Archive for March, 2010
Once upon a time Japan was a truly amazing economy. With a skilled and highly disciplined workforce, combined with a real passion to come back from the adversity and huge economic depression it suffered after losing World War II. It really was an economic behemoth. Japan was a technology pioneer with some of the world’s leading companies like Sony, Fuji, Toshiba, NEC, Nintendo, Fujitsu (and many more) and it wasn’t half bad at manufacturing vehicles either with global giants like Toyota, Mitsubishi, Subaru, Mazda, Honda etc.
Japan’s Problems
The problem for Japan is that its nominal GDP now is less than it was in 1992. It appears that Japan has been in a long deep slumber for nearly two decades. Last year was particularly savage for Japan, with the global financial crisis smashing this export dependent economy. Japan’s economy contracted a large 8.6% from its peak in 2008 to the end of 2009, giving Japan its deepest recession since the nuclear annihilation of Hiroshima & Nagasaki brought a rapid end to World War II. Japan’s nominal GDP fell 6 percent to 475 trillion yen last year, while its real GDP declined 5 percent. Meanwhile, nominal GDP in the United States decreased 1.3 percent to US$ 14.2 trillion and real GDP fell 2.4 percent.
In the 1980s Japan experienced a Super Bubble, where the total value of housing stock in Japan amounted to 40% of the global total of housing stock, and 7 of the 10 most wealthy billionaires in the 1980s were Japanese Property Developers. Now Japan’s property prices have been declining at nearly 7% per annum for the past 18 or so years.
The Bank of Japan has forecast continued deflation throughout 2010 and into 2011. The real issues for Japan are a shrinking labour force and ageing population, combined with a very high amount of debt.
Ageing Population Effects
Rising national debts in developed economies are driven by aging. The benefits theypromised during the high growth period cannot be supported by governmentrevenues anymore. They resort to borrowing to keep promises. Japan’s national debt at ~192% percent of GDP is the second highest in the world.
What can Japan do?
Lately exports have picked up a bit in the global recovery. The Democratic Party of Japan led by Yukio Hatoyama, now controls the Government, and have tried to stop deflation by putting huge pressure on the Bank of Japan to be more active in its governance of monetary policy. The Government announced their own 7.2 trillion yen (~US$80 billion) fiscal stimulus package. This package includes financial incentives to purchase energy-efficient cars & products, loan guarantees and employment subsidies. The Bank of Japan then announced their own 10 trillion yen lending programme.
Immigration is the solution many developed countries around the world see to the problem, but this will be highly competitive as the years roll on. Raising the retirement age to expand the workforce is another solution. However I don’t think that this will significantly assist Japan. I foresee big inflationary pressures to Japan as the debt they have is already very high as a percentage of national GDP. If Japan gets its money printer out (quantitative easing) in the future to repay debts and provide for continued stimulus, it runs the risk of massive inflation. No-one wants to see an economy as large as Japan’s become like Zimbabwe (screenshot of my 50 trillion Zimbabwean Dollar note – signed by Gideon Gono the Reserve Bank Governor of Zimbabwe):
A tough decade is in store for Japan who need to address their very real challenges of too high debt levels, shrinking labour force and ageing population.
Sources and Acknowledgments: Bloomberg, Daily Mail, Saturn Portfolio Private Client Seminar (Craig Stobo) March 2010, The Guardian, Wikipedia, CIA World Factbook.
As a property investor, it is very important that you select the right strategy or strategies for your needs. Most commonly the long-term buy and hold strategy creates the most wealth. I acknowledge that often property investors diverge into property trading (buying with the intent to resell at a profit – eg. renovations and on-selling straight away), and some succeed at this when they time the market correctly and remember to pay GST and income tax on the properties that they trade. However the vast majority I have mentored have truly excelled at the long-term buy and hold investment strategy.
With internet and social marketing coming to the fore, all too often we see property promoters drafting a large menu with so many choices, and telling us about how great our lives will be with another strategy. Many property investors using the success from their long-term buy and hold strategy let their own greed kick in and they feed the greed of the property promoter of the day, and spend a small fortune on education on a different strategy to the one that has served them so well. This is a distraction, and distractions cost you money.
