Blog: The Landlord says...

Boy we are in for a good debate over tax if these reports that Labour plans a capital gains tax on investment comes to fruition.

I’d been thinking about the idea after reading a couple of piece over the weekend.

The themes which are emerging are that this National-led government doesn’t have a clear (or clearly articulated) economic plan. As an aside it is surprising how many National voters I have come across recently who say they won’t vote for the party this election.

It has, to its credit, revealed a plan to raise money by selling state assets to get the economy back into surplus. This too seems to have luke warm support. I wonder what happens in future economic cycles when we get into a hole and no longer have any state assets to sell. What will happen then?

Another option is to raise revenue by changes to the tax system. The most obvious one is a capital gains tax of some form.

Many, without giving it too much thought, will ridicule Labour’s supposed plan. It will be labeled a left wing, tax the successful, politics of envy sort of thing.

But wait a minute. If you explore the web you will find that many on the so-called right are supportive of the idea of a CGT.

So too are the other side.

We covered this issue in the previous election. The Greens and the Maori party supported a CGT.

Even the NZ Property Investors Federation had some sympathy for a CGT as opposed to other tax options targeted at property investors.

It’s also interesting to look at this in the light of changes the National-led government has made. Its changes to tax laws (depreciation and LAQCs) have neutered the capital growth/negatively geared investment strategy used by many property investors.

Now the standard strategy is cash flow positive with income, as opposed to capital gains. Under this scenario a CGT isn’t too bad.

There is some logic to a CGT. It is pretty much standard practice in other Western economies.

Put aside all the bluster and it may transpire that if this is what Labour proposes then it could be called real leadership and vision.

Forget pulling the rug out from someone, Westpac  has gone one better and pulled the rug, floor, foundations, walls -  the whole house in fact.

The bank took possession of a family home after they failed meet mortgage payments – by carrying the property off on the back of a truck.

They were told they had one hour to remove their belongings from the home they had lived in for 18 years before workmen arrived to chainsaw through the foundations and remove the house.

Westpac refused to comment on the repossession, citing the fact that the legal owner was the ex-wife of one of the homeowners and no longer resident in the property.

However, Aaron Sewell, who serves court documents on people, said that while taking boats and property for mortgagee sales was not unusual, such a literal repossession was a new one for him.

“I’ve never heard of that [taking a house] ever before,” he said.

Going from chalk to cheese – or more appropriately Prince to pauper – Westpac also featured in another property story this week.

The bank’s New Zealand boss George Frazis has vacated his exclusive Paritai Drive property in Auckland and reports suggested he may find himself before the Tenancy Tribunal over allegations he broke a lease agreement and skipped out on $134,000 in rent.

The good news though for home hunters is that the rental is back on the market at just $3,400 a week.

No further details of the dispute between Frazis and the home’s owner, James Kirkpatrick, have been forthcoming, however the Landlord humbly suggests Kirkpatrick could follow the example of a fellow landlord in the UK in future. . .

Simon Everingham has taken a novel approach to stop his tenants skipping off with the GBP15,000 he says they owe him.

He hired ten skips and used them to block off access to his property.

He took the unusual step as American tenants Dan and Christina Herring planned to return to the States and he feared he would never get his money back if they left.

Previous attempts to block access to the property were thwarted when the Herrings employed friends to carry objects – including a piano – through a neighbouring field to a removal lorry, prompting Everingham to order an additional six skips and use mattresses and sofas to further hinder their efforts.

“This isn’t how we imagined our last year,” said Mrs Herring.

A new productivity watchdog, consisting of around 21 people and with a budget of $5 million, has been set up by the government.  I admit, the idea of a productivity watchdog terrifies me.  Imagine an enormous dog barking at me whenever I’m unproductive.  The poor dog would have keeled over by Tuesday afternoon.

However, I digress.  The watchdog’s first job will be to examine why housing is so unaffordable, particularly in Auckland.  Residential housing in Auckland has been rated as more expensive than New York, though the most recent data shows that houses are at their most affordable in seven years.  At the top of the unaffordability index are New Zealand, Hong Kong and Australia, all classed as severely unaffordable.

