Blog: The Landlord says...

I wasn’t expecting an Auckland University think tank on retirement income was the sort of crowd who would drop a bombshell on the Tax Working Group, but that’s exactly what they did yesterday.

The Retirement Policy and Research Centre, headed by well-known superannuation commentator Michael Littlewood released a paper which questioned the accuracy of one of the TWG’s numbers on the property market. By questioning the group’s predictions on the size of the residential investment market it also casts significant doubt over the assumptions made about how much revenue the government can raise by putting new taxes on property investors.

To his credit Finance Minister Bill English was quick to comment on the research and even acknowledged it may mean changes to their thinking.

He says Treasury analysis was showing that changes to property tax would make a smaller contribution to government tax revenue than what was estimated by the TWG.

Pity his side kick Peter Dunne on the revenue side hasn’t listened. He made a speech today with the same old line that changes to the tax treatment of property were likely, to make the rules fairer and more equitable for all taxpayers.

Some of the questions one has to ask is what other fundamental errors did the TWG make? Also one wonders whether they were in fact just a ginger group set up to stir up a debate and prepare Kiwis for radical – and unpopular changes – as opposed to an objective working group.

I know last week’s Blog, where we talked about some numbers produced by the NZ Property Investors Federation. It calculated that if the government goes ahead with changes to depreciation rules for residential property investment then rents are likely to rise. Landlords, it estimates, would lose on average $1750 a year if they lost the tax deduction and this amounted to $34 a week, which would be passed on to tenants.

These calculations provoked a response that that this numbers from the federation where use political statements lacking analysis.

Judging by what we have seen from the Retirement Policy and Research Centre there are questions that need to be asked about the TWG and its plans.

The good news out of this is that maybe there is hope that the government will not be as harsh on the residential property sector as first indicated. We will know on May 20 – Budget Day.

It was pleasing to see the NZ Property Investors Federation come out and put the issue of rent rises on the agenda this week.

For those who missed it NZPIF vice president Andrew King calculates that if the government goes ahead with changes to depreciation rules for residential property investment then rents are likely to rise.

He says landlords would lose on average $1750 a year if they lost the tax deduction and this amounted to $34 a week, which would be passed on to tenants.

There is no doubt that any changes to investment rules will impact on the economics of property investment.

After all it is an economic equation which needs to balance up. There is little point in making an investment if the returns are not there. You need to remember that most investors are after cash flow and income; they are not speculators chasing quick capital gains.

Rents are one of the key inputs into this equation and another, from a cash flow perspective, are depreciation claims.

It seems absolutely logical that if you change the rules around depreciation it will have an impact on rents.

So Prime Minister John Key sounds like he has had some dud advice when he told TVNZ that the advice he has received is that proposed changes will have little impact on rents. (We’re looking to find this piece of advice at the moment).

Likewise arguments that tenants set rent is only part of the picture.

What hasn’t been touched on is that if other changes are made to penalise Kiwis who choose to prepare for their retirement by investing in property then there is absolutely no doubt rents will rise.

Next week is shaping up to be fairly a interesting one for the housing market and where it is headed.

It’s not quite the big bang – that’ll be May 20 when the government unveils its new taxes in the Budget.

Rather, next week we see the latest house sales data from QV and REINZ, plus we have the next Official Cash Rate announcement from the Reserve Bank.

Anecdotal evidence we are hearing is that the housing market has slowed considerable, especially amongst investors.

There have also been reports floating around that a good number of investors are saying enough is enough. Let’s sell before the government destroys the market effectively taking away property investors’ retirement savings.

However, others are sitting tight waiting to see what happens.

The OCR announcement is a critical event to watch. While we are not expecting the governor, Alan Bollard, to increase the cash rate (like his counterpart across the Tasman did this week), we will be watching for a strong steer on where rates are heading. Or more precisely, we know they are heading up, we want an idea of when and how steeply they will rise.

There will be a point where borrowers enjoying these wonderfully low floating home loan rates will have to make a big decision.  Stay floating or move to a fixed rate? If it is the latter, the question becomes what term?

At the moment it looks like the shorter duration loans – out to around two years – will be the ones to go for. Longer term loans look pretty expensive right now, even though we have seen some decreases in the past couple of weeks.

So next week will be one to watch. While the data and news isn’t likely to spark huge amounts of activity, it will be fundamental information needed to plan future moves in the property market.