This article was published on 14 May 2022. Some information may be out of date.

Q&As

QI was speaking to my wife the other day about how we have a rental property and how we are being painted the “villains” as mum and dad investors.

I wonder what the media and the government are going to say (I wouldn’t expect an apology, especially with this government lol) when capital gains start dropping and mortgage rates get fixed at crazy rates (especially when banks’ profits are huge) and we have to top up our loans each week to keep the good people of New Zealand housed?

We have a great tenant, and we appreciate she looks after our rental really well. But please tell me with all of the investment options out there why should we even think about helping other people out by hanging in there?

Do you think the government should now help landlords to keep rental properties going? I’m sure the government wouldn’t want more people it has to house right now.

Funny how things can change so quickly for this government, because of their kneejerk reactions to the so called “Capitalists”. We aren’t really, we are trying to help our young family get ahead, that’s all.

AI’m not sure there’s huge sympathy out there for landlords, pretty much all of whom have seen the value of their properties soar in recent years.

The fact is that if you’re driven out of the investment now, as interest rates rise and interest deductibility is phased out, you will probably pocket heaps. Okay, not as much as the banks are pocketing. And you may be taxed on your gains. But you will probably still make a tidy profit.

As far as the stock of rental housing goes, when you sell, maybe another landlord will buy, so the stock is unchanged.

If your buyer is an owner occupier, they may be a first homebuyer. If they already own a home, somebody else will buy their old place, and on and on, until somewhere along the chain we have a first homebuyer. There’s one less house for rent, but one less family needing to rent.

While there’s still a housing shortage in New Zealand, a landlord getting out won’t affect that. The house is still there.

So no, I don’t think many people expect — or even want — you to hang in there if you don’t want to. If you and other landlords sell and more people get into their own homes, most of the good people of New Zealand will think that’s fine.

P.S. Sorry if I sound a bit tough on you. You seem like good landlords — and certainly not villains.

QMy accounting practice acts for lots of property investors, including several who rent their own home while owning one or more others.

Just thought I’d mention another tax trap your column missed last week — interest deductibility. If your correspondent bought their rental after March last year, they can’t claim their mortgage interest unless they fit into one of the short list of exemptions including new build property or renting to social housing.

Of course they wouldn’t have been able to claim interest on their own home either, but that would at least have given them the tax-free benefit of imputed rent (the value of not having to pay rent.)

For all of the “tax fairness” comments in the recent speech by our minister of revenue, this interest rule is a big stinker. Anyone can see it hits the wealthiest landlords (with little debt) least hard, while doing huge damage to those brand new landlords with large debt burdens.

Someone who buys a rental with 100 per cent debt (leveraging existing equity) has no more wealth than they did before they bought, but is taxed much more harshly.

AMost landlords who bought earlier than last March are also affected. In this tax year, they can deduct 75 per cent of their mortgage interest, but that decreases in steps. From April 2025 they won’t be able to deduct any interest.

I agree that this change is unfair, hitting some landlords hard while others, with no mortgage, are unaffected. It’s also economically distorting, given that most other business expenses are deductible.

I would far rather see a clear capital gains tax on investment property — and shares and other investments — that affected everyone.

But let’s not reopen the capital gains tax conversation in this column. We did it a while back, and it went on and on for weeks. The conclusion: It’s not easy to design a fair tax. Still, New Zealand is one of the few OECD countries without a capital gains tax. We could copy the best features from other countries.

Some surveys suggest that most New Zealanders don’t want capital gains taxed. I suspect they don’t realise it would mean lower income taxes. The long and the short of it: Why should people be taxed for doing work but not taxed for sitting around watching their assets gain value?

QAs an economist, I created a model of home ownership versus renting at the beginning of the 1980s. It could be run under a range of scenarios including inflation rates, interest rates, rent increase rates and rate of house price changes.

It also took into account the targeted saving mechanisms of the day e.g. special home loan accounts. Kiwisaver/Home Start are the current equivalents.

The model concluded one was better off renting than owning just on economic grounds.

Despite this I bought my own home and later investment properties. The net worth of the portfolio is now over $10 million.

However, I rarely if ever have any time free. Was it worth it? Sometimes I have to ask. Some of the properties are in other regions. It has been especially difficult to get to them over the past two years. It’s even harder to organise maintenance for them and to manage (some) tenancies.

AInteresting that renting came out the winner. But you bought a home anyway — underlining that your model didn’t take into account the non-monetary issues discussed in the last few columns, such as the desire not to have to move when it didn’t suit you.