What else do they have in common?  They’re all awesome places to live.  Australia and New Zealand are all over the ‘best places to live’ lists each year.  And Hong Kong is the investment of choice for many wealthy mainland Chinese; it’s also an international business hub and one of the world’s top centres for the squillion-dollar horse-racing industry.  I think it’s safe to assume that demand to live in these places is extremely high.

I know that there are other reasons that housing is unaffordable, such as:

• There aren’t enough houses to go around.
• If you want to build a nice new development, you must complete a Krypton Factor-like series of tasks and assault courses in order to get permission.
• Um, something about urban sprawl.
• Investors are awful, and first home buyers are like sweet little bunnies.
• Other stuff involving bubbles, booms, busts and boobs.  (Okay, maybe not boobs.)

Clearly, I’m no economist, but real economists know a lot about this stuff already.  So, I’m optimistic that this watchdog group will review all the existing information and draw some nice, helpful conclusions which assist council planning decisions and Government policy.   The other alternative is that the watchdog will spend a long time and a shedload of cash and then tell us what we already know, then this information will fail to be acted on by any other institution.

Nah, that would never happen…

If you’re an Auckland landlord, get out the cups of hot tea and the emergency blankets, because apparently your tenants are going to contract a serious case of rent shock.  You’ve heard of ordinary shock, diabetic shock, and perhaps even toxic shock, and you certainly wouldn’t want any of these unpleasant conditions.

Yet rent shock is a disease unlike any of these; and the horrifying news is that your doctor can do nothing to treat it.  This rare condition is brought about a rapid rise in rents – symptoms include a horrified expression, irritability, and a feeling of lightness about the wallet region.  Treatment is extreme: Pony up or move to Wellington.

Auckland rents are at record levels, reflecting a massive imbalance between demand and supply.  Now is a very good time to be an Auckland landlord, with brainy APIA president David Whitburn predicting rent rises of up to $150 during 2011.  If you listen to some stories, tenants are foaming at the mouth, throwing handfuls of money at landlords and pick-axing the knees of competitors.  (No, wait, that was Tonya Harding.  Well, you get the picture.)

Apparently, there’s a massive shortage of rental accommodation in Auckland, caused by a number of factors – the displaced Cantabrians are just the tipping point.  The past three years have taken their toll on landlords and aspiring landlords, from the global financial crisis to the tax changes.  The construction industry has had a similarly hard time, so too few new buildings are being created to house the increasing population of Auckland.

It’s not going to improve quickly.  Not only are new builds not going to pop up overnight, but first-time buyers are going to look at the cost of servicing a mortgage versus the cost of rent and start talking to their banks.  So Auckland landlords are going to be enjoying high rents for some time to come, and there ought to be some trickle-down to the rest of the nation’s centres, too.

So keep your rent somewhere near the market rate and enjoy it, because after the past few years you’ve earned it.  Just keep the Twinings and the Gingernuts handy, because that rent shock isn’t going to wear off anytime soon.

Well it finally happened. There has been a spring bounce in house prices according to REINZ figures out today.

We often talk about the housing market picking up in spring and until now it has failed to materialise. Looking at the numbers there has been some lift which will no doubt have many of the doomsayers scratching their head.

It isn’t that surprising to see this lift as for a couple of weeks now contacts in the real estate industry have been reporting that there have been increased levels of activity in the market.

Perhaps what has been the most surprising is that the low interest rates haven’t spurred on much activity in the housing market – something Reserve Bank governor Alan Bollard noted last week in the Monetary Policy Statement.

The good news, for investors, out of that statement was that he has now indicated that the official cash rate will be kept low for longer than previously expected.

You’d think this would be seen as a positive sign for the market. However, we put out our quarterly property investment survey today and early submissions flag interest rates as one of the issues for next year. At least it shows investors are thinking about what is happening out there.

If you would like to have your say click here to take part in the survey.

Coming back to the latest stats one has to be careful about extrapolating them as it is, after all, only one month. There are still plenty of positive and negative factors battling each other and this could just be a blip, or as some say a dead cat bounce.

Immigration and interest rates are positives; however affordability and a still weak economy are negatives.

