Blog: The Landlord says...

The worst kept tax secret for some time is out. Labour has today unveiled its tax plan to help win the election.

The centre piece is, as leaked last week, a 15% tax on capital gains. Or as Labour’s finance spokesman David Cunliffe says; people will be able to keep 85% of the capital gains. (And the tax is on gains less costs such as agent fees).

The tax is forecast to raise $26 billion over 15 years.

While the CGT information was much as expected there was one other thing in the announcement investors may not have known. It was only dealt briefly, but Labour plans to ring fence tax losses on property.

Property investors won’t be pleased with what’s planned. I attended the media conference today and one of the underlying themes that came through is the anti-property theme.

Cunliffe trotted out the (disproved) Tax Working Group argument that says landlords pay no tax on $200 billion of assets.

NZ Property Investors Federation president Andrew King has on many times explained why that number is wrong.

However it felt there was an anti-property theme to what is planned.

Labour’s economic development spokesman David Parker said things like: “Our tax system currently favours the speculator and penalises the productive export sector.”

“The OECD and Treasury both say it is wrong for our tax system to have advantageous tax rules for property investment.”

The theme being that property investors make too much, don’t pay tax and are holding back the economy.

Without trying to defend the CGT idea it’s worth suggesting that some form of CGT is inevitable. It will happen some time. New Zealand is finding it is harder and harder to escape pressure to doing things like other countries.

There is an argument that CGT is political suicide or a “third rail” issue. Touch it and you die.

That argument is intellectually lazy.

What would be good would be to see one of the big two political parties being prepared to address the other third rail issue and raise age of eligibility for New Zealand Superannuation.

Is there anything good about a CGT? One of the redeeming features is that it is reasonably comprehensive and covers other assets and excludes the family home.

Also it is not retrospective. The idea is there will be V-Day when the value of all assets are set. The gains will be from capital appreciation from that point in time.

While V-Day stands for Valuation Day, there is no doubt Labour thinks it’s V-Day, as in World War II terms, for them in the general election this November.

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…)

Last week, with little fanfare, the Residential Tenancies Act was finally been passed after years of mucking around. Oops I mean consultation and discussion.

The RTA, which is the rulebook landlords and tenants live by, has generally been given the thumbs up.

However the latest issue of the NZ Property Investor Magazine sent out this week we take a deeper look into the changes.

While there are some things landlords will like it appears that running a rental property may get quite a bit harder. Also there is a raft of different things fines can be levied on.

In writing the article we discussed the changes with many people who will have to help manage the rules when they take effect and they made the point there was quite a few areas were there was uncertainty.

The only way definition was going to come into the rules was once there had been some test cases.

It is a sure thing some of the recalcitrant tenants will try out these new rules and use them to have a go at landlords.

I would suggest, if you are a landlord, you have a read of the article and learn what the changes will mean for you. Another option of course is to engage a property manager to take over the job.

To find out more about what is in this issue of the NZ Property Investor Magazine click on this link. If you want to save some money then think about subscribing this month as the cover price and subscription rates will increase when the government increases the gst rate to 15%.

Subscribe now for just $99 a year

It seems like we are into another round of mindless predictions about how low the housing market is going to fall.

There is no doubt the housing market is going to remain soft and subdued for a period of time – just as the Reserve Bank governor Alan Bollard wants.

Two pieces of information came out recently which make a lot of sense around what will happen.

One comes from the ASB in its quarterly confidence survey. Most people agree that there is an issue with affordability. That is when you look at the economics globally it appears New Zealand house prices are expensive relative to income levels.

However that doesn’t mean, as some have wrongly argued, house prices will fall to “where they should be”. Rather, as ASB says, house prices won’t go anywhere fast and they will wait for incomes and earnings to rise and meet them.

The other point, and one which annoys me somewhat, is that many commentators talk of the New Zealand housing market as one big homogenous market. This is rubbish.

QV provided some excellent graphs with its monthly commentary yesterday which show what has happened to houses in the main centres over the past few years. If you haven’t seen them you can find them here.

They are fascinating as they show that each market has its own characteristics. For instance Hamilton and Tauranga show similar trends, but they are different to Auckland.

It seems Auckland is far more bullish than other centres and again this comes through in the ASB survey which shows Aucklanders think their house prices will rise more than other centres.

When it comes to factors driving the market I am not sure house buyers and investors give a single thought to factors like what is happening in international markets.

They think of interest rates, rents and prices.

The one economic factor which does stand out in this market is immigration.

It is here we have seen a big change recently – more people are leaving this country – which will undoubtedly impact on the overall housing market.

This is the week of market data, which is probably why the headline hunters are out. A recurring message is that the market is slow and subdued.

What interests me is why it is like this. Investors appear to be staying in the market, some of the pressure has come off interest rates and it is considered a buyers’ market. Why then is there not more action?