Your last paragraph is telling. Perhaps you should sell at least some of your properties and put the proceeds into share funds? Once chosen, they take up hardly any time.

QLike most people I am shocked by the comments and attitudes of Simon Henry of DGL, re Nadia Lim. I would hate to think that my KiwiSaver was supporting a company whose leadership held such attitudes.

I am hoping you might ask (named fund manager) on my behalf? I suspect a “public” question will hold more weight than me asking privately.

AIt’s easy to find out yourself. Go to the Smart Investor tool on the Sorted website. Click on Compare, and then KiwiSaver funds and find your fund. Then click on the fund’s name to get details. Scroll down, and you will come to “Full list of investments this fund holds”.

Don’t leap to conclusions though. While some fund managers are selling their DGL shares, others plan to complain to the DGL board about the CEO’s sexist and racist comments. It can be more effective for a major shareholder to keep their shares and demand action than to just go away.

If your fund holds DGL, write to them about it. If they don’t reply — or communicate about it to all their members — switch provider.

QI’m an avid reader of your column and follower of your general strategy around diversification and thinking long term.

I use my Sharesies account to buy into index funds which have very low fees, and I strongly believe they outperform actively managed funds over time. I don’t buy individual shares.

Therefore I think the idea of using Sharesies for schools is great — as mentioned in recent letters. You could take students through the options of buying individual shares, buying index funds, advantages and disadvantages of both, and let the students decide which path they want to follow.

Just by the by I had actually started the whole index funds strategy thing a couple of decades ago after reading a website called The Motley Fool.

ABeat ya! I’ve invested in index funds since learning about them while doing my MBA at the University of Chicago in the 1970s. The idea was revolutionary back then. Ever since, I’ve been writing about what good long-term investments they are.

So yes, I agree that it would be great if students learn about index funds through a school share club.

A recent article about research by S&P Dow Jones Indices backs up your and my belief that index funds tend to do better than active funds.

Last year “was the third-worst year on record for US active managers. For example, 98.6 per cent of large-cap growth funds failed to beat the S&P 500 Growth Index,” it says. Large-cap companies are the biggest ones.

Over the longer term, “90 per cent of equity funds have underperformed the S&P Composite 1500 over the past 20 years, but an even greater 95 per cent did so on a risk-adjusted basis.” Wow. The article is here.

QI have to agree with last week’s contributor who disliked investing being called “playing”, and to disagree with your saying a student share club would be “sexier” than learning about money management.

That thought — “playing”, “sexy” “fun” — is the reason a lot of people are doing poorly with their investing.

There are statistics now about “32 per cent of people admit to trading shares while drunk”.

What we need to sell is that the result of investing is sexy, fun etc. Such as being 50 or 60 and having the choice to work or not. Or ultimately, the result of investing well is having choices. That is something to aspire to.

AFair enough — although attracting students into a lunchtime club is not quite the same as supporting drunken share trading!

QWhilst I agree senior students should learn about investing in the classroom, and a school share club could help that, how does the Financial Markets Authority feel about this, given the rules that govern investment advisers?

AFairly relaxed, it seems. “The FMA has in fact supported share investing clubs, such as presenting to the AUT Investment Club, as part of our investor capability activity in the past couple of years,” says a spokesperson.

“People should feel comfortable talking about investments and companies on the share markets. We encourage all New Zealanders to take an interest and discuss financial matters, to get more familiar with financial products.

“It’s encouraging to see the growth of DIY investing has led to the rejuvenation of share clubs. If students can learn about the benefits, risks and basic principles of investing, they will get a good start on thinking about their financial future throughout their working life. The FMA has produced a range of resources and campaigns through various channels to reach the new generation of investors who have joined the market, especially through DIY investment platforms.

“It’s only if you stray into making personal recommendations to somebody about purchasing specific financial products, or hold yourself out as providing professional advice when you’re not authorised to do so, that you could get in trouble with the laws around financial advice.

“Telling someone you’ve had a good experience with a certain company is not the same as recommending to someone to buy those company shares or purchase that company’s products,” he says.

QIn reply to one of your readers asking for a refund of Bonus Bonds, here is what happened to me.

When I finally got through to the refund centre (took ages) I was told because the bonds were in my son’s name, they could not action any refund. My son is on a ship that sails between Darwin and Fremantle off the Australian coast, and is very difficult to contact.

So I took the bonds to the ANZ Bank in New Lynn, and walked out five minutes later after being assured by the bank staff the money would be in my account in a few days. It was. I had to provide a birth certificate to prove I was the father. All sorted.

ANice story. It just goes to show that real live person-to-person contact can work best.

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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s 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 [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.