The next two months are unlikely to give much more of an indication on where things are heading as they are traditionally pretty dormant. However we did get the spring bounce in summer so who knows.

PS: The latest issue of NZ Property Investor Magazine is in the shops now. In it we have pitted the North Island against the South Island to see which has the best investment opportunities.

More info and pics on our Facebook page http://www.facebook.com/NZPropertyInvestor

And here

Activity in the housing market is still at a very slow and weak pace at the moment. It seems there are no real hard signs that a pick up is around the corner, however Harcourts did say on Friday that it was expecting a lift in activity.

One point which is often discussed is that banks are holding back the housing market by keeping lending criteria tight and keeping properties, which should be going up for mortgagee sale, off the market.

Here are five reasons why banks aren’t deliberately holding back the market or trying to keep house sales at a low level.

1. The real estate market is an important part of the economy employing thousands, probably tens of thousands, of people directly and indirectly. It’s not just the real estate agents here either. It includes lawyers, accountants, valuers, media companies and builders. In fact the list is quite long when you think about it. It seems this industry is nearly at a tipping point. It can’t go much slower without serious damage being done to itself and the economy. This is not in the best interests of the banks.
2. Banks need to make money for their shareholders. Currently they make little in the highly competitive term deposit space as margins are under pressure as they battle for funds (thank the core funding ratio for that). The mainline of business for banks is lending and currently their margins in this space are pretty good. To get an idea of how they have changed check out this graph. During the home loan wars margins were nearly non-existent. Now they are pretty fat. To grow profit banks need to increase their lending. It’s a volume game. Reserve Bank figures show lending growth is weak.
3. At some stage banks will “pull the trigger” and ease up on lending criteria. Sources I have spoken to confirm there are active discussions going on within banks about when to do this and by how much.
4. When the trigger is pulled it will be a substantial fillip for the housing market. One key real estate industry figure summed it up like this: “The volume of sales is not at true market levels.”
   “If banks ease their criteria there could be a 10 to 20% lift in sales volumes.”
5. Finally it is worth noting that mortgagee sales make up a pretty small proportion of houses sold each month. Arguably it is not material enough to have a big impact on the market.

I first heard the story that banks were stock-piling mortgagee properties earlier this year and sent one of my team out to investigate it.

It sounded pretty interesting as the premise was that banks were holding properties back from the market, therefore giving house prices some artificial floor.

I see the story appeared again in the Sunday Star Times. http://www.stuff.co.nz/business/4291388/Banks-drip-feed-mortgagee-sales-to-prop-security

Well, unfortunately it isn’t 100% correct. In New Zealand banks don’t actually take ownership of properties when a borrower defaults – like they do in the United States.

In New Zealand banks manage a sale process to recover their money and during that time the owner could actually sell the property (with the bank’s approval).

Banks have also told us that when borrowers get into difficulty their first step is to try and manage the process and find a solution with a mortgagee sale being the last option.

So this theory banks are propping up the market sounds good, but actually looks different.

If you want more on what banks do when a borrower defaults have a read of this story http://www.landlords.co.nz/read-article.php?article_id=3657

Instead it is purchasers who are keeping downward pressure on house market – especially in the lower end of the market. The more people at the coal face of real estate I talk to the more this message comes through.

One active property investor actually made the comment recently investors aren’t responsible for driving house prices up – as is commonly thought. Rather it is their duty to drive prices down so they can get better deals. (While at the same time pushing rents up!)

We will soon get into another round of house price reporting and everyone is looking for a spring bounce. I’m not sure we will see one – however feedback it that the middle end of the market is doing well. Good prices, reasonably quick sales, but a lack of stock.

It’s the lower end that is struggling. Two factors which will make a difference are some more certainty around tax rule changes which were first announced in the Budget. The second is bank’s willingness – or should that be unwillingness – to lend.

There are tentative signs funding is getting ever so slightly easier. But it is still hard.

Once a bit more money is made available expect to see a lift in house prices.

Considering we are, apparently, through the worst of the global financial crisis, and that banks are making some of their best ever margins on home loan lending at the moment, there is reason to be hopeful around the question of finance.

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? Read the rest of this entry »

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.