This article was published on 17 January 2006. Some information may be out of date.

Readers rally to back houses

It always happens. Whenever I write about investing in houses and shares in the same column, people say I’m unfairly negative about houses.

In my final column last year, I wrote that the rise in house prices over the previous year was slower than the rise in: New Zealand shares, hedged overseas shares and unhedged overseas shares, all including dividends. That surprised me, and I thought it might surprise you.

I also noted that while shares have their ups and downs house prices also fell in the late 1990s. And I concluded with two observations: New Zealanders are so preoccupied with housing that we don’t take enough notice of other possibilities, and our memories are too short, given that property and shares should be long-term investments.

This was not a point-by-point comparison of the two different investments. Nevertheless, three readers emailed me with their concerns, and they are worth discussing.

One noted that I included dividends in the share returns but not rent in the returns on housing. This is a fair point.

But how much rent? It varies hugely. And in some cases it should be zero. Many people put more money into their home than they otherwise might because they regard it not just as accommodation but also an investment. Sure, they live in a nicer place, but they don’t receive rent.

Perhaps I should have used three sets of figures: one with high rent, one with low rent and one with none.

The other two readers said I should have included leveraging (sometimes called gearing) — the fact that most property investors benefit from growth on borrowed money as well as their own money, after allowing for interest paid.

This is not such a fair point. While most people who leverage are property investors, you can also leverage a share investment or anything else.

It is certainly harder to raise money to leverage shares. But these days, with revolving credit mortgages and lenders not too concerned about how borrowers spend the money raised through other mortgages, many New Zealanders could borrow to invest in shares.

Whether they should is another question. While leveraging of any investment makes a good return better, whenever the return turns out to be lower than the interest rate it is a losing idea. And if the investment value falls you can end up owing more than you own.

Shares, of course, sometimes lose value. Leveraged share investment, then, is for the brave or foolhardy only.

In the current housing market, though, I wouldn’t recommend borrowing to buy investment property either.

As one of the emailers acknowledges, rents are flat or falling. “The market is overpriced due to yields in all sectors of the property market being significantly less than borrowing costs.” And we know what tends to happen to overpriced assets.

Not only is leveraging not unique to property, but it’s a mixed blessing anyway.

So where are we?

Perhaps I should have included not only examples of houses with high rent, low rent and no rent, but also with high leverage, low leverage and no leverage. And also shares with high, low and no leverage.

It’s starting to sound like a book rather than a column, when all I wanted to say was, “Hey, houses are not the only things rising in value!”

Anyway, thanks for the letters, you three. Your points have now been aired.

By the way, one emailer also mentioned the tax advantages of property investing. But they may not be all they seem, especially in light of some recent developments. More in my next column in two weeks.

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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.