Blog: The Landlord says...

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.

The talk about changes to the tax system has died down a little and now reality is starting to sink in.

Most commentary has been around the fact that the proposed changes are designed to whack residential property investors. The anti-property brigade has been in strong voice once again pushing the spurious line all property investors are fat cats rorting the system; thankfully investors have been putting up a pretty good defence.

While things are still murky around what the government will do and how far it is prepared to go to alienate a good chunk of its support base, there is acceptance change will happen.

As I have digested the changes and talked to other investors it has become clear this is big.

Indeed I would argue the changes are once-in-a-generation stuff. The rules around residential property investing will totally change. The business will be totally different and investors will have to change their approach.

I have heard that many investors have got the heebie geebies and are already looking to exit and have put properties on the market.

I’m not sure that is necessary. The changes don’t necessarily mean that investing in residential property will no longer be profitable. It means you will need to think about how you approach it.

One change I suggest will happen is that some of these companies who find properties for investors and sell them to them on the basis of depreciation gains and tax benefits will struggle to survive.

Also the changes are likely to drive up rents over the medium term. While that is a plus for investors, tenants won’t be happy with the government.

The March issue of NZ Property Investor will be giving you lots more information about what these changes mean and what you can do adjust.

I’d love to hear your thoughts on the changes and how you plan to adjust to them. You can comment below or send an email to thelandlord@landlords.co.nz

PS: I was in Auckland this week and attended one of Kieran Trass’s breakfast presentations. He has plenty of views on the changes and also some ideas on what to do. If you are in Auckland and want to attend one of these Wednesday sessions click here.

The Reserve Bank governor threw a cat amongst the market pigeons this morning, defying predictions about when rates will rise.

Economists and the market have all been predicting that the Reserve Bank will have to back off its earlier predictions about rate hikes. Some even argued increases to the OCR could occur early in the New Year, rather than late in 2010.

Today they were right about one thing: the OCR was left at its historical low of 2.50%. Where they were wrong was with Bollard’s position that he sees no need to start tightening monetary policy soon and the increases are still some time in the second half of next year.

He made his views very clear in this part of his statement: “In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010.”

Just for the record, current market pricing was saying there were expectations for a 100% chance of a 25 basis point hike in January and 200 points of hikes priced in over the next 12 months.

The central bank’s comments today will do nothing to stop the on-going increases to medium and long-term fixed rate home loans. The pricing of these mortgages comes off the back of what is happening overseas. Bollard and the Reserve Bank have no control over them.

However, today’s announcement will mean that variable rates stay low and, arguably, there could be some more downward pressure on them.

There is already a big variation in rate cards. In the competitive floating rate market the range is from BNZ’s 5.59% for its Total Money product, through to ANZ’s 6.45%. Added to this you need to look at revolving credit rates too as some lenders are using this product as its leading variable rate offer. Here the range is from Westpac’s 5.69% to 6.85% at HSBC.

Adding to the complexity of this market there are a number of lenders with more than one offering. ANZ has in the past month introduced what it calls its “Simple Variable” floating rate which has a few conditions attached, but is competitively priced at 5.69%.

We, the New Zealand Property Investors’ Federation are concerned about the high level of misinformation around taxation of property and the introduction of a capital gains tax (CGT).

The following is a reply to much of the misinformation and outlines why a CGT is not a magic bullet to solve New Zealand’s economic problems.

A CGT will not stop property price changes. Countries with a CGT have had at least the same level of property price increases as New Zealand, with many having greater increases. If anything, a CGT will increase property prices as vendors demand higher prices to offset the tax.

Rental property does not have a tax advantage over other investments or businesses. This was clearly confirmed in 2007 by Deputy Commissioner of Inland Revenue, Robin Oliver, when asked by a government select committee if there was some tax advantage for investments in rental housing.

“The short answer is there is none” was Oliver’s reply. “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income, are the same for investments in shares or anything else. In fact under the housing case, the capital gains boundary is brought back a bit. There are tighter rules regarding what is a capital gain.”

With the exception of fund managers, anyone who generates an income through trading an asset (property, shares, gold, antiques etc) is taxed on the profit they make.

Property traders/developers/speculators are required to pay tax on profits they make through selling property. The IRD has been allocated over $14m to ensure that people in this sector pay the tax they owe and is achieving good results.

Anyone who sets up a business, buys shares or owns property primarily for long-term income, is not taxed on any capital gain they make. Therefore if a business owner sells his or her business and makes a $100,000 profit, this is not taxed. If a shareholder buys 100,000 shares for $1 and sells them for $2, they pay no tax. The same rule applies to rental property.

Many businesses make a loss during the first few years while getting established and rental property is no different. The rental market is extremely competitive and tenants enjoy lower rents because of this, helping them to save for a deposit on their own home.

