions, challenging the status quo and considering alternative solutions — as outlined in the publication mentioned in the last Q&A.

I'm not quite clear on your point about UK pensions. You must have spent some of your working life in the UK, so that government is contributing to your NZ Super. Still, local taxpayers are also contributing.

If you feel hard done by, perhaps you should get that political party going. What will you call yourselves? Gold for Oldies? Other readers might have some ideas.

State care

Q: The person complaining last week that their father's savings were depleted in a rest home, whereas the neighbour in the room opposite "had lived in a subsidised state house and never saved a penny", got up my nose.

My parents never owned their own home. They rented a house (that my grandparents had rented prior to them). My father was a manual worker and died when I was 8. When I was 12 Mum got TB and was in hospital for six months and then we moved to a state house.

She worked very hard as a clerk, but when she retired at 64 she had enough money for a deposit on a home, but couldn't service a mortgage, so she had to keep renting. Consequently, when she fell out of bed, broke her hip and had a stroke in her 90s, any money that she had over $15,000 (not much) went towards her care, and then the government paid for her care.

I see my friends inheriting their parents' estate when they pass away. No such luck for me — but I wouldn't trade my mother for anything. She was a wonderful support, calm and gentle, and I'm just sorry she didn't live to see her great grandchildren.

A: Thanks for presenting another point of view. I don't think many would begrudge your Mum the government support she received.

I was going to add a relevant quote here. But when I was researching who originally said it — apparently it was a Muslim, Indian or native American saying — I came across this variation: "Before you criticise someone, you should walk a mile in their shoes. That way when you criticise them, you are a mile away from them and you have their shoes."

American humorist Jack Handey rather took the wind out of my sails — or the shoes off my feet!

By the way ...

Q: I think the saying is, "there are no pockets in shrouds".

Love your column.

A: I think you're right. After all, coffins — said to be pocketless in last week's column — aren't made of fabric. Still, if last week's correspondent's grandma used the word "coffins", good on her.

And thanks.


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 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.