In the sticks you won't need a tee time

By MARY HOLM

Q. Always enjoy your column in bed on a Saturday morning with a cuppa.

I think you could add a codicil to your answer last week about the people with a $400,000 home wanting to trade down, along the following lines ...

Unless people have an emotional or other attachment to Auckland, they could follow in the footsteps of other retirees who have sold a $400,000 house in the city and moved to the provinces.

In places like Taumarunui it is possible to buy a good-quality home for much less than $100,000, and clubs like the golf and bowling clubs are crying out for new members. They have facilities some city clubs charge much larger subscriptions for.

And they are by no means isolated, being within two hours of Hamilton and Rotorua and only three hours to Auckland, New Plymouth and Palmerston North.

As an aside, one of my favourite stories about Taumarunui Golf Club, which has one of the best all-weather country courses in New Zealand, is about the local player who happened to be in the clubhouse midweek, for some reason, when the phone rang.

There was a very obviously Remuera voice on the other end, asking the player, who was the only person around, to book a tee time for the following week.

Nonplussed the local said, "Why do you want to book a tee time?", to which the Remueraite responded, "Don't be impertinent. I obviously want to play golf."

The local's reply was, "You don't need a tee time ... Just turn up!"

A. Evidently tee/tea time in Taumarunui is in bed in the morning rather than later on the golf course.

Your tale reminds me of a sight I saw recently on the South Wairarapa coast.

An elderly gent was sedately driving his farmbike along the road, towing his golf cart behind it.

He was obviously headed for the nearby rough-and-ready-looking Ngawi golf course. I doubt if they have tee times, either.

On to your main point, which is a good one.

You certainly can get much more house for your dollar outside Auckland.

It pays to consider why that is, of course.

For all kinds of reasons, most people would rather live in Auckland than Taumarunui.

But if you're not one of those people, why not head for the hills - and the member-hungry golf and bowling clubs?

By the way, you're not by any chance a Taumarunui real estate agent, are you?

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Q. I read your column regularly, and often the subject of "asset-rich and cash poor" situations comes up.

There are several UK institutions that offer "equity release" to owners with a reasonable amount of equity in their properties.

This is big business and increasing at a fair rate.

There are also facilities whereby you can capitalise your pension.

Both offer lump sums or annuities.

For some reason this hasn't appeared here, yet it has existed in other countries for years.

As far as I can establish it, there is only one company in New Zealand offering this service.

It would be a very good service if it were available and seems to be a business opportunity going begging. Any clues or comments on why it doesn't appear to be in vogue here?

A. I wish I knew.

As you say, the need is there.

For the benefit of others, equity release - or home equity conversion or reverse mortgage - programmes give money to retired home owners.

In exchange, the company gets a share of the proceeds when the house is sold.

There is, indeed, one company offering such a deal here. But I gather it hasn't proved popular. The market would, no doubt, be better served if there were several programmes with different features.

Over the years, when I've interviewed executives in finance and insurance companies that might offer equity release schemes, I've often asked why they don't.

A common response is that they are looking into it.

Lately, a couple of companies have said they are researching the market more seriously.

I've asked them to let me know when they come up with something. So watch this space.

Another reader who wrote a letter similar to yours, in support of equity release programmes, raised an interesting point.

"I realise," he said, "that parents hesitate to reduce their estate, but in many - most? - cases the adult children are more financial than their parents.

"There comes a time when one has to indulge in a little forgivable painless running-down, don't you think?"

Absolutely.

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Q. My wife and I are both 35, have a 2-year-old daughter and are working on expanding the family further.

We have a combined income of between $60,000 and $70,000. We both have employer-subsidised superannuation.

The combined total is about $95,000.

We own a home worth about $400,000, which has no mortgage. This property is unique in that my parents live in the property and will do so until they die.

We receive no income from this property, so it is viewed more as a retirement vehicle than anything else.

We are embarking on a 12-month stint starting mid-2004, working in the UK and returning to our jobs here around mid-2005.

What should we do right now?

* Continue renting at $290 a week and buy one or two coastal sections in the far north.

* Buy a family home now, with a 100 per cent mortgage, for maybe $350,000 and rent it out when we go overseas.

* Borrow and invest in the sharemarket.

Without the benefit of a crystal ball, just my gut feeling, I feel that things may flatten in the property market as they did in 1997.

