This article was published on 15 May 2004. Some information may be out of date.

QThe following is the sort of thing that makes me glad most of our money is in property. Luckily, I lost all my money at the time in the ’87 crash, so I learnt a lot about share investors.

Mum and Dad, who took the plunge in January 2000 and bought shares in the WiNZ Fund (which invests in an index of international shares) were looking at a negative real return of about 55 per cent by the end of last month. In other words, inflation has been about 10 per cent and the shares’ value is down by 45 per cent.

That’s not a great start, and it gets more depressing when you realise that if international shares return 7 per cent a year from here on — an optimistic assumption — the investment will take another 14 years to catch up to inflation at 2 per cent a year.

What I’d like to know, Mary, do they get out now or wait another 14 years and hope to cut even? They have no more money to invest, just a nice house by the beach.

Nobody needs shares but everybody needs a home.

ANot so! The whole system in which we live needs shares.

Without them, companies couldn’t as easily raise money to produce goods and services, and provide jobs. From the investors’ point of view, while the many thousands of New Zealanders who own shares might not absolutely need them, they choose to own them.

So let’s look beyond glib comments like that, which sound as if they’ve come straight out of one of those real estate seminars that entice the gullible into enriching the seminar organisers.

Much more to the point is your parents’ sad experience. They took the plunge as you say, and struck rocks just below the surface, going into WiNZ just a few months before the start of the longest decline in world share prices in many a day. That’s rotten luck.

It’s rather late to point out to them two basic investment messages:

  • To reduce volatility, it’s best to spread your money over different types of assets. If your parents had put some of their money into, say, investment grade bonds and/or an index fund of New Zealand shares, their loss would be much smaller.
  • It’s better to drip-feed money into riskier investments like shares or share funds and property. That way, you don’t buy the lot at top dollar, as they did — and as some people may now be doing with property.

On the other hand, they are to be congratulated for sticking with their investment through the bad times.

Many people have bailed out of world shares in the last few years, a decision they may live to regret.

Your parents’ best plan now is not to dwell on how much money they invested in 2000. (By the way, my calculations on catching up don’t quite agree with yours. But if we’re not dwelling on the past, we’ll ignore that.).

Looking at the situation today, is the money your parents now have in WiNZ likely to grow faster left there, or invested elsewhere?

Nobody knows.

WiNZ’s performance depends not only on what happens to world shares, but also to the Kiwi dollar. That’s because it’s not hedged against currency movements.

When our dollar falls, WiNZ gets a boost. In the late 1990s, that meant it performed even better than the booming world share market. Annual returns of more than 30 per cent no doubt attracted your parents into the fund.

Then, early this decade, both factors turned bad. World share prices fell and our dollar rose. It was a double whammy for WiNZ.

In 2003, we had a bit of both. World shares rose impressively, with the WiNZ index gaining 26 per cent in local currency terms. Your Mum and Dad would have been well pleased if our rising dollar hadn’t turned that into a mere 4.8 per cent, including dividends.

More recently, the Kiwi’s decline has helped WiNZ again. That may continue, or it may not. All I can say is that I still think international index funds such as WiNZ are a good bet for the long term.

All of this assumes, though, that your parents are in a position to stay in for, say, ten more years.

If you are old enough to have invested in shares in the 1980s, your parents might be close to retirement. So they might be planning to spend some of the WiNZ money in the next few years.

If this is the case — or if they would prefer less volatility — maybe they should move some of the money into bonds or similar.

By the way, it’s nice that you’re glad about your property investments. But there are tales of people who have fared far worse in property than your parents have in WiNZ.

Property doesn’t usually fall as far (although it has in Japan). But investors are much more inclined to borrow to invest in property, boosting their risk.

In the late 1990s, when Auckland house prices fell, I heard of more than one family that couldn’t keep up mortgage payments on rental properties and ended up selling for less than their mortgage. Not only did they lose their deposit, but they also owed the bank.

That’s not a common scenario. But it does happen.

If you take just one family’s experience over just a few years, and you pick the right years, you can illustrate any investment experience — from fantastic to abysmal — with any type of investment.

QI read with interest in the NZ Herald last week that a real estate agent called the Reserve Bank’s rate increase a “small negative in a whole lot of positives”.

If you believe that NZ’s property market is a lot like Australia’s, then many investors may soon think otherwise.

In Sydney the latest auction rate clearance has dropped to 35 per cent, half of what it was last year and the lowest in 13 years. The implication, of course, is that prices must come down.

But with household debt at 140 per cent of disposable income, the risk is that prices could fall further than expected as homeowners get cold feet about how much they are prepared to borrow.

This would be bad news for consumer spending and the economy. New Zealand’s credit-induced expansion is coming to an end, as are over-exuberant house prices.