The claim that rental property owners are somehow ripping off other tax payers and that a CGT would level the playing field is false.

A third point, often raised by CGT proponents, is that the rental industry is not part of the productive sector. This shows little understanding of what it takes to make a country productive.

Rental property owners house around a third of New Zealand’s workers. Without access to decent housing, these workers would be considerably less productive.

Rental property owners also contribute to the general economy through supporting banks, local councils, trades people, professionals, hardware stores, insurance companies and a host of other businesses.

It has been said that a CGT will allow a reduction of income tax.  This is an argument that may appeal to New Zealanders, especially high income earners who primarily invest in shares.

However any increase in tax revenue from a CGT is likely to be small. Overseas experience shows that a CGT does not raise a high level of tax dollars and is costly to administer. This means that any potential reduction in income tax levels is likely to be insignificant.

In addition, if a CGT is restricted to just rental property and excludes the family home, farms, businesses, shares and other types of investment, then the ability to collect enough tax to reduce income tax rates is even smaller.

Consider the tax losses that are currently being experienced by many rental property owners and the negative affect this would have on tax revenue should a CGT be introduced.

In summary, a CGT would not reduce property price increases and would not significantly increase the tax take. Rental property does not currently have a tax advantage over other businesses or investments, so a CGT would not create a level playing field – it would distort it.

Rental property is definitely part of the productive sector and to suggest otherwise is misleading.

Martin Evans is president of NZPIF

Property investors could well feel battered and bruised after many of the comments made in the media, following yesterday’s official cash rate announcement.

I’ll put it on the record now. Much of this property investor bashing is totally unwarranted. There is a perception, which is wrong in my view, that all these investors are hell-bent traders and speculators, buying and selling residential properties non-stop.

Wrong. The large majority of the investors we deal with through the NZ Property Investor Magazine and www.landlords.co.nz are conservative, buy-and-hold investors.

Some people chose to invest in shares, others prefer managed funds, while others go for cash and fixed interest. Many people have decided that property is their preferred means of saving and providing for their retirement. There are lots of reasons for this, and all of them quite valid. They range from the desire to hold something tangible they can see, touch and feel, through to having poor experiences in the sharemarket.

So I often come across investors who feel they have been unfairly castigated and discriminated against because of their choice of investment. Their view is at least they are doing something to plan for their retirement and aren’t relying in taxpayer-funded pension from the state.

Investing in property is not like some of the other asset classes. Yes, there are different tax rules and there are benefits like depreciation and gearing.

What seems to get lost in this debate is that these people are not only investors. They are running a business providing a service to fellow New Zealanders. Therefore, they quite rightly can use some of the same structures as business owners, such as loss attributing qualifying companies (LAQCs).

The other thing which surprises me is some of the comments about putting a capital gains tax on property investors. For the record, there already is one. The Inland Revenue Department is on a $15 million, three-year education and enforcement campaign to enforce this part of the law.

Already it has pulled in hundreds of millions of dollars in unpaid tax.

One comment I do agree with from Dr Bollard is this: He says New Zealanders should not consider housing investment to be a one-way bet. Investment expectations need to be realistic. We won’t go back to the boom times of the past eight years. However, in the long run, property prices, like those of other asset classes, tend to appreciate.

Tax reform is one of those phrases which we are all going to hear a lot about in coming months and one suggestion already being aired is a capital gains tax on property.

Property investor lobby groups made it clear before last year’s election that, vote for Labour and you vote for a capital gains tax on property.

Vote for National and you’re safe, they said.

The argument went that Labour was keen on a CGT and so too were its likely support partners, the Greens and the Maori Party.

Well hello; investors got their National-led government and its Finance Minister Bill English seems interested in the idea of a CGT on property, or some form of land tax. Yes, he has acknowledged that it may be hard to get through the National party caucus, but I am sure if he wants to he will succeed.

While New Zealand may be out of line on this one with many of its peer countries, I am happy for that to be the case as there is little evidence a CGT works in keeping house prices down.

The other side of the argument which is difficult to fathom is that many argue Kiwis shouldn’t invest in residential property. Well if this group of more than a quarter of a million people aren’t prepared to own, finance and manage houses, who is going to?

Property investment is a legitimate form of investment. Investors are landlords and providing a service industry – accommodation.

Do we really want house prices to fall 30%? That would see a huge loss of wealth to the community and no doubt put some major strains on the economy.

While I don’t think the people making these claims have much credibility with their forecasting, the fact that they get so much air time is scary.

Leave these things like CGT on property alone. Previously the playing field was tilted in favour of property investors, however changes in recent years, such as KiwiSaver and the PIE tax regime have evened up the score.

