Mary Holm: Bricks and mortal thoughts

Q. I am writing on behalf of my sister, who rented her house out and shifted to Australia for a year. She likes it and has decided to stay a few years.

She put the furniture in the basement and left the house with property managers, but she still gets hassles with it from time to time, periods without tenants, and the rent received has gone down.

She worries about it and often thinks of selling, but I always say, "What will you do with the money?" She has no idea about investing.

She is 56 and I think if she keeps the house at least when she retires she will have something to sell, whereas cash could get consumed easily.

The house is four-bedroom, brick, mortgage $70,000, market price $230,000 or so, rent $250 a week.

What do you think the best course of action would be, Mary?


A. Ah, the hassles of being an absentee landlord. It's so much harder when you're far away.

Nevertheless, I think your sister should keep her house - and perhaps hire better property managers who can solve more of the hassles for her.

Her rental income is considerably higher than the mortgage payments. It might be worth paying some of that excess for superior management.

It's quite possible that she would do better selling and going into, say, bank term deposits. House prices might fall in the next few years or grow only slowly. And, with interest rates rising, mortgages get less attractive and term deposits get more attractive by the month.

But there are two risks:

* It sounds as if she might be tempted to spend some of the money, leaving her with little in retirement.

* House prices might continue to rise fast for a few more years.

While a slowdown seems inevitable, we don't know when.

The main point is that your sister will need accommodation in retirement.

You say that keeping her house would give her something to sell, but I presume you would expect her to use the proceeds to buy another home. Most prefer the security of home ownership after they have retired.

She's in the New Zealand housing market now. The lowest-risk strategy is for her to stay in that market.

* * *

Q. I am a great fan of money and civilisations.

From a scholarly point of view, I've been watching the latest housing cycle with great amusement, particularly when considered against the entire history of money - especially events such as the historical tulip bulb frenzy.

This cycle has been interesting because of the way the herd mentality interplays with the internet, and also because of the nature of the global structures involved.

New technologies, new power structures, new ideologies, but alas the same old human nature.


A. We haven't quite got to the tulip bulb stage. Back in the 1630s in Holland, a single bulb was exchanged for 5ha of building ground, says Burton Malkiel in his excellent book A Random Walk down Wall Street.

Another bulb went for 17 bushels of wheat, 34 bushels of rye, four fat oxen, eight fat swine, 12 fat sheep, two hogsheads of wine, four tuns of beer, two tons of butter, 1000 pounds of cheese, a bed, a suit of clothes and a silver drinking cup.

In one month, the price of bulbs rose 20-fold. Then, when the end came, prices plunged until bulbs were almost worthless.

House prices will never get to that. Still, it's sobering to read Malkiel's comment about "the madness of crowds".

"Unsustainable prices may persist for years, but eventually they reverse themselves.

"Such reversals come with the suddenness of an earthquake; and the bigger the binge, the greater the resulting hangover."

The longer house prices rise, the more uneasy I feel.

* * *

Q. Can I ask you about a comment you made in your column a couple of weeks ago?

You wrote: "While shares are basically riskier than property, the typical New Zealander's property investment is probably riskier than the typical share investment."

My wife and I are at a stalemate. We are in our mid-30s with a young child. We rent because, while our jobs are stable, the city we live in is not.

We would like to make an investment for our retirement and we have saved about $30,000 so far.

My wife wants to buy an investment property. She believes it is less risky than investing in the sharemarket. I'd like to invest in the sharemarket because I think it is less risky than property.

My view is that with our small savings we can invest in many different countries and industries very easily through the sharemarket, so that hopefully when some shares drop in value the impact will be lessened by others doing well.

But, with the amount we have to invest, we can only invest in one property in one city so it is much riskier.

Because we can't agree the money is sitting in the bank.

Who is right or wrong about the risk of these investments?

I haven't heard people suggest that property investment of this sort is riskier than shares before.


A. Before either of you reads my answer, promise me that this won't lead to a marriage break-up!

Okay. Let's start with the basics. If you were considering investing in one share or one property with no mortgage, the share would be riskier.

Returns on shares are more volatile. They can become worthless or worth many times your investment.

As you point out, though, you can easily diversify with shares. That can greatly reduce your risk without reducing your average expected return.

The other issue is gearing. Unless you settle for an extremely modest house - I recently read of $29,000 houses for sale near Invercargill and Gore - you'll have to get a mortgage to buy a property. And borrowing to invest in anything boosts both the expected return and the risk.

Say you buy a $200,000 property, with a $170,000 mortgage. If property values keep rising, you get growth not only on your $30,000 but also on the $170,000.

You also get rental income, but these days that usually doesn't cover the mortgage interest on a heavily-geared property, let alone rates, insurance and maintenance. You will have to contribute extra cash. Still, a big enough capital gain will more than offset all that.

If you get that gain. What if, instead, your property value slumped to $180,000? Tired of putting in cash and scared prices might fall further, you might sell. Your $30,000 would be slashed to $10,000 after repaying the mortgage.

And if the price fell to less than $170,000, you'd lose the lot and owe the bank. (The maths are actually more complicated. You would have paid off a little mortgage principal. But that is really just separate savings.)

Even if your property value grows a little, you could be worse off than in a share investment, after taking into account the extra cash you've put in over the years.

Enough arguments on your side. Your wife is also right, in that even a diversified share investment can lose lots of value. Just ask those in international share funds a couple of years ago.

If you make either investment, vow to stay in it for 10 years - by which time any downturn should have had time to upturn.

One compromise: You could invest in a property fund, which would give diversification and wouldn't require gearing. Look for one that charges low fees, holds different types of properties in different areas, and is easy to get out of - and don't take the manager's word on that.

Another possibility: Agree that you spend the $30,000 on a share fund and the next $30,000 on a property.

Why that way round? With rents low and prices and mortgage interest rates high, even diehard property lovers agree that this is hardly the best time to buy a rental. But by the time you've saved up again, property market conditions might be better.

Now, how about you kiss and make up?