AAround the middle of last year, an article in the Economist magazine predicted that house prices would fall “within the next year or so” in America, Australia, Britain, Ireland, the Netherlands and Spain.

Economists here looked at the magazine’s number crunching — on prices, rents, incomes, economic growth, migration, building rates and so on — and found the numbers weren’t quite so alarming here.

Assuming that’s still the case, we might not suffer Australia’s fate. Oops! Let me reword that. While property owners don’t want values to fall, would-be buyers would no doubt love to see that happen, so I should be neutral. How about: house prices might not fall here, or at least not as much as across the Tasman?

Still, your point about debt levels is a good one. Just as I said above about WiNZ, who knows what’s in store?

QI want to comment on a letter in your column on March 27 from a correspondent who claimed to be “somewhat unique” in living in one house in Auckland since 1968, Olly Newland’s comments on this letter and your judgment of Olly Newland on May 1.

First, your initial correspondent is not as unique as he may think. I moved my family to an average-to-good Auckland suburb in December 1968, having purchased a house for $18,500. We still live here and have just had this house valued at a market rate of between $480,000 and $520,000.

I have no difficulty in accepting this figure because of the prices at which neighbouring houses have sold in the last year, in particular the house next door, which sold a few months ago for $480,000. That house was, by coincidence, available for purchase at about the same price when we purchased our house in 1968.

If your March 27 correspondent paid $19,000 for a house in 1968 which today is worth only $300,000, I can only suggest three possible explanations:

  • He made a very bad purchase in the first instance, or
  • He has done no maintenance, allowing the house to practically fall down, or
  • He is quoting an out-of-date RV, not market value.

Now I want to make it clear that I am not defending the current inflated house price ruling in the market, nor am I championing the cause of real estate investments compared with other investments. I am writing in defence of objectivity.

Furthermore, I have had no acquaintance with Olly Newland in any capacity whatsoever. I do know from what I have read, however, that he is a person with enormous experience of the housing market. I also know from my own recent investigations that what he wrote to you concerning Auckland house prices 1968 to 2004 is correct.

Had you been able to refute his statements, I feel you should have done so. To attempt to win the debate by discrediting the messenger, as you have attempted to do, is unworthy of you. You have not brought any objectivity to the question but merely demeaned yourself.

Remember, too, that the housing bubble of the late 1980s had its genesis in the frenzy feeding on the share market in the mid 1980s. But I don’t suppose you will publish this letter either.

AWhere did the “either” come from? I publish practically all critical letters, and never edit out the criticism — unlike the compliments, which usually get cut in the interests of space.

I want to start by saying the whole point of running the March 27 letter was never to present the one case as typical.

I said then that the man’s house had risen by about 0.5 per cent more than inflation, while the Reserve Bank says the average house price has grown 2.2 per cent more than inflation.

The writer’s point — and I endorsed it — was that people who expect house prices to continue to rise as fast as they did in the 1970s and 80s are in for big disappointment. Inflation was much higher then.

In the next column, Olly Newland said he had bought houses in the late 1960s for $12,000 to $18,000, and they are now worth $650,000 to $2.5 million.

I didn’t challenge the correctness of anything he said. In fact, I congratulated him for doing so well.

I also pointed out that while my own experience with house prices has been very mixed, I don’t rely on any one person’s experience — his, mine, yours, the March 27 man’s or anyone else’s. I prefer aggregate figures, like the Reserve Bank’s.

Funnily enough, though, if we did decide to concentrate on your experience, it actually supports my message more than Newland’s.

You have, indeed, done better than the March correspondent. I suspect, from your two addresses, that it’s largely because your suburb became more desirable than his over the years. Put that down to foresight if you like.

Anyway, inflation since you bought your house has averaged 7.5 per cent a year. (See the CPI Inflation Calculator on www.rbnz.govt.nz). Your house has grown by a bit less than 9.5 per cent a year. (See the Lump Sum Calculator on www.sorted.org.nz) .

If it had grown by the national average, of 2.2 per cent above inflation, or 9.7 per cent, it would now be worth $543,000.

As for discrediting the messenger, the letter I ran two weeks ago was the kindest of about half a dozen I received that commented on Newland’s letter to this column.

Several of the writers had lost money in Landmark Corporation, which was run by Newland’s investment management group and in which Newland was a major shareholder until 18 months before the company was delisted in 1990.

I twice sent copies of letters to Newland, asking if he would like to respond to them. Instead, he threatened to sue me for defamation. I decided, then, it was best to simply state what happened to Landmark.

If anyone has been treated unfairly here, it’s those whose tales of Landmark share losses didn’t make it into print.

If you can show me one sentence in all of this where you think I haven’t been objective, please point it out.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding 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.