This article was published on 29 May 2004. Some information may be out of date.

QI’ve been following the recent discussions regarding the houses bought in 1968 and the increases in value above inflation.

Even if property prices go up or down it is easy to find areas that always do better than the average (coastal areas of Auckland, areas of Wellington etc), and these are offset with areas that will always be below average (check most of the areas listed by WINZ as not being supporting of jobs).

Are there areas in the sharemarket that will consistently increase in value above average for the next 30 years? Do you have examples from the past 30 years?

To increase the value of any property I own, I can do something about it (clean it up, add a room, subdivide etc.) What can I do to increase the value of my shares?

Am I right in my understanding that investing in shares is nearly always done through experts (share investors, traders, etc) and these experts still can’t consistently succeed. Yet property investment and property trading can be done by anyone with no experience, and in most cases they do well?

There are stories of individuals who’ve struck trouble in property, which can be compared to large numbers who are affected by the collapse of a company, or mistakes and fraud of “experts”.

AWhy are you taking the time to write to me? Why aren’t you out there borrowing up large and buying heaps of property in the areas that always do better than average?

If I knew which those areas were — or which types of shares would top the return lists — you wouldn’t see me for dust.

Sure, you can see which property and shares have outperformed in the past. Even then, though, it will depend on which period you look at — the last year, the last five years, the last 20 years, the last 100 years, or what?

And which period is best? The more recent periods are most like current conditions. But the longer periods give us more data, including several booms and busts, so they may be more accurate.

Even after you’ve made that decision, though, the information might not be very helpful.

Let’s look at coastal property prices around Auckland. A few years back, I annoyed Coromandel real estate agents by saying that people might not continue to make huge profits on coastal properties. The very fact that sellers were charging then-high prices meant that buyers might not do so well with their purchases.

As it turned out, the boom did continue. Foreigners, immigrants and returning New Zealanders, able to buy heaps of Kiwi dollars with their savings when the Kiwi was cheap, kept pushing prices up even further.

Booms never go on forever, though. The Kiwi dollar has risen, mortgage rates are on the rise, immigration is decreasing and public sentiment about property is turning.

Coastal property, which has risen faster, might fall faster, or at least slow down more than other quieter performers. In all types of investments, the stars in good times are often the dogs in bad times.

It’s quite possible, in fact, that a house investment in one of those WINZ areas — dirt cheap now for the very reasons you cite — will do relatively well in the next few years. It has more room to grow.

On to your next point. The ability to improve the value of a property, but not shares, is the very reason some people love property. It’s also the very reason those who would rather spend their weekends at the beach don’t want to own it.

Yes, share trading is often done by experts, although there are also plenty of amateurs. And yes, nobody consistently succeeds. That’s why I recommend buying shares in index funds, which hold the shares in a market index. No expertise is involved, so you don’t pay for something that may not deliver.

With property, amateurs don’t usually do too badly — although it might happen much more than we realise. Individuals don’t shout that from the rooftops. But when a listed company is in trouble, the information is publicly available.

And while a corporate collapse does affect many people, smart shareholders have only a small portion of their savings in any one company — unlike many property investors, who concentrate on one or perhaps two rentals. It’s much easier to lower your risk through diversification in shares.

Still, you’re right, property is basically less risky than shares. That’s why average returns tend to be lower.

QThe pro-property camp seldom acknowledges the costs of disposing of the asset when it’s time to realise any gains.

This is an area that inflation has turned into a big-dollar item, and it’s blissfully overlooked when most of us talk about the profit we make on a house sale. We don’t want the facts to get in the way of a good story.

I’ve just sold a small Auckland bungalow, which we bought as an investment seven or eight years ago. We tried to flick it off in the tough times of the late 1990s, but would have taken a loss and decided to hang on. It was fortunate we could afford to.

The property surge over the last couple of years (and excellent tenants) meant we finally did quite well out of it, but selling a house is a little more expensive than selling shares.

Realistically, you have to go through an agent to get a sale. Some people may get lucky with private sales, but they’re few and far between.

On the $400,000 sale price for our bungalow, I paid a total commission of just over $17,000 (including GST). That was quite a chunk out of the paper profit.

