NZ Herald 28 April 2007

AIrritated, tired, amazed — you’ve been on a bit of an emotional roller coaster. I hope writing about it all has made you feel better!

Your views are largely shared by BNZ chief economist Tony Alexander, although he has a more radical solution than Avondale or other suburbs.

In a recent newsletter, Alexander wrote rather colourfully about young home buyers “having to realise that after a lifetime (for them) of easy credit access to consumer goods and services, the reality of struggling as previous generations have done is simply manifesting itself.

“They may have to live further away from their work than they want, as some are doing by buying in Featherston and working in Wellington.”

With work available outside big cities, “The route toward home ownership for the easy credit generation seems logically to be buying and working in the regions.

“After all, how many times have we heard people say you’ll get a coffee in the regions as good as, if not better than, what gets served up in the cities — plus better access to the outdoors, less vehicle pollution, and less road congestion.

“Eventually you’ll build up enough housing equity to help fund a house purchase in a city further down the track if one wants to pursue a career in a bigger smoke.”

Would-be home buyers might also have to consider “cutting down on the cell phone use to limit the monthly bills, cutting foreign travel, putting off getting a modern car, plasma TV, latest gaming console, latest phone, and cutting twenty $3.50 cups of coffee a week until after the deposit is raised for a house,” says Alexander.

He adds, in brackets, “(Written by one who spent the first six months after purchasing a tiny house in 1987 getting four hours of sun a day in winter, sleeping on the couch for want of a bed — with an 18.5 per cent interest rate. …Fade to Four Yorkshiremen skit.)

That wonderful Monty Python skit featured four old men competing with one another for having had the toughest childhood.

It ends with one saying, “I had to get up in the morning at ten o’clock at night, half an hour before I went to bed, drink a cup of sulphuric acid, work twenty-nine hours a day down mill, and pay mill owner for permission to come to work, and when we got home, our Dad and our mother would kill us and dance about on our graves singing Hallelujah.”

Adds his friend, “And you try and tell the young people of today that … they won’t believe you.”

Each generation of oldies seems to think that the young are a bunch of softies. And each generation of youngies think the old are a bunch of whingers. I guess that’s inevitable as living standards rise.

As you say, though, some of the softies are people barely younger than you. And I must say I largely agree with you — that it wouldn’t hurt first home buyers to lower their standards.

It can be an interesting challenge to make a home out of a hovel.

On the rental property issue, the animosity probably stems from some property investors’ gloating about their tax deductions and tax-free gains. If you don’t gloat, you don’t deserve hostility.

But I can’t let you away with your comment about shares becoming useless pieces of paper.

It’s true that a tiny proportion of shares become worthless. But I always advocate buying a wide range of shares, or investing in a share fund that owns many shares. If you do that, you are practically guaranteed not to lose the lot — and you might well do better than with rentals.

But let’s not start that argument. I’m already worried enough about your blood pressure.

AWhere did that assumption come from?

The prices of both property and share funds will almost always grow faster than inflation, over the long term.

Funnily enough, it seems to me that the advisers you have talked to have rather undersold their share funds. What a breath of fresh air.

Using the lump sum calculator on the Retirement Commission’s www.sorted.org.nz website, we see that if $700,000 grows to $2 million in 20 years, the average annual return, after fees and taxes, must be 5.4 per cent.

That’s pretty low. I reckon you could expect about 7 to 9 per cent returns, in which case your money would grow to $2.7 million to almost $4 million.

We can allow for 3 per cent inflation by subtracting 3 from 7 and 9 per cent. That gives us totals of $1.5 million to $2.2 million in today’s dollars. Not bad.

What about property? Historically, its value grows about 2 or 3 percentage points faster than inflation — which brings us to a somewhat lower total. But who knows what the future holds?

My advice to you is to invest in whichever you prefer, for non-financial reasons. If you would like a home of your own, go for it. If that doesn’t appeal, share funds are a great idea over long periods.

If you choose the latter, I do hope you pay your parents some board!

AThe blog looks interesting. But I bet many readers won’t look at it. They don’t want to know.

Funnily enough, in the article I quote above, the BNZ’s Tony Alexander says, “house prices might be exactly where they should be.”

His reasons include: higher immigration; lower and less volatile interest rates than in the past; strong job security; and high constuction costs.

He concludes that it’s “very unlikely” that house prices will fall sharply.

On the other hand, we keep being told that house prices are at record levels, relative to rents and incomes. And that more and more people can’t afford their own homes — even if they will settle for west of Avondale or down country. That all suggests downward pressure on prices.

To be honest, I don’t know what to make of it.

Like you, though, I could never have the blind faith in property that some New Zealanders have. How quickly they have forgotten house price falls in the 1990s. And how reluctant they are to take note of bigger falls in other countries.