This article was published on 16 April 2011. Some information may be out of date.


  • You need to compare rental properties and share investments on the same basis
  • How does KiwiSaver work for kids, and will the parents “trap” them into something they won’t want as adults?
  • Should we look at house prices versus household income, rather than individual income, when looking at affordability over time?

QMary, can you explain something that has bothered me for years. Why do financial commentators (yourself included) continue to compare returns on rental property versus, for example, shares, without taking into account that in many circumstances people are not investing much in their rental property — the tenant is. Yet nobody is paying off your share portfolio for you.

I have neither shares nor investment property, but frankly the latter seems way more interesting. Someone else pays for your asset, and — barring a disaster — it will always be there.

Companies come and go. Certainly the past few years have shown that up very clearly. I must be missing something?

AYou are indeed. Your misunderstanding stems from the fact that you are comparing plums and apricots — just for a change from apples and oranges.

The difference between the two fruit is borrowing. People usually borrow to buy a rental property — in the form of a mortgage — but they don’t usually borrow to invest in shares or a share fund.

However, it’s possible to do the opposite. You can buy a rental without a mortgage if you have a large sum of money. And you can borrow to make a share investment — perhaps using a revolving credit mortgage.

So let’s start by looking at the no-borrowing situation for both assets — buying either a rental property or a share fund investment with cash.

You pay in full upfront. Over the years, you receive rental income on the property, or dividends on the share fund. At the end, you sell — hopefully for more than the purchase price. Your total return consists of rent or dividends plus a capital gain, minus expenses.

Now let’s borrow to invest in a rental property and a share fund.

In both cases, you make a deposit, and pay the rest with a loan from a bank. Over the years, you pay back the loan. In some situations, the rent or dividends cover all the mortgage payments, but sometimes you have to top up with other income. At the end, you sell. If you haven’t fully paid off the mortgage, you do so with some of the sale proceeds. The rest — after selling costs — is yours.

One of the big differences between the no-borrowing and borrowing situations is interest. If you borrow to invest, much of the rent or dividend income — especially in the first years — goes into paying interest, which is “dead” money to you. The tenants or the companies are not helping to pay off your investment much at all. Over a longer period, though, their payments will make inroads into the loan principal.

Note, though, that borrowing to invest — a.k.a. gearing — does make the whole thing shakier.

When things go well, you benefit from the gains not only on your deposit but also on the bank’s money. Gearing makes a good investment better.

But it also makes a bad investment worse. Even if you sell for more than your purchase price, you may have actually lost money in total. People sometimes forget all the mortgage top-ups. And share fund investors have to pay fees over the years, while landlords have to pay maintenance, rates or insurance.

Worse still, if you’re forced to sell when the market is down — as has happened lately — your sales proceeds might not cover your mortgage. You can end up with no property or share investment and a debt to the bank. Your investment won’t “always be there.”

Why do people usually gear rental property but not shares? A couple of reasons:

  • You can buy into a share fund with small amounts, adding more over time. With rental property, you usually have to pay the whole lot in one go — and most people simply don’t have enough money. There’s no option but to borrow.
  • Property is usually less risky than shares. Given that gearing raises risk, people tend to be more comfortable gearing into property.

I should add here, though, that it’s easy to diversify shares, and diversification is automatic in a share fund. Given that diversification reduces risk, a share fund might be less risky than a single rental.

As you say, companies “come and go”. But it would be rare for more than a few shares in a share fund to go belly up. Share prices fall often, but most of them rise again and grow over the years. Landlords may face just as much risk from bad tenants, or a period with no tenants, or the discovery that the building leaks.

So there you have it. If you compare like with like — ungeared property with ungeared shares, or geared property with geared shares — you get a clearer picture of what’s going on.

With either shares or property, you can borrow and let rent-paying tenants or dividend-paying companies help you pay off the loan, especially if you invest for a long period. But be aware of the risks.

QI have two pre-schoolers. If I enrol them in KiwiSaver, once they have the $1000 kick-start, do they also get the $1043 tax credit if I put in that amount each year? If not, is it still worth doing?