It will take time for people to shift and change their investment patterns, but it will happen – slowly.

Instead of a CGT on property, more effort should be made in strengthening and deepening the capital markets so there are other investment opportunities.

A revamp of the housing market data announced today is great news for property investors and is long-overdue.

One of the big concerns I have about reporting on house price movements is that most commentators think of, or report the market as being one big mass. This implies the market is the same.

The reality is far different. The housing market is an extremely complex beast with lots of different sub-markets or sections.

The Reserve Bank today released a document on how it would like to see the market reported. The ideas are good, and hopefully the index will be better than the name they gave it: “Development of stratified housing price measures.”

What they do is talk about different levels, or strata, in the market, based around price bands.

This will be useful to understand what is happening in the markets property investors are interested in.

We know house prices and rents are of intense interest to investors and something they watch often.

A comment in the bank’s document highlights part of the reason for this.

It notes that “sales volumes on cheaper property is more cyclical.” It’s understanding these cycles which is so important. (As an aside, the guru of property cycles, Kieran Trass, has just released a new book on the subject. The Housing Bubble is well worth a read if you want to learn more about how the market works).

The other point worth making about the market is that it can be cut up many other ways than just by price. You can look at it from a metropolitan/provincial point-of-view, by types such as apartments, three-bedroom homes, flats and so on.

The more information there is out there telling investors what is happening in the market, the better.

My hope is that once this series is established we will see much more informed house price commentary.

Full RBNZ discussion document here.

One of the less reported news items this week was the Prime Minister’s speech about the economy where he lambasted its recent performance.

The speech also included the “six drivers” the government wants to use to address the country’s economic underperformance.

One which property owners need to be wary of has been labelled “a world-class tax system”.

Now this speech was a little fuzzy and didn’t tell readers or listeners much about what the problem with the tax system is or what could change.

However, already there have been comment pieces suggesting the target of such reform will be property investors.

One metropolitan paper ran an editorial saying that changes must be made to stop New Zealanders using foreign funds to borrow up big and then invest in housing.

This is a theme which has been picked up elsewhere.

While the tax system, arguably, may encourage property investing, making changes to the tax system isn’t going to be some magic bullet to solve economic performance or to make houses more affordable.

I’m wary that forces are lining up to attack something which has arguably delivered a lot of wealth to New Zealanders.

Any changes need to be well thought through and discussed. As for property investors, be warned: you may be about to come under attack.

Mortgagee sales are likely to hit the headlines again when the latest stats come out showing a big increase in the number of properties sold this way.

We’ve been looking at this issue for an article in the next edition of the NZ Property Investor magazine. Mortgagee sales are interesting, as most people think that banks are unhelpful and will move to a sale quickly.

It reinforces that notion banks are bastards.

Indeed the opposite appears to be true. Around 30-40% of mortgagee sales are conducted by banks, yet they are responsible for more than 80% of all home loans written.

That suggest second tier lenders, particularly finance companies and mortgage funds, are the ones fuelling this market along.

The latest stats, yet to be released by Terralink, will show that the number of mortgagee sales have increased yet again from just over 200 in March to more than 250 in April. No doubt this will be trumpeted as some additional sign of doom and gloom for the property market.

However, if this market is being driven by the second tier lenders rather than that banks, then it wouldn’t be out-of-line to assume that they are well through the process of liquidating their loan books and the number will start falling again.

So for investors looking to nab a bargain (according to QV the sale price of a property is on average 16% below market value), then they better get in quick.

The other thing which came up when researching this area was that banks actually want to avoid mortgagee sales.

As one said: “It is in the bank and customer’s best interests to not force the sale of a property, due to increased costs and the risk of the end sale price being lower than what could have been reached through a normal sale.”

One of the more exciting things in what was a rather dull Budget last week was funding for home insulation jobs.

This is an idea the previous government started and National initially trashed when it took over the Treasury benches. Seeing it pick the policy up again is, pardon the pun, but warming news.

It’s also something which the media has really got its teeth into too.  There are plenty of stories about the “ice blocks” people live in and how cold New Zealand houses are.

Over the week I’ve also heard lots of stories about the old, cold houses and flats people have lived in before, and there are plenty of these stories.

The other thing which has caught my attention is how many people have asked about rental properties and whether landlords are going to get their investments insulated.

To me it is a no-brainer. Provide a good property and you will get better quality tenants, keep them longer and even charge higher rents. But unfortunately it seems not many investors have, in the past, been prepared to do this.

I hope that this attitude changes and landlords wake up to the offer which the government is making.

Meanwhile, if you are a landlord and have insulated a property I’d love to hear from you to find out how you went about it, and what the end result was. You can send an email to thelandlord@landords.co.nz