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Archive for February, 2010

Statistics NZ Population Projections to 2031

Statistics New Zealand have just released their population predictions out until 2031, 21 years away.  The nation’s economic hub Auckland, is projected to provide for 60% of our country’s population growth and number 1,940,000 people.  I am very excited by this as it doesn’t take a tax lawyer to work out that these nearly 2 million will need houses.  The 2006 census showed that Auckland had 1.37 million residents and Auckland is thought to have just over 1.4 million residents currently.  This means over the next 21 years Auckland will have 570,000 more people and need 211,000 more houses (assuming a 2.7 people per household ratio).  Around 2/3 of this increase is natural (from births exceeding deaths) and the remainder is from migration internally inside New Zealand to our country’s best city, or externally from overseas.  What a great time to be a property investor!

Consent issuance is already lagging in Auckland, some skilled tradespeople are going for better wages in Australia, where there is lower unemployment too.  However

North vs South Island

The population of the North Island is projected to increase by an average of 0.9 percent a year between 2006 and 2031, from 3.19 million to 4.00 million.  Seventy percent of this growth will be in the Auckland region with an increase of 1.4 percent a year.  The remainder of the North Island is projected to grow by an average of 0.5 percent a year during this period.  By 2031, the North Island is projected to be home to 78 percent of New Zealand’s population, compared with 76 percent in 2006.

Aging Population

Mortality

Enjoy the 20/20 Cricket versus Australia tonight and Sunday

PRESIDENT’S REPORT FEBRUARY 2010

Happy New Year and Decade everyone. We trust your are all enjoying another beautiful Auckland summer and are back into the groove. The Auckland Property Investors’ Association (APIA) has a great line-up of speakers for you again this year, and we are planning a special seminar for May this year too, that will be highly topical and popular. We had a large February Keynote meeting and an outstanding presentation with Dean Edgerton, Director of Markets from ANZ National Bank Limited. Dean heads the dealing room of New Zealand’s largest financial institution and was able to shed light on interest rates and their likely direction, and cover why long-term interests are so much higher than floating and shorter term fixed rates.

Market Review

It felt like 2009 went quite quickly, and it certainly was an interesting year for property investors. For Auckland properties we saw rents increase healthily in 2009, particularly in the mid-high socio-economic areas, yet some areas were hit hard by unemployment and towards the end of 2009 a tougher approach by Work and Income New Zealand. Our property values, recovered nicely from the doldrums of 2008. Whilst history provides no guarantee of the future, it can show trends and give strong indication of future direction. So lets take a look back at the decade to see what happened to house prices. In December 1999 the median sale price in Auckland was $235,000, and we closed out the ‘noughties’ decade in December 2009 with our city’s median sale price being $476,500. This represents a 103% increase in capital growth, or an average annual capital growth rate of 7% across the region as a whole. Over the decade the values of residential properties (this excludes residential sections and commercial properties) traded in the Auckland region (through real estate agents) was a massive $125 billion dollars.

So you can see property was a great investment over the decade, and the Auckland Property Investors’ Association was proud to assist you in your decision to take responsibility to become financially free, and to help make decisions that will assist you plan your own retirement – and in many cases we hope an early one! We look forward to servicing your needs and providing a platform for networking with you for another decade.

Tax – The Topical Issue

Normally tax is perceived to be pretty dry and boring, and an area reserved for mega geeks in grey suits with white shirts and black suitcases with packed lunch where they toddle off to work each day, come home, read some legislation, case law or tax information bulletins and then they go back to work in their grey suit, white shirt with their packed lunch and repeat this every day. I know as I used to be a full time tax lawyer working at Big 4 Chartered Accountancy firm Deloitte and then at leading law firm Russell McVeagh, before I saw light of becoming a property investor and immersing myself into the market. However times have changed and tax is cool once again. I can say to my many friends who are tax lawyers and accountants, that tax is very interesting, and highly topical. For many APIA members 2008 and 2009 were tough years. Some members have sadly even hit the wall being smashed in a high tide of debt as the property price wave crashed down upon them. Other members with lower gearing and sound management systems however thrived and been able to put their rents up and found respite with interest rates coming down from cyclical highs and property values recovering last year.

