Blog: The Landlord says...

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

A little reported piece of news in the past week is something which looks good for landlords, and maybe not so good for tenants.

That is the reporting back of the Residential Tenancies Bill to Parliament. Now this bill is the bible which both sides of the housing market have to obey. The current act is more than two decades old and there has been lots of talk of changes to it in recent years.

I suspect many tenants will have wished Labour had made more haste with this project as they would have ended up with a better outcome than they are now facing.

Landlords on the other hand are pretty happy that National is now running the show on this one, as the bill put back in the house over the past week shifts the balance of power more towards property investors and landlords.

Both the NZ Property Investors Federation and the Real Estate Institute are happy with the direction it is going.

Indeed, Richard Evans from REINZ’s property management group says in the past the rules tended to favour the tenants, but now they “restore the balance”.

His view is that in the past people were put off property investment because of the difficulties around tenant management, but this new set of rules (if passed) will “encourage  people  to invest in property again”.

A key issue is if the bill gets through Parliament. I suspect it will, but I wouldn’t be against a wager that Labour and the Greens will kick up a big fuss about some of the changes.

Their fault though for not moving on the changes when they had the chance. After all they began the “reform” process early on in their nine years in power.

What drives the property market?

There is plenty of commentary around at the moment about the state of the property market and where it is going. Much of it, in my view, is misguided.

Let’s sit back for a moment and think about what the key factors are.

Three of the biggest are: mortgage rates, immigration and affordability.

I would argue things like the United States economy, mortgagee sales and what farmers are doing has a marginal influence on the market. Indeed, using these factors as arguments for where the market is heading is misleading.

Mortgage rates are a critical factor in the affordability of property. Right now rates are at or near historical lows which help make the property equation stack up.

Buyers in this market are getting a real leg up with low rates and people with existing debt will see their servicing costs come down as they roll over loans. The Reserve Bank has made it clear it sees interest rates staying down for some time, which must be a plus for the market.

History shows us that immigration numbers and the housing market are closely related and tend to move in tandem. The basic logic, which is hard to argue with, is that when people move to New Zealand they need a roof over their heads. Thus, supply of property has to increase.

Right now there is an uptick in immigration numbers which should help stabilise at the least and even support house prices.

The other positive factor for the market now is one which doesn’t generally get a lot of air time and that is consents.

It’s like immigration. With a growing population base the country needs more houses. Right now, new consent numbers are low. Basic supply and demand economics says that in such a situation, house prices will rise.

The big unknown at the moment is rising unemployment.

And finally, a little reality check.

Double digit returns aren’t likely to be widespread in the property market for some time. So what? They shouldn’t be, and nor should there be an expectation that there should be. The risks of rental property investing aren’t high enough to justify double-digit numbers.

Secondly, people shouldn’t look at the residential property market as one big generic asset class. It is made up of lots of sectors and segments. You can break it down in a myriad of ways from coastal to apartments; from lower value rental property to high value prestige properties; from urban to provincial. Each of these markets is different and should be understood.

Many investors are jumping into the market, not for massive quick capital gains but for low risk, cash flow positive properties. This is quite understandable considering some of the other investment options available to them at the moment.

Making sense of what is happening to house prices has to be one of the most difficult things for home owners and investors to do.

Firstly there is a wealth of data, mainly from QV and the Real Estate Institute (REINZ), which you can use to interpret yourself. This is raw data on sales which you can use to draw your own views. We collect the REINZ data and provide some tools to track and compare what is happening here.

Over the top of that there are numerous commentators, some expert and some not.

A couple of pieces of news this week caught my attention and are helpful in understanding these two groups of information.

The first is a piece by Alistair Helm which compares and comments on the differences between QV and REINZ data. Each organisation collects and reports things differently and often they can seem to tell differing stories.

The second piece comes from BNZ chief economist Tony Alexander who summed up well in this week’s newsletter, his thoughts on some of the “commentators” who end up in the media and why they seem to have gone quiet. The key reason they have gone quiet is because the market isn’t tanking, but showing signs of recovery.

I have included some of Alexander’s views here as they are important:

“One doesn’t hear so much now from those who have been picking a 40% fall in NZ house prices. It has always been a mystery to us how one could generate such apocalyptic forecasts.

“For another individual the reason is probably that they have been predicting a property market collapse since at least 1988 when one first heard them speak.”

I agree with Alexander and suggest that people need to understand a bit about people who are making forecasts, what their experience is, but more importantly, what their motivation for commenting is too.

One can argue bank economists are always saying things to please their masters and help drum up business.

My experience is that bank economists give fair and frank assessments. They aren’t out there saying things just to help drum up business and they aren’t just glorified PR merchants.

Call me contrary. First it is great to see there is life coming back into the property market. Those of you who follow The Landlord will know that I have been suggesting for some time now that the market isn’t dead and it isn’t going to fall 30%.

There are just too many factors to suggest that there is a level of support which will keep the market and prices from crashing down.

To get a 30% fall in house prices would need an unheard of economic disaster. While it is tough out there, it’s not that bad, nor looking like being that bad.

However, I would suggest that people don’t get carried away with this little bit of positive news we have seen in the market.

Previously I have argued one of the biggest risks is unemployment. As more and more people find themselves out of work, there will be increasing downward pressure on the property market.

The other factor that I have increased my weighting on is banks and finance. It is no secret that banks and their tight, tight rules around lending are hindering the market big-time. That came through loud and clear in the Landlords.co.nz/Mike Pero survey of property investors this week.

What is also concerning is that banks just aren’t lending much. Good Returns has reviewed the latest lending numbers for the period to December 31. There are two surprising findings. Groups like ANZ National have cut their lending activities back significantly. Meanwhile, Kiwibank accounted for the large majority of new lending in the quarter.

It has done such a good job with acquiring new customers that it is now facing a service issue. It seems that it too has reached a capacity point and it will join the big banks on pulling back from new lending.

That means there aren’t a lot of places left for people to find money to buy property. This factor is likely to have a bigger impact on the market than previously thought.