Ha. Just when everyone said that rising interest rates would kill the housing market banks cut their rates.

Kiwibank surprised me yesterday when it took its two-year fixed rate below the 7.00% mark. But what surprised me even more was that most of the other banks followed suit quickly and ANZ and National Banks went one further.

They decided to lower their three, four and five year fixed home loan rates and made major cuts – 74 basis points in one case.

I was surprised as Nigel Stirling at Radio New Zealand asked me earlier in the day whether the conditions were ripe for a mortgage rate war. My answer was no.

A number of factors seemed to suggest otherwise. Banks tend to compete in just one major area at a time. Currently the battle is for term deposits.

Secondly competition tends to be around the times when the housing market is running hot, or when there is good demand for business. Thirdly none of the banks have shown much interest in aggressively fighting for home loan business.

So what happened? One is that things have changed in offshore markets and wholesale money is becoming available at attractive rates. Secondly banks have some pretty big margins at the moment so they have room to move on their interest rates. The third, and a good sign, is maybe some of this conservatism we have seen recently is wearing off.

While there may not be obvious signs that competition is picking up there are some positive developments. One is that non-bank lender NZF is keen to take on the banks in the prime lending market.

The cuts to medium and long term rates do another thing. They change the equation around borrowing strategies. For those on floating rates it looked as though they would have to ride out this part of the cycle at the short end of the yield curve. With two year rates of 6.99% versus floating rates of around 6.00% and forecast to rise the equation becomes quite different.

This maybe one of those short term windows where borrowers can lock in an attractive rate to help them in a rising interest rate environment.

PS: Tonight Westpac has followed ANZ National and cut longer term rates and BNZ has made its changes. Details here

Latest stats confirm that the housing market hasn’t gone anywhere in the lead-up to this year’s Budget.

Now that event is behind us there is plenty of discussion about where to now for house prices.

Certainly the bears have come out of the woods again (even though it is winter) making all sorts of negative predictions ranging from a 5%  fall in house prices right through to 15%.

I’m not going to make any prediction like that – partly because it will mean I’m likely to have to walk the length of the country or apologise for getting it wrong.

Rather it’s worth looking at the factors which drive the market.

The traditional ones that seem to have the most impact are: immigration, interest rates and construction.

House prices are closely correlated to immigration. At the moment it seems immigration is positive and it will remain so for the foreseeable future. Mark this one up as a plus for house prices rising.

Interest rates are on the move. We have hit the bottom of the cycle and the Reserve Bank started its tightening last week. Although banks are yet to move home loan rates it will happen. This is a negative for the housing market.

If you want a positive it is this – home loan rates are not expected to rise as high in this cycle as in previous ones.

Factor three is new construction. Numbers have been down for some time, but there are signs new building is increasing. However not at the rates previously seen.

I hear there aren’t as many builders around now and many who ran their own businesses during the boom time are now working for other builders on wages. This factor is possibly a mild positive for house prices.

Besides the traditional drivers there is one “unique” one at the moment and that is the changes Finance Minister Bill English announced in this year’s Budget.

The changes around deprecation and LAQCs will make property investors evaluate their holdings and in some cases sell.

The majority, who are buy and hold investors, probably won’t be too badly affected and will hold on. However those that are negatively geared and using LAQCs will have to make some decisions.

Many of these properties which have little chance of turning into cash-generating investments in the near future will hit the market.

How many fall into that category are unknown. Some suggest as much as half of the investment property stock could be in this group.

These properties will hit the market but not all at once. They are not likely to be bought by other investors, rather they will become owner occupied. This may be a window of opportunity for first home buyers to get into the market.

The other thing to consider is that many of these properties are in the lower price bands (ie. less than $300,000). It is this part of the market which will suffer. Changes from the Budget are less likely to impact the upper parts of the market.

When people talk about where house prices are heading they should look more closely at different parts of the market rather than talk about it as one big market heading in one direction.

It’s now a week since the Budget where finance minister Bill English tried to put the kibosh on the residential property market.

We’ve just completed a survey at Landlords.co.nz and the results show that while investors are not particularly happy with what Prime Minister John Key and English have done, it’s not enough to deter people from investing in bricks and mortar.

We will have full results from the survey on the site next week.

Looking through the data and the Budget in more detail, it’s clear there’s still plenty of work for property investors to do around their strategies and their property holding.

Perhaps one of the key points though is that much of this work will need to be done before April 1 next year when changes take effect.

The other interesting debate extending from the Budget is what will happen to house prices and rents. With the latter there is no doubt that rents will rise. By how much is one of those how-long-is-a-piece-of-string questions. Investors I have spoken to have a range of views on this from a big increase to small incremental increases over a period of time.