There was keen interest in the property market this summer, but this changes when the Tax Working Group published its findings on 20 January 2010. The relevant recommendations to property investors are:

1) Raising GST to 15% or 17.5%
2) Imposing a Capital Gains Tax on all properties, or excluding owner-occupied housing
3) Imposing a Land Tax at 0.5% of the property’s land value
4) Imposing a Tax on the net equity investors have on their properties (assuming a 6% return on equity invested, and investors would ignore rental income and all expenses, as only the equity invested is relevant) – thanks sharemarket CEOs/fund managers with vested interests recommending this market killer.
5) Removing depreication on buildings
6) Removing loading on new assets
7) Bringing the top personal tax rates down, to be the same as the company and trust tax rates (ideally all at 30%, with perhaps the company tax rate being even lower depending on what Australia do)

These recommendations were praised by the usual suspects that despise residential property investment including the Gareth Morgan (Fund Manager of Gareth Morgan Kiwisaver & Economist), Mark Weldon (NZX CEO & chief cheerleader of NZ’s long suffering sharemarket), Bernard Hickey (interest.co.nz) and the Green Party.

However we had mostly good news last week with Prime Minister John Key’s opening address to NZ Parliament stating:

we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,”

So it appears that there will no land tax, no CGT or that ridiculous and market annihilating risk-free return method imposed on us. However Key said that the Government will “be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget.”

What this means for investors:

It is reasonably good news now with no Capital Gains Tax, Land Tax or Risk-Free Return Method being applied. But still the Government thinks “there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid – in fact the government is actually losing revenue in this sector.”

We would vehemently argue against this as only in 2 of the past 28 years did the Government make a net loss on residential property investment. The 2008 income year was used by the Tax Working Group and that year had cyclically high interest rates (floating rates all above 10%, most fixed rates exceeding 9%) and peak prices in the cycle. Unfortunately the Government do not seem to understand this and are not listening to us. It seems that our depreciation claims will be slashed. It is likely that there will be a 0% rate of depreciation for building structure (residential and commercial), just like land! This is a little absurd. We have members with leaky buildings in their portfolio – try telling them that their property has not depreciated! It is likely that the 20% loading for new assets will not be there either. So we need to wait until May’s budget to find out exactly what is happening. I think members should wait and make an informed decision and not make a hasty decision that is later to be regretted to sell their property.

If you are not impressed about these changes, remember the politicians are their to serve us, and they need our votes next year. So consider lobbying to protect your rights. Do what some other members and I are doing and contacting your local MP. Otherwise email your own personal letter to Prime Minister John Key, Finance Minister Bill English or Revenue Minister Peter Dunne.

David Whitburn LL.B BSc
Vice President
Auckland Property Investors’ Association (Incorporated)

we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,”

The government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid – in fact the government is actually losing revenue in this sector,”

We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget.”

We have to wait and see what happens in May next.  However now is clearly not the time for making rash decisions like selling your long term buy & hold properties.

It’s official, New Zealand has has worst unemployment rate for over 10 years.  Here’s a graph of NZ’s employment vs unemployment from Statistics NZ figures for the past 2 decades:

So whilst the recession is over, unemployment is still rising.  New Zealand now has 168,000 people unemployed.  It seems that a significant number of our unemployed people are new to entering the workforce (finishing secondary or tertiary studies).  Our Prime Minister John Key stated to the NZ Herald that

“unemployment was always a lagging indicator, he said. That means it is slow to reflect downturns and upturns in the economy. The reality is the international economy has been weak and New Zealanders are concerned about their jobs so they are spending a little bit less.”

In addition those toughest hit were young people 18 – 24 years of age with 18.4%, Maori people 15.4% unemployment, and Pacific Island People at 14% unemployment.  These figures compare with just 4.6% of NZ European’s being unemployed. If you think New Zealand is doing it tough spare a thought for Spain’s youth with over 40% unemployment there, which beats Lithuania’s current predicament.  Spain’s unemployed number nearly the entire population of New Zealand, and they are close on 20% unemployment.  At least Spain can take some comfort in arguably being the world’s greatest sporting nation with its top ranked and European Champion winning National soccer team, the best soccer club in the world in Barcelona FC, it’s tennis players (Rafael Nadal, Fernando Verdasco, Tommy Robredo, David Ferrer, Juan Carlos Ferrero, Nicholas Almagro, Albert Montanes, Maria Jose Martinez Sanchez, Anabel Medina Garrigues, Carla Suarez Navarro etc), its Formula One Drivers, strong volleyball, basketball, hockey, atheltics etc.

The Victoria University of Wellington Tax Working Group’s (“TWG”) Report has got much media attention, whether on Television, newspaper, radio or the internet.  The report is interesting and whilst I admire the aims of striving to provide a “fairer” tax system, with a consistent top tax rate amongst companies, trusts, PIEs and individuals, there are some gaping holes in it.

Firstly here are the estimated costings of what the TWG has proposed: