KEY POINTS:
Q. My wife and I are avid readers of your column. However, we have never come across a situation quite like ours.
Our 19-year-old son is a terrific saver. He is an apprentice and has surplus cash of about $200 a week. He recently bought a motorbike
on hire purchase and paid it off in seven months instead of a year as he wanted his own credit rating.
He realises that the Auckland housing market is getting more difficult to get into, but would like to buy a house and rent it out (he has no desire to leave home at present). As parents we can help him with a deposit and any unforeseen expenses.
Do you feel that we should go ahead and give him the ability to be a landlord or wait until the market stabilises? We have great confidence in our son to pay back the deposit in the near future.
A. Your son does, indeed, sound remarkable. But whether he should venture into rental property in the current market probably depends on how deep your pockets are if things go wrong.
With rents at record lows relative to house prices, it's almost impossible to buy a mortgaged Auckland property on which the rent comes anywhere near to covering the mortgage and other costs. Your son's $200 a week is likely to go straight into the property, and perhaps more.
That will be fine if, in the end, he sells the property for a nice big capital gain - big enough to make up for not only all the money he has put in, but also the loss of the returns he could have made if he had invested that money elsewhere.
If he had bought the property some years back and sold it now, he would probably have made such a gain. But in the future, who knows? While house prices might continue to rise, no unbiased expert is predicting fast growth in the next few years. And prices might well fall.
That won't matter too much for those who hold on until prices rise again. And I suppose we can count on that happening sooner or later - although the Japanese will tell you that it can take a while.
But those who find they have to sell in a downturn can end up with a financial disaster on their hands.
I wouldn't recommend that anyone buy a rental property now - especially if they are borrowing most of the purchase price - unless they have heaps of resources behind them.
You might think not much can go wrong. Read on.
Q. I used to love reading your column. I still read it, but recently there has been a bit too much whining by your correspondents. Could you put a cap on the uni whinger letters?
I was in a low-paid, unsatisfying job, which was hard work with no prospects. So I bit the bullet and went to uni.
Auckland is not a cheap city, but there is no shortage of part-time jobs. I worked late into the night for $7.50 an hour. I lived in a closed off hall, 1.2m x 2.4m. I still I had a loan owing at the end of it.
But I have no regrets and no complaints. I enjoyed my studies and still gain enjoyment to this day from the things I learned there. Those who cry "Not fair: I have this loan to pay - the Government should pay" are very shallow and selfish in their thinking.
Who pays? Joe Average, paying tax on his McJob, with a family to feed. Why should he work overtime to pay for me to pursue what I choose?
The above does not even take into account the financial gains. On graduation, I earned double my previous salary, in a job I enjoyed, and am still enjoying.
Learning to live on a budget served me well and after several years of saving, I bought a house, which I rented out while I worked elsewhere.
The first lot of tenants left with thousands owing in rent. The next tenants not only left rent unpaid, but did thousands of dollars in damage.
I'm not writing to whinge about it, rather pass on caution to those who are attracted to the idea of buying a house and renting it out for a while (not necessarily an investment property - I always intended to live in mine and merely rented it out while I worked out of Auckland).
Never mind rent controls. What will kill you are the laws on tenants' rights. No matter how good a contract you may have, tenants can destroy your place, owe thousands and disappear.
The law gives landlords very little protection. The maximum bond is capped by law and with the price of tradesmen and materials these days covers very, very little. A determined idiot can easily cause tens of thousands of dollars' damage in a short time.
Tenancy Services (through whom all tenancies must pass) informed me that even if I went to court and the tenants could be found, the tenants could be ordered to pay "$10 a month, for the next 50 years".
The helpful officer there also cautioned me that he had seen cases when the landlord won the court case but the judge declined to order the tenants to pay the landlord's legal fees.
I would like to warn any prospective landlord to check tenancy law - you may find it scary. For example, crazy as it sounds, just because tenants do not pay rent, you cannot terminate the lease and replace them with someone who will pay.
With the cost of repairs, the long period of no rent while repairs were being done, combined with increases in interest rates, I was unable to keep up mortgage payments. I was forced to sell the house in a hurry, taking a huge loss. I was fortunate not to lose my shirt.
Still no complaints. These things happen. And now without the hassle of home ownership, life has become a lot more enjoyable.
I would caution others: Don't take a gamble and then whinge when it goes wrong. If you are contemplating buying real estate, be aware that just as some people have made huge gains from it, some have incurred big losses.
With a little left over now, I'm looking at investing in shares. If you were buying shares now, which ones would you buy?
A. I wouldn't buy any individual shares. I don't believe I can beat the market by selecting shares, so I just put my share money into a low-fee index share fund and go to the beach.
Thanks for telling us your sad landlord story - a scenario that I suspect is played out more often than many realise, as people don't want to look like fools.
I hasten to add that there are also tenants' stories of nightmare landlords. Rental property is very much a people-oriented investment, with all the good and bad that can come with that.
That's one reason I prefer share funds. You don't get late rent, property bashing, or leaking washing machines on the beach.
Q. You said a couple of weeks ago that an OE was good for everyone - those taking it, and New Zealand in general, as long as the travellers returned.
How does the New Zealand economy benefit from people who have worked for many years in other high-wage economies? The couple in the letter worked overseas for seven years.
New Zealand does not benefit by Kiwis working and paying taxes long-term in other countries. If we all encouraged our young people to head for the airport departure lounge, then the ages of workers and taxpayers left here in New Zealand would be skewed.
Also, the Government would have no control when the expatriate Kiwis returned to New Zealand. If most of them returned in their 30s to have families, then it would put more pressure on our schools, hospitals, housing stock and transport, because immigrants would have filled that generation void.
A. I suppose you could argue that New Zealanders typically live overseas in young adulthood, which is when they often pay more taxes than they use up in government services.
On the other hand, many return to New Zealand with big savings, bringing more wealth into our economy than they might have accumulated if they had stayed in this country the whole time. That was the point of the letter two weeks ago.
I can't really follow your argument about immigrants. Sure, they will tend to come here to fill jobs made vacant by Kiwis doing their OE. But if the New Zealanders then return, they won't simply demand services such as schools and hospitals. They will also supply those services.
That reminds me of a politician, who shall remain nameless, who are few years ago was complaining that immigrants were taking New Zealanders' jobs.
That's a nonsense. When somebody, immigrant or not, takes a job, what do they do with the money they earn? They spend most of it, creating a little bit of demand here, a little bit there, which all adds up to creating another job.
Even the money they save ends up buying resources or funding a loan for someone else, adding to economic activity.
We don't need any theory to prove that everyone who takes a job creates a job. Just look around. In an economy of 100 people, most have work to do. If others enter that economy, after a while they have work to do, too. In an economy of 100 million, most have work to do.
I'm not saying New Zealand hasn't lost something to the brain drain.
But we have also benefited greatly when New Zealanders have returned from overseas with knowledge they could never have acquired here, a wonderful citizen-of-the-world attitude, and great ideas on different ways that New Zealand can do things.
All that aside, even if New Zealand were to gain nothing from OE, surely the mere fact that the young people themselves gain makes it all worthwhile. What is the good of New Zealand if not the good of its people?
Perish the day when we don't encourage our young to fly away - albeit with the odd tear in our eyes.
* Mary Holm is a seminar presenter, author and publisher. 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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.