And am I potentially “trapping” them in the scheme once they turn 18, when it may not be to their benefit to be in KiwiSaver?

AIt’s worth signing up children to KiwiSaver, to get the $1000 kick-start. Given these tough times, who knows when the government might reduce it.

However, children under 18 don’t get the tax credit. So there’s no advantage to your contributing to their KiwiSaver accounts compared with saving for them elsewhere. And other savings can be used for tertiary fees or to start a business.

It’s different, though, when the children start earning, perhaps from part-time work. They will have to contribute 2 per cent of their pay, unless they take a contributions holiday. I suggest you encourage them to save in KiwiSaver — and start a fund for a first home and a lifelong savings habit.

As for “trapping” your children, if they don’t like being in the scheme they can take contributions holidays all the way through to retirement. At that point, they will get the kick-start plus returns on it. Who would be annoyed by that?

QI often see, in the media and also recently in your Herald column, housing affordability related to the ratio of house price to median salary. And by this measure NZ houses are relatively unaffordable.

But it seems to me that we have seen an historical shift from single to double income families, and it is as families that so many purchase houses. Is the ratio of house price to median household income a better measure?

AIt depends on what point you are trying to make.

Stephen Toplis, BNZ’s head of research, says it’s still valid to look at house prices relative to individual incomes, “as it still provides the simple representation of how long an average individual would have to work to pay for an average house.” He adds that, “It is also useful for international comparison.”

However, he points out, looking only at incomes — whether individual or household — doesn’t tell the full story about affordability. “The level of interest rates will play a significant role in this. Also, one should really be looking at after-tax income as tax clearly delineates take-home pay.”

Nonetheless, says Toplis, “While far from perfect, price:income measures still offer a useful back-of-the-envelope look at the state of the housing market, and do offer the conclusion that by international and historical comparison New Zealand houses are ‘expensive’.”

Would that still apply if we compare house prices with median — or average — household income rather than individual income?

The answer was surprisingly hard to come by. So Andrew Coleman, Motu Economic and Public Policy Research senior fellow, crunched some numbers for us, using largely census data but also Reserve Bank data.

Coleman started by looking at what makes up a household. “The changing nature of the household makes your correspondent’s question fundamentally awkward,” he says.

Between 1966 and 2001, there has been a big drop in the number of people per dwelling. One-person households have grown from 13 to 23 per cent of all households, while households with three or more people have declined from 63 per cent to 44 per cent — with the biggest drop being in households with five or more people.

Lots more people are buying — or ending up in — houses on their own. Also, families don’t tend to have so many children to support — presumably making it easier to spend more on housing.

But let’s push on with what you asked about, the situation for couples. Coleman looked at average income for males and females aged 30–35, figuring they are typical buyers of first homes.

He found that between 1966 and 2006, the average male income for that age group rose 17-fold, while the average female income rose 64-fold — reflecting women’s growing participation in the work force. Put together, the average income for the couple grew 24-fold in that period.

That compares with 15-fold growth in the Consumer Price Index. Unsurprisingly, with many more women working, couples can buy much more with their pay than they could in the mid 60s.

But has that income growth matched house price growth? For a long time, yes. From 1966 to the early 80s, house prices fell relative to our couple’s income, but then the trend changed. By 2001 they were back at about even pegging with 1966. In other words, the ratio of house prices to total income for a typical early 30s couple in 2001 was about the same as in 1966. House prices grew lots, but female incomes grew more.

Then came what some call the house price bubble of the noughties. By 2006 the ratio of house prices to our couple’s average income was 74 per cent above the 1966 level.

Over the whole 1966 to 2006, house prices grew 42-fold — from a mere $6500 in the mid 60s — compared with our couple’s 24-fold income growth.

As Coleman says, “In terms of price to income, it was much harder in 2006 for a (working) young couple to buy a house than in 1966.”

How about since 2006? We couldn’t get more recent data that was comparable. However, we know house prices grew after 2006 but have dropped in the last few years. Affordability has been improving lately. But it’s still much harder for both individuals and couples to buy a house now than in 2001 — or 1966.

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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.