Mary Holm: Want less and you can work less

Mary, just reading your last column and I saw the letter re factoring house prices against the median personal income or the median household income.

The very tragic but salient point missed is that we have indeed moved from a society where it was expected that a man's income would be enough to sustain a family, buy a house, have holidays, etc. That implies that if a woman did work (in a society that at the time did not necessarily encourage it), the added income improved the family's life beyond the median.

We now live in a society where for the median it is necessary for both adults to work to fund a family life. Granted that that now includes far more consumption - holidays in Bali in place of camping in the Coromandel, etc, than our parents contemplated.

For this current discussion it implied that for a family to own a house it now takes the labour of two adults instead of one. Surely a more tragic yardstick to measure by.

"Tragic" seems a bit strong. In many two-earner families, both partners work out of choice. Still, there are many other families in which one partner would prefer to work less.

The bit that I think is sad is that they could work less if they settled for less in the way of goods and services.

You've already pointed out the huge change in holiday expectations in just one generation. And if a family holidays at their bach, it's probably no longer a shack.

Our main homes, too, have grown considerably. The average new dwelling in 1974 was 109sq m, according to Statistics NZ data. By 2010, it had almost doubled to 200sq m - with the fastest growth being in the 1990s.

New houses nowadays tend to have a family room as well as a living room, and two or more bathrooms. And you don't see two or three kids to a bedroom much these days. So even though family size has shrunk, the number of bedrooms may not have decreased. Beyond that, most rooms are presumably bigger.

What about what we put into our houses? Well, my first home didn't have: a microwave oven, a dishwasher, a clothes drier, a computer, a video recorder, pay TV, or even an automatic washing machine - you had to put everything through the wringer after the wash, and again after the rinse. We had only one phone, one television set and one car.

Furthermore, these days we expect to eat out or eat takeaways more often. And many of our pastimes - concerts, skiing, shopping - motor through the cash.

True, some things - such as electronic goods, cars, clothes and travel - are cheaper after adjusting for inflation. But given that inflation is simply a measure of price increases, that means other things must be more expensive after adjusting for inflation. Overall, people spend more on consumption.

I know, I know, I sound like an old grouch. It's probably too much to expect people to go back to wringer washing machines.

I also acknowledge that there are two-earner families that indulge in no luxuries and struggle to feed their kids.

But for many families, it's a case of priorities. They could work less if they wanted less.

Boarders best bet

Further from last week, housing affordability seems constantly just a little out of reach. Instead of paying rent, I am interested in co-buying a property as a solution. Do you know where to find like-minded people, and do you have any suggestions for this route?

Sorry, but I don't know a source of potential co-owners. And I must say I'm a bit wary of the whole idea. What happens when one of you wants to spend money on maintenance and the other doesn't? Or one brings lots of friends around and the other wants peace? Or - most worryingly - one wants to sell the property and the other doesn't?

You would at least want to buy with somebody you know well. And even then, you should do lots of talking first, and draw up a legal agreement about selling the place.

It might be better to buy on your own and have several flatmates or boarders. That might help affordability just as much, and one person would be running the show.

House prices correct

Last week you quoted mid-60s houses at $6500. Heck, we bought our first house in 1966 and we were not big earners. It was an ex-state house in Mt Roskill and it cost about £6500. I've no idea what we could have got for $6500 but it wouldn't have been much.

Maybe not in Auckland, but we're talking New Zealand-wide.

My source last week, Motu economist Andrew Coleman, isn't the kind to muddle up dollars and pounds.

Says Coleman: "My data on house price levels comes from Land Transfer and Mortgage statistics. These were published by the Department of Statistics until 1986 and comprise the number of transfers and the total value of transfers. In 1965 there were 62,656 transfers valued at £198,903,000. The average is therefore £3175."

For the benefit of the young, you multiply that by two to get dollars. My $6500 was a round number, for ease of reading.

Making interest deals

In a story in the Herald on October 11, 2008, following another big Powerball win, you were quoted as saying: "After tax, the interest on a $10 million investment in government bonds should return about 5 per cent. This would give $400,000 annually, or $500,000 for corporate bonds."

Surely if the winners of the latest Powerball prize were to walk into the head office of one of our banks, ask to see the customer services manager and tell them they have $17 million cash to invest for two years (while they work out what to do with it) they should get a better return than 5 per cent.

I would suggest 8 per cent, net everything, or $1.36 million a year, interest calculated every month and adjusted for inflation. I would also ask to be a secured depositor. Is this too much to expect?

I realise the question is hypothetical to everyone but the two winners. But the point is, if you have a large sum of money in cash to deposit, can you negotiate an individual rate with the bank, and if so, what would be reasonable in this day and age?

I don't remember that quote, and the arithmetic is wrong.

I prefer to think I said that 5 per cent on $10 million would give $500,000 a year on government bonds - or more for corporate bonds.

By the way, interest on short-term government bonds is considerably lower these days. But that's not your point. You're right to expect a bank to offer a better-than-standard deal for someone with many millions of dollars.

There's a limit though. Banks cover their costs and make their profit on the difference between what they pay on term deposits and the interest they earn when they lend that money out as mortgages and other loans.

Given that mortgage interest rates are between 5.5 and 8 per cent, I don't like anyone's chances of getting 8 per cent from a bank - let alone a net 8 per cent. A finance company or similar might offer such a rate, but that's only because they charge more on their loans, which are riskier. I wouldn't recommend going down that track.

As for adjusting interest for inflation, I doubt a bank would take that risk. Who knows where inflation might go? And I've not heard of banks giving one depositor more security than others.

Generally, our banks are pretty solid, so I doubt if that would be an issue - although I guess if I had many millions I might spread the money over a couple of banks.

Broadly, then, yes, someone with that much money would be in a good position to negotiate, and there's nothing to stop them from asking for whatever they want from all the banks. But they probably wouldn't get everything you suggest.

Revolving mortgage

In last week's column, you said: "With either shares or property, you can borrow and let rent-paying tenants or dividend-paying companies help you pay off the loan, especially if you invest for the long term."

Mary, that is certainly news to me. I cannot find any mainstream bank that will lend a significant amount of money to buy shares, using the shares as security. Certainly not at the favourable interest rates shown by the banks on your Herald page.

Yet they will all lend money using property as security. Property is pretty much all they will take as security.

Perhaps they know the answer to your last sentence: "But be aware of the risks."

Just a thought.

You must have read right past an earlier sentence, "And you can borrow to make a share investment - perhaps using a revolving credit mortgage." With such a loan, the bank has no idea what you are using the money for, so it could easily be shares.

True, you have to have equity in a property as security for a revolving credit mortgage. Without that, you're quite right.

Banks are reluctant to lend for share investment because shares tend to be riskier than property - although sharebrokers can help you do it.

I wasn't suggesting, last week, that anyone should borrow for share investing. I was merely pointing out how borrowing to invest changes the very nature of an investment - whether it be in property, shares or monkeys.

Anyone comparing different investments needs to keep that in mind.

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 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.

Ticket winners
The winners of the free tickets to the "Down to earth home finance" seminar at Massey University, Albany, are: G. Anderson, Epsom; Tony Cooper, Mt Albert; and Peter Tam, Mangere East. They will receive two tickets each.

The seminar, presented by Professor Ben Jacobsen, will be held on Saturday, May 7, from 9am to noon. Those who didn't win can buy tickets for $25. To register, email A.C.Deane@massey.ac.nz or phone 09 414 0800 ext 9620.