This article was published on 28 August 2004. Some information may be out of date.

QI appreciate maybe you can enlighten me on my investment in property.

I have a mortgage-free house worth about $400,000. I am a pessimist in NZ property.

But is it a wise decision now to sell my house and rent one, and wait for a lower price to buy back?

One of the problems might be: Is the return on my investment with that $400,000 adequate to cover my rental expenses?

Taking into account the “worst” scenario of a further rise in property prices, is there any kind of investment that I can hedge against this with my cash after the sale?

AStay put.

Quite a lot of people try to time the share market, hoping to sell when prices are high and buy back when they are low.

As often as not, they get it wrong. And, because they have to pay brokerage and perhaps also tax on their gains, most end up worse off than if they had bought and held.

Far fewer people play this game with real estate, even though it seems to be easier to predict the property market. Some possible reasons:

  • It’s much more hassle, particularly if it’s your own home. Selling and then buying, to say nothing of moving twice, is not everyone’s idea of fun.
  • There are usually many more dollars at stake.
  • Most importantly, you can still get it horribly wrong.

Even real estate agents aren’t predicting further big house price rises soon. But there’s no guarantee that prices will fall — certainly not enough to cover the considerable costs of selling and buying.

With real estate, too, it’s not so important what happens to the whole market as to your particular properties.

You would want to sell at top dollar and then buy a bargain. There’s a fair bit of luck in all that.

Don’t forget, too, that if you flick in and out of houses too often, Inland Revenue might decide your gains are taxable.

A hedge against property prices rising? In other words, you need something that will appreciate with property.

I don’t know of any investment that is hedged against house prices — although there are possibly some products if you were talking commercial property.

In any case, if you put your money into something that goes up with property, presumably it will also go down with property. There are no investments with a high upside and no downside.

If things go according to your plan and house prices do fall, your alternative investment will also fall. So why bother? Forget about hedging.

Basically, your plan is risky. There’s no denying that you might do very well, but there’s a pretty big chance you won’t.

Given the hassle, it’s not a gamble I would take.

QI am interested in your comments (two weeks ago) on the similarity of prices for real estate services. If prices are all the same, does it mean that there is collusion, or does it mean that the competition is really hot?

As I recall economic theory, competition will force prices down to the long-run average cost, which suggests that for the same service, prices would be similar across different providers. Of course, price fixing might appear to give the same result.

I wonder if the structure of the real estate industry lends itself to a high long-run average cost. Regulation might lead to little difference between the perceived service from different providers, and the “boom and bust” nature of the business cycle would cause industry players to demand a high return on investment to reward them for high volatility of returns.

Consumers can understand different levels of travel choices (first class, business, economy), but between regulated real estate companies they expect the service to be equivalent.

Is there a budget service for a budget fee? (“Yes, I’ll list for that fee but I will only show every third prospect around your property, and I won’t put up a picture in the window.”)?

What would be useful would be an independent review of the structure of the real estate industry to find out how existing structures (particularly regulatory ones) sustain high long-run average costs.

If the industry is truly competitive, providers will emerge over time offering different levels of service. If it is a closed shop we will see the internet (for example) facilitate new market structures overseas but not in New Zealand.

AHow long is “over time”?

Real estate agents have been free to set their own fees since 1985. So why, almost 20 years later, don’t we have cheaper no-frills real estate, like no-frills rental cars, stock brokerage services, groceries or, as you say, travel?

Some agents say that it’s been tried, and it just doesn’t work. But I wonder if it’s been tried hard enough.

I don’t like your ideas of showing houses to only every third prospect, or withholding pictures from windows.

But what if Cheapy Real Estate made a virtue out of operating off High Street with a big sign that says, “We run our business cheaply so you can buy and sell cheaply?

Agents could wear T shirts that read, “We dress cheaply so you (etc)”; drive small older cars emblazoned with, “We drive cheaply so you (etc.)”; buy fewer expensive ads — and charge considerably less?

Some home sellers might find this too down market. But I would certainly consider selling via Cheapy, and as a buyer I would check out all their listings, in the expectation that lower fees might translate into lower prices.

They would need lots of publicity to get the volume that would make up for the lower profits per sale. Maybe that means a larger company would have to do it. How about it, big guys?

As for whether real estate agents collude to fix prices, that’s what the Commerce Commission is looking into right now.

The question of whether similar prices mean competition or collusion is often applied to petrol prices or banks’ mortgage and deposit rates.

In those industries, though, there seems to be less room for variation in services — apart from some new banks’ avoiding having a branch network.

With real estate, variation would seem easier. Here’s hoping the Commission either helps us to understand why we don’t get more variation, or takes steps to ensure we do.

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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.