Blog: The Landlord says...

We’re into the next round of monthly house sales data with Barfoot and Thompson, yesterday, releasing stats on sales in Auckland.

The story seems to have a recurring theme to it. Prices good but volumes low.

I’ve been looking at the big question about where house prices maybe heading and was sent a set of slides from a presentation ANZ did recently. It has lots of regular themes in it, but also a couple of graphs which grabbed my attention.

The first is one we used a year ago which show house prices through their peaks. (Click on image below to see it).

The most recent housing boom lasted for 24 quarters and prices rose something like 80%-plus. The idea is that the bust time would be quite long and house prices would fall 20-25% from their peak.

At the time this graph was put together the falls had run for 12 quarters yet prices were down only 11%.

What’s fascinating is after they came off their peak they bounced again.

The message is that it seems that the housing market just want crash.

The ANZ economist Khoon Goh, behind these slides has also written about the affordability issue in the latest issue of the NZ Property Magazine. It’s worth reading, but in summary says although homes are becoming more affordable they are still on the expensive side. The way this is going to close up is that incomes will rise rather than prices come down.

The second graph is the one at the end of the presentation where two housing cycles were compared. The results are uncanny at how closely correlated they are. Click on the image to the left and see a bigger version of the graph.

I’ve put a red circle in to show the current time point. Assuming the trend continues we are likely to see house prices come back some more then rally and do so quite strongly.

The question is will this really happen? (more…)

What’s best renting or buying? Radio New Zealand asked me that question last week, partly because another one of those affordability surveys had come out and headlines screamed out Queenstown and Auckland were the most unaffordable places to live.

One can ask why do you need a survey to tell you that? Queenstown is a very unique place in New Zealand and the home of some serious wealth. (Personally it hasn’t had that much appeal to me, but hey I enjoy Rotovegas!)

Auckland is a different story and illustrates why I don’t like these surveys – that is they are all about trying to say the housing market is one big amorphous mass. In reality it’s lots of little markets. You could even think of it in sharemarket terms where each individual house is a separate company listed on the exchange.

House, like shares, often trade at prices which are different to fundamental economic valuations. We see that in the housing market at present where prices are around five to six times the average wage, when three to four times is considered “fair value”.

Coming back to the story and the Auckland headline. It is silly to make such a bald statement as it is such a big market. Sure plenty of bits are seriously unaffordable, while others are the opposite.

After the RNZ interview I had a good yarn with Harcourts chief executive Hayden Duncan. While he had lots of interesting things to say one thing was the state of the market. It’s a two speed job at the moment with the middle and top end doing well with good sales volumes and prices and, if anything, a lack of stock on the market. Those who do sell are making reasonably quick sales at good prices.

At the other end of the market, which tends to be the preserve of first home buyers and property investors, it’s a different story. High stock levels, low sales volumes and soft prices.

To me this, along with current interest rate forecasts, suggests to me that it is a great time for both investors and first home buyers.

It’s quite a different story to what the affordability surveys show.

We Kiwis have a bit of a fascination with house price stats, which probably is no surprise considering our so called love affair with bricks and mortar.

I suspect this penchant to look at house price stats will become even more interesting following the awful events in Christchurch earlier this month.

It’s our second biggest city and accounts for its fair share of house sales each month. However following the quake the market has stopped dead in its tracks.

Part of the reason is to do with insurance, or the lack of appetite for insurers to issue cover at the moment.

In coming months this is likely to distort the numbers produced by organisations like QV and REINZ.

But the quake also raises lots of other questions which will no doubt test the minds of property investors. One is that we often talk about the best house to buy as investments are low maintenance brick and tile properties.

Following the quake it seems most of the damage has been to these types of property rather than the wooden, weatherboard, tin roof type houses.

Also you have to wonder what will happen to house prices in the Garden City once sales start again. Will people, including investors, still want to buy property there? Or will they opt for other areas?

Maybe, if they are buying in Christchurch the criteria for may change and premiums will be paid for good quality buildings which have withstood the destruction unharmed?

Another thought which has crossed my mind is that maybe there is a potential “leaky home” type crisis brewing. Engineers certify a building is sound following the quake but years later some damage is found which is expensive to repair and impacts on the value of the property.

We’ve been keeping an eye on what is happen on Landlords.co.nz and the next issue of NZ Property Investor will have a feature on what the quake means for property investors. We’d love to hear your thoughts on what the big shake has meant for the property market and particularly investors. Leave a comment here or email your thoughts to editor@landlords.co.nz

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.