I then did a rough calculation of what it would cost me to sell a portfolio of a dozen or so shares with the same value. These days, online brokers would have given me change from $500.

Agreed, the big brokers would have charged a good deal more (on the basis that their good advice would have accompanied the transactions), but I’ve never dealt with one yet who gave any advice whatsoever on a sale. When you’re familiar with the market and have decided to sell, who needs an expensive broker?

I’m not making this point to knock real estate agents (they’ve been riding the gravy train lately, and they’ll need that cushion because some cold months may not be far away). But the fact is that their commissions are a significant and often-forgotten cost in the business of selling a house. And the internet means selling shares is now quick, easy and cheap.

AGood point. And it’s not only cheaper to sell shares than property, it’s also much easier and usually much quicker.

Don’t forget, too, that there’s often a depreciation clawback on your next tax return after you sell an investment property.

If you’ve been deducting depreciation, and you sell the property for more than you paid for it, all your depreciation over the years is added to your taxable income in the year of sale. Even if you sell the property for less than you paid, some depreciation may be clawed back.

This can amount to thousands of dollars in tax.

Sure, you had the use of the money in the meantime. And if your tax bracket is lower when you sell than when you deducted the depreciation, that boosts the advantages of claiming depreciation.

Still, many people don’t think much about the clawback until they sell their property. And it can make a sizeable hole in their profit.

QRecently at a function we were discussing your column (as you do!), especially with respect to risk and return.

It was a farewell function for a couple who had given up well paying jobs to shift their family south, where they had bought into a business. The wonderful letter from one of your correspondents was discussed, where your writer noted that in life, just as in investment, often greater risk will lead to greater return. (Luckily our friends found this comforting!)

This all comes to mind with the continuing debate about matrimonial property agreements. I think what has been missing is a fundamental look at the institution of marriage!

What you are promising, indeed swearing with all your heart, in front of your friends and family, especially if in a church, is that you plan to stay together for the rest of your lives.

Why are people doing this, and yet in a burst of cowardly hypocrisy drawing up matrimonial property agreements?

It wasn’t that much of an issue for my husband and me. Really we only came in with a few possessions and modest savings (enough for our first home deposit, though I did have to cash in my life insurance). But on the other hand the decision to have (three) children has severely impacted my career, as has the times I’ve had to give up good jobs to transfer with my husband.

Last week’s correspondent Happily Married may find the very same thing happens to her, and it’s very hard to accurately quantify (eg did I really get passed over for that promotion because my hubby may be transferred again within 18 months? Or because child number 2 has been sickly and I’ve had to take time off?).

No, to us it comes back to risk and return. We were getting married because we wanted to be together. We did not go into it with a “what about when we break up?” attitude.

Maybe you could say without an agreement you are facing greater risk. We say you are rewarded with greater return. And so far (a mere ten years, not long I know) we have been more than happy with “our returns”.

Also Happily Married

AI’m sure many marriages are better because they didn’t start with a conversation about what would happen if they end. But that’s not always true.

It’s easy for those with few possessions not to worry about agreements. But if one spouse has lots more than the other, after a few years the lack of an agreement could find the richer one worrying that the other one married them for their money, or feeling concerned that, if the marriage does end, they will lose out. Such worries don’t make for harmony.

If, instead, both people know where they stand financially, that might free them up to concentrate on making the relationship work. “Cowardly hypocrisy” might really be common sense.

Complications arise, too, in second marriages, especially when there are children from first marriages. Without an agreement, the kids can end up losing lots to a step mum or step dad who — at least from their point of view — does turn out to be wicked.

Having said that, I like your line of thought — although the effects on your career of children and your husband’s transfers aren’t really relevant, as a pre-nuptial agreement is signed before any of that happens. Still, it’s great to feel romantic about marriage.

But when things go wrong, and people end up being treated unfairly because there is no property agreement, romance flies out the window.

Property agreements are optional. And the requirement that each spouse has independent legal advice should prevent one person from being coerced into an agreement. While people like you can give them a miss, we’re all better off for having choices.

P.S. It’s great to read that your south-bound friends got some comfort from the column. Some correspondents’ letters are indeed wonderful.

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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.