NZ Herald 2 July 2005

AI think 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 around $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 elsewhere — 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 other country’s, prices are still rising here while they are now falling in Australia, Britain and elsewhere. So our bubble is still expanding.

And we are among nine countries where prices are at record highs relative to rents and income. Either rents must rise, or prices must fall. And, in the current 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 for some other reason house prices continue upwards? You would then be sorry you waited.

And 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, 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.

Over all, 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. If the sellers refuse, try elsewhere.

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?

By the way, good on you for not only managing on a much lower income than many families, but for looking to the future.

APresumably 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 per 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 current 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.

AI hope you’ve been buying lottery tickets lately. 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 current 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 house proceeds to generate all the rent you need.