There is far less certainty around what will happen to house prices. One commentator who has had the most attention on this has been Kieran Trass. Funnily enough, his prediction was not too outlandish, rather it was his comment that if house prices didn’t fall by at least 5% in the next six to nine months he would walk the length of the country. (We’ll be keeping a close eye on this.)

My prediction is that house prices for lower-value properties will possibly soften in the short term and this may give some first home buyers the chance to get into the market. But judging from our survey, investors will still be active in the market which will help to put a foundation underneath it.

Maybe my prediction is similar to Kieran’s one? The only difference is I won’t have to leave my office if I’m wrong.

Property investors have been holding their breath for a long period of time waiting to see whether the government’s threats to give them the bash would come true.

They can now breathe a sigh of relief. The government was, as many expected, more mouth than biff.

The Budget included the predictable. Changes to depreciation; no capital gains tax; no stamp duty and no land tax.

The big worry was that some sort of ring-fencing of losses in LAQCs for property investment would be announced.

I have argued many times before that to single out one sector was unfair.

The changes it is making to LAQCs and qualifying companies have some logic to them. What is pleasing is that the changes are across the board, not just to property owning entities.

Also pleasing is that the government is closing down those who are rorting the system through Working For Families. I suspect this is a small minority of investors.

These changes to LAQCs make sense and will encourage investors to look at how they have structured their investments. Structuring has always been a hot topic for investors and will remain so.

It will be interesting to see how investors address this issues (email your thoughts to editor@landlords.co.nz or leave a comment below).

The biggest losers are tenants. There is no doubt rents will rise. Investors need to ensure their cash flows remain robust.  In some ways it is no surprise that tenants are the losers when a National-led government is in power.

While a number of commentators have said this is a good Budget for the savings industry and people who invest in financial assets, I don’t think it will make a material change to residential property investment.

Sure there will be some who are less enthused by the sector, but it will still remain popular.

What will change is the sort of strategies used. To move away from highly geared investments which rely on capital gains to work isn’t a bad thing.

Some numbers from Treasury this week show how important housing is to our overall wealth, and why it would be foolish for the government to make too many changes to property investment tax rules next week.

Treasury released its estimates of household assets and liabilities. It showed that houses make up nearly three quarters (74%) of our total gross assets. The actual number is $603 billion verses the $212 billion we have in financial assets (shares, KiwiSaver, deposits etc).

Yes there should be some encouragement to shift the balance so more of our wealth is held in financial assets, but it should be done on a softly, softly basis rather than by using shock tactics.

Plenty of New Zealanders are wary of financial markets and you can’t blame them when you see what has happened to share and bond markets in recent years.

We have seen government’s wipe millions off dollars of savings off New Zealanders before. One of the more recent examples is when the Labour government changed the rules in the telco market and destroyed massive value for Telecom shareholders.

Next week’s budget shouldn’t be National’s version of what not to do to people’s savings.

If it is then Prime Minister John Key could well end up on the menu at the property investors conference.

Housing is an important source of wealth not just in New Zealand, but also across the Tasman. Australia is often heralded as being a nation of sharemarket investors and a country where people own many financial assets because of its compulsory superannuation scheme.

However it still has the majority of its wealth in houses. Figures show that 59%of their wealth is in bricks and mortar, as opposed to our 74%.

Sometimes sitting and waiting for an important appointment is one of the hardest things to do. It feels like that at the moment, as we are just under a fortnight out from what maybe one of the biggest forces to hit the property investment world – the May 20 Budget.

The government has made it clear changes are imminent, but what is in store still remains a mystery. In talking to property investors there is a view that the changes will not be as big, as first indicated. Maybe it will be changes to depreciation rules and a little bit more tinkering.

Then maybe investors are being lulled into some false sense of security, thinking this government isn’t bold enough to make mega-changes which would hurt a core constituency?

While the changes are unknown their pending announcement is being blamed for a subdued housing market.

This week Barfoot & Thompson put out its latest sales stats for the Auckland market. These showed that sale prices dropped by more than $3,000 last month.

Likewise, ASB put out its quarterly housing confidence report. This too showed things are pretty subdued at the moment. Indeed ASB is predicting that house prices could fall 3% to 4% this year due to a lack of buyer appetite.

I think that is a pretty brave call. Many of the factors which influence the market are reasonably neutral at the moment. Perhaps the biggest factor in real estate land is the “wide imbalance” between supply and demand.

I’m wondering if once the Budget comes around people will act quite quickly and try and sell properties (if the news is bad) or whether the opposite happens. That is if the changes are palatable, uncertainty is removed and buyers will act quickly.

Perhaps this situation would be helped by the prospect that interest rates will start increasing in June or July at the latest. Whatever, getting this appointment behind us is something all investors are looking forward to.