My superannuation has started making money again recently after a few years of losses, and I am aware that when the masses are into something, that is rental property investment, the smart money is already elsewhere.

Your insight would be appreciated.

A. You are obviously risk-takers.

In all of your options, you plan to borrow money - to buy sections, a house or shares.

Whenever you borrow to make an investment, you up the ante. If the investment goes well, you will do even better because you have geared.

If it goes badly, you will do even worse.

We're all used to borrowing to buy our own home.

Many people also borrow to buy rental property. But even property can be riskier than many people realise.

If you suddenly find you can't meet your mortgage payments - perhaps interest rates rise, or you lose your job - you might have to sell in a hurry.

If it's a rental property, there's also the risk that the rent will fall, or you will have no tenants for several weeks.

The trouble is that the same market conditions - higher interest rates, a tough job market, or shortage of tenants - will affect other property owners at the same time.

That can lead to a glut of houses for sale. And we all know what that does to prices.

Under such a scenario some people find the proceeds from their property sale don't cover their mortgage, especially if they had borrowed 90 or 100 per cent of the purchase price.

The result: a debt to the bank and nothing to show for it.

It's happened in New Zealand in the 1990s and, to a greater extent, in some other Western countries.

Borrowing to invest in shares is also risky.

Your dividends might not cover your interest payments, especially if interest rates rise.

One advantage over a rental property is that, if you have trouble paying off the debt, you can sell part of your share investments rather than the whole lot.

But if you are forced to sell within a few years of investing - perhaps after a job loss - there's a reasonable chance that you'll get less for the shares than you paid for them.

Again, you may be left with a debt to the bank.

Sections are similar, except that there will probably be no income flow to help with mortgage payments.

While land prices have soared in recent times, that's all the more reason to worry that they could fall for a while.

In all cases, if you can make it through any tough times there's a good chance you will do well over the long term, and a fair chance you will do extremely well. But how sure can you be?

The issue certainly worries Reserve Bank Governor Alan Bollard.

"Households with high levels of debt and exposure to investments that are riskier than they appreciate could potentially face painful problems," he said in a speech this week.

"Some may find that the rate of return on their investments is considerably less than they had thought it might be, or even that their investments make a severe loss."

It's not wise to count on continuing low interest rates, he says. "Interest rates have been relatively stable in recent years, but there will inevitably be times when pressures on inflation will require interest rates to rise."

And if the foreign lenders whose money we borrow don't like the look of New Zealand any more, that too could cause "a jump in interest rates".

He adds: "I think there remain many in this country whose behaviour suggests that they might not understand the risks they are taking."

Okay, enough lecturing about borrowing. You're young, and you've already got about half a million dollars in retirement assets. Well done.

If one of you loses your job, presumably the other can keep the wolves from the door for a while. You're certainly in a stronger position to take risks than many others.

So I guess you could borrow to invest, particularly if you want to own your own home. But do you want to?

More and more people these days are renting, and putting the money they would have spent on a mortgage, insurance, rates and maintenance - over and above what they pay in rent - into other investments.

Financially, that can work as well as home ownership.

Most people want their own mortgage-free home in retirement, but you could presumably use the house where your parents live (lucky them), or sell it and buy another.

On the other hand, many parents of young children like the security of owning their own homes. Landlords can't force you to move just when your child is settled into school. If you think that will be important to you, go for your second option.

But I'm not sure you should buy now, planning to rent the house out while you're away.

As you say, too many people may now be into rental property.

According to Bollard, in 1991 rental housing made up less than a fifth of private urban dwellings. In 2001 it was about a quarter. "I suspect it has risen further since then," says Bollard, and few would disagree.

"Investors need to be mindful that the laws of gravity apply not only to Newton's apple - they also apply to asset prices, including house prices," to which I would add rents.

And things can go horribly wrong when you're a landlord on the other side of the world - even when you pay a property manager, which eats into your profits.

I suggest you save over the next year or two to put a deposit on a house when you return from Britain.

If you would rather continue renting, you could borrow to invest in coastal property or shares.

But, again, I would advise you to save first, and borrow maybe half the money needed, not the whole lot.

Even then, note that whenever you borrow to invest, you gain only to the extent that your return is higher than the interest you pay.

Is it worth taking the risk?

Only you can judge. But many don't think so.

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