Blog: The Landlord says...

The little theme of this week’s newsletter is about looking ahead at the property market and what is happening. Pondering the market is something we often do and it is worth addressing again as there is so much uncertainty and change.

While the news has been pretty gloomy and the housing market appears to be dead, I wonder if it is as bad as some make out?

As readers know we try to be a bit more balanced in our view on the market and look for positives as well as negatives.

One thing that strikes me is winter is always a moribound season for house sales; this year is no different.

Some interesting figures from Alistair Helm yesterday show that the trend quite well. Often when we enter the spring period the market lifts quite swiftly.

On a month by month basis the last set of numbers looked sad. However its worth looking at them with a longer term view.

Helm’s reports says sales fell by 2.9% from June to July, and a total of 4,411 property sales were recorded by licensed real estate agents in July.

Back in July 2009 the total sales was 6,014. On a moving annual basis sales are up 2.8% with 63,701 sales in the past 12 months as compares to 61,952 in the prior 12 months.

The stratified price fell from $363,925 in June to $359,525 in July. The June price is up just 1.8% as compared to July 2009.

Sale prices across the country has remained fairly stable over the past nine month with some small ups and downs. The current price is still 3.1% below the peak price in the market back in November 2007.

Looking ahead there are a couple of warming signs. One is my discussions with real estate agents. No-one shies away from the fact June and July were awful periods. However, word getting back to us is that August has been far better with more buying activity and more stock coming onto the market.

While we put together the September issue of the NZ Property investor Magazine we also came across comments that were far more supportive of the market than one would believe if they listened to only some commentors and media.

Everyone agrees it is a buyers’ market and those in the position are doing just that. Again comment which came through was that it’s better now as “there has been a clean-out of timewasters, dreamers and fly-by-nighters.”

The other slightly positive factor was last week’s immigration numbers. (Read about them here).

And if I had to add another it would interest rates. The emerging view is that the next official cash rate will come later rather than sooner, and overall the increases will be less than what we have seen in other cycles.

So the next set of numbers will give us a good feel for whether these positive signs turn into activity.

I started by talking about looking ahead and finding out what is happening in the market. You can help do that too. The annual ANZ/NZPIF survey is on. You can take part here (and go in the draw to win a prize).

One of the questions at the moment is whether property investors are selling up post the Budget or continuing on?

Reading the headlines there are conflicting views. Our survey at Landlords.co.nz shows that very few investors are planning to quit the market due to the removal of the ability to claim depreciation and changes to LAQC rules.

However, others suggest that there is a sell off happening.

Of course I will be a little subjective on this and say that our survey sums up the mood of the market pretty accurately.

We are finding little evidence of a mass sell off and looking at real estate listings it doesn’t appear landlords running for the hills. Indeed if you look at REINZ’s numbers today it is becoming more of a buyers’ market and investors will be in on the action.

It was suggested that maybe the survey is a little skewed as readers of the NZ Property Investor Magazine and Landlords.co.nz are, let’s say, a little more professional and do some more research on their investments than others. (I couldn’t possibly comment).

Then there was this story yesterday that residential property investors in Canterbury are quitting “en masse”.

A sale of 20 properties in a metropolitan city doesn’t seem like en masse. On closer inspection the story is actually good news.

Investors are selling for a variety of reasons. Some of them are getting rid of underperforming assets. Others are highly leveraged and have investments don’t stack up. Others have had bad experiences and poor advice.

What is good about this? The fact that investors are getting rid of non-performing assets is good. Why continue to hold onto a dud? Maybe these people will buy more property? Yes, the Budget will force out some people who probably shouldn’t have invested in property in the first place.

As for whether there will be a wholesale exodus from investment property I say no. Many people like property as it is an investment they can touch and feel and have control over. In fact it is one asset class where the investor can actually add value.

Many investors have no desire to put money into shares, bonds and finance companies – partly because they do not trust the people who run them and they can’t “see” what happens to their money.

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 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

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.

One of the most common questions I get asked is, where are interest rates going? People want to know where rates will be in a year’s time to help them make decisions on what to do now.

Unfortunately, no one can answer that question. It’s a bit like asking what you are going to have for dinner on June 15, next year.

Rates can be highly unpredictable, especially in this period of time where there is much economic uncertainty.

A year ago no one expected interest rates to be as low as they are today; if they did then it would be hard to explain why all these people took out long-term loans.

If they knew where rates were going they wouldn’t have done that and we wouldn’t have had this huge amount of activity in breaking fixed rates.

While we don’t know where rates are going we do a lot of work at mortgagerates.co.nz trying to get a handle on this question.

One of our regular surveys is of economists and their predictions about where interest rates will be in the future.

In the survey we ask the question about the OCR and the floating rate mainly as they are tied together, although the Bank of New Zealand chief economist argued otherwise recently.

The results of our most recent survey show a clear trend, but also show that economists have some quite different views around timing.

The overall trend, and this shouldn’t come as a surprise, is that rates will stay low until some time in 2010, and then start to rise quite quickly.

Looking at this floating rate graph, it shows that we may well see some more cuts to what is on offer.

The cuts are looking at coming in the next quarter or so which may tie in with any spring advertising campaigns from banks. From there we don’t see any movement until early to mid 2010. Then rates rise, and according to predictions, they may rise quickly and strongly.

Indeed there are suggestions that floating rates could get up above the 8% mark within 12 months.

While that seems high, the floating rate has averaged a whopping 9.4% over the past five years – making 8% look nearly cheap!

One of the more fascinating stories for property investors this week has been changes at formerly high-profile “education company” Richmastery.

This story reports on a restructuring where the business is transferred from one company to another and the former company is put into liquidation.

Richmastery is one of those organisations which attracts a fair bit of criticism; Often it is labelled as promoters of “get-rich-quick” schemes and even the word “spruiker” has been attached to it.

No doubt some of the criticism is well-founded. Other bits are tall poppy syndrome, or just competitors taking a free-hit.

One does have to acknowledge though, that over the years Richmastery has helped many people get into property investment and succeed.

What is interesting to observe is that the company is not as prominent as it was during the boom years. Its advertising is rarely seen these days. The millions of email I used to get in my inbox have stopped coming.

Many companies have a life cycle and one wonders whether these “property education” companies only last for one property cycle? I don’t know the answer.

It seems there are a number of contenders starting to emerge who are eyeing up the space once dominated by Richmastery.

Of course the other reason Richmastery may have gone through this corporate restructure and left behind a shell company with no assets and $76,000 in debts could be something to do with one of the last comments in the liquidator’s report.

It says Richmastery and Gilligan Rowe are in a legal battle. None of the details are revealed, but no doubt a scrap between the two principals would be one riveting legal battle.