The house buyer's dilemma

Q: I am 44 with two kids, 7 and 9. I have savings of $100,000 but do not own a house. My income is about $1600 a month, which just covers my expenses. My rental is about $200 a week. I am concerned about my ability to own a house and put the kids through school and retire. What would you propose?

A: You should buy a modest home or unit. It gets you into the housing market and gives you and the children more of a base. Landlords can't kick you out and it's easier to decorate the way you like, to develop a garden and so on.

If you make mortgage payments the same as your rent, of about $867 a month, you could get a 20-year, $106,000 loan on a five-year fixed rate of 7.6 per cent. By the time we add your savings and subtract purchasing and moving expenses, you have about $200,000 to play with.

It's still possible to buy a small home for that price in parts of Auckland and if you live elsewhere - or are willing to move - you'll get more for your money.

The hard question is: When should you buy?

Here's what I would say under normal circumstances: "Buy now. Given that you want to own a home eventually, the low-risk strategy is to get in there sooner rather than later. If you don't, and house prices continue to rise, you might never again be in a position to buy. And if prices should fall, you might wish you had waited, but you won't care too much. You've got your home and that's the main thing."

In normal times, though, big reductions in house prices are highly unlikely. These aren't normal times.

After reading a recent article in the Economist that says the house price boom in many countries is "the biggest financial bubble in history", I'm wondering where our house prices are headed.

While New Zealand's 66 per cent growth since 1997 is not as big as some countries, prices are still rising here while they are now falling in Australia, Britain and elsewhere. So our bubble is still expanding.

We are among nine countries where prices are at record highs relative to rents and income. Rents must rise or prices fall. In the present low-inflation environment, the latter is more likely, says the article.

It also noted an International Monetary Fund study of house prices in 14 countries from 1970 to 2001. That found 20 examples of "busts", when prices fell almost 30 per cent on average after adjusting for inflation.

Before that adjustment, of course, the drops weren't as big. But these days, with inflation so low, a fall of 30 per cent after inflation equals more than 25 per cent in normal unadjusted prices.

Who knows if such a drop could happen here? It would certainly make your $200,000 go further. What's more, if you wait a couple of years, your savings will have grown.

But what if immigration rises again or house prices continue upwards? You would then be sorry you waited.

Not everyone is as negative as the Economist. Westpac chief economist Brendan O'Donovan reckons our housing market is, on average, 10 per cent overvalued.

"When we run through the list of what has been driving the housing market up," he says, "most factors have turned."

Still, says O'Donovan, "the owner-occupied markets should hold up pretty well" - although he has more concerns about investment properties.

Overall, then, I'm inclined towards the low-risk strategy of buying now. Perhaps you should find a place you like and make a low offer on it.

But if you're prepared to take a gamble on prices falling, hang fire. After all, while rents are low relative to house prices, you are probably getting a good accommodation deal in the meantime.

Can't decide? When there's no clear-cut financial answer, it's often best to let non-financial factors sway you. Would it suit you and the kids to move now?

Q: We own a property worth about $450,000 with a $50,000 mortgage. It is no longer meeting our needs and we need to shift. However, as we only intend to stay in the city for the next two years maximum, it will only be an interim move. Would it be better to: * Sell and buy something in the area in the meantime.

* Sell, invest the money and rent.

* Rent our house out and then rent something that fits our needs?

We wish to keep abreast of inflation and house-price fluctuations and minimise real estate commissions and lawyers' fees. We require the extra space for my husband's business, so there may be tax considerations with the three options.

A: Presumably you've ruled out the obvious answer, to rent separate space for the business.

I'm not keen on your first option, which would involve two house sales in two years, as opposed to one.

Commissions, fees and so on could knock you back $20,000 a house, to say nothing of the hassles of putting two houses on the market.

That leaves the second and third options. In both, you'll be tenants for a couple of years. The difference is whether you leave your money in your house in the meantime or invest it elsewhere.

While it may not look like it, that choice is the same as in the first Q&A. And my response is the same. The low-risk strategy is to stay in the housing market, renting out your house until you buy elsewhere in a couple of years.

That, of course, ignores the risk that you will get bad tenants or even that you will have trouble finding tenants in the present rental-glutted market. It might be time for some research on your local rental market.

If being a landlord doesn't appeal, and you could live with the consequences if house prices do continue to rise, maybe you should sell now.

In the end you, too, should probably decide on the strength of non-financial considerations.

On the tax issue, don't let that drive your decision. You'll be able to deduct some expenses either way.

Q: If people don't think houses drop in price, look at the Australian market. Sydney is now a buyer's market and prices are still coming down. We sold in 2003 in Auckland. We have since moved to Australia and invested the money in term deposits, and it does pay our rent with some left over. We will wait and choose the time to enter the market, be it here or back in New Zealand.

A: I hope you've been buying lottery tickets. You're on a lucky streak.

I said last week that people who sold their homes in 2003, thinking the market had peaked, would now be regretting it. In your case, though, you moved countries and walked into a declining housing market.

Maybe you made the move in the hope that you would profit from the housing cycle. If so, good on you. There are always some winners - although you would probably have done better still making your move more recently.

But most people change countries for other reasons and simply accept that their housing dollar will buy whatever it buys in the new place.

On your comment about the money in the bank more than covering your rent: that sometimes happens, particularly in the present low-rent environment. Often, though, this is helped by the fact that you rent a place that's not as nice as the home you used to own.

In the scenario we looked at last week, the profit-seekers would rent a comparable house to the one they had owned. That makes it much harder for the proceeds to generate all the rent you need.