My own mistakes and resolving them
Firstly I must admit that I’m not perfect here, having been distracted buying a Blue Peak property finding licence, but I soon realised the loss of focus in what I have truly excelled in, which is long-term residential property investment. So I stopped and removed myself from the situation, settling out of court to allow me to focus on being a Dad for the first time and on my own business interests.
I would now note that the Blue Peak property finding system devised by Phil Jones, Sean Levy and Sean Wood has been proven not to work, and as is often the case with Phil Jones, he lost another good relationship he once had and litigation commenced amongst the other 2 promoters.
Phil then passed Blue Peak onto Steve Goodey’s Venture Property. Some affected licence holders (including me) who felt that they had been ripped off, stood up to the promoters about the unethical and incompetently run Blue Peak scheme. So I learned two things from this – (1) not to lose focus and go down distraction lane, and (2) not to conduct any business with Phil Jones.
Distraction Lane
On networking at the breaks during Dean Letfus & Shaun Stenning’s NZ Property Guru’s [sic] Auckland seminar earlier this month, and hearing from investors that have paid to go to courses with the next best thing to do in New Zealand, I have found that people over the past 2 years have been taught about:
- Lease Options
- Rent by the Room
- NLP Training
- Presidential Inner Circle
- Tax Liens & Tax Deeds
- then insert any other random sidetrack you had like internet marketing, sports betting software, FX trading, buying apartments in Australia, buying property in Guyana etc
These are all simply distractions and whilst some of them can make you good money (I have seen many people make good money from lease options and renting houses by the room), strategies like tax deeds and liens, US property and internet marketing seem to predominantly only make money for their unethical promoters like Shaun Stenning and Dean Letfus). Think about the Hybrid Real Estate Board Game – there is a distraction lane that you go down, and as a seasoned player of the game since working with Kieran Trass in Hybrid in 2003, I knew going down it meant a significant retardation to the accumulation of my wealth in terms of both growing my equity, and my passive cashflow.
Seriously – what is wrong with sticking with one strategy, perhaps even making a few mistakes, then fine tuning it over time and mastering it. This has worked well with property investment for at least 5 generations in my family, and I see little reason why it can’t for the next 5 (barring being on the losing side of a World War!).
Major Distraction – US Tax Liens/Deeds?
How it works is that some states of the USA are tax deed states, others are tax lien states. States are divided up into counties for administrative reasons and each county levies property taxes for things like roads, streetlights, schools, internal governance and administration and community services. If you don’t or can’t pay your property taxes a lien may by statute be put on your property in favour of the county which takes priority over a lender’s mortgage. These liens get sold (usually by auction) from time to time by counties to investors to help with revenue collection. Whether the state is a lien or deed state is irrelevant, as what was portrayed for sale was returns of 15% to 50% (in Texas).
Commercial Alert on Tax Liens and Tax Deeds for New Zealand Property Investors
From talking with dissatisfied purchasers in my network and reading PropertyTalk.com forum posts, and taking the time to understand the offering, I personally take issue with promoters who don’t tell the full story about significant aspects of their product. During Steve Goodey’s presentation at NZ Property Gurus:
- There was no mention of US accountancy fees, nor state and federal tax compliance – which all will cost the Kiwi investor money;
- There was no mention of the NZ tax consequences (including the accrual regime) on the US tax liens;
- There was no mention of US initial structure (company/trust formation) costs – although this may have been in the US$5,995 pack and with a bit of ‘googling’ I could see LLC formation for as little as US$199;
- There was no mention of the minimum US$1,000 balance in the US bank account that apparently has to be opened by Kiwi Tax Lien/Deed investors;
- There was no mention of exchange rate risks (although I note that at $1NZD : US$0.69 this is less of a concern than it once was, however what is stopping the US Dollar devaluing to above $1NZD : US$0.80 or worse?);
- Legal costs to foreclose on a lien (a friend working as a lawyer in the US noted that it often costs over US$6,000 in legal fees to foreclose a lien owner, and it is not unheard of to be over US$20,000);
- Risks of buying a lemon property – you could purchase a piece of swampland, a landlocked property, a road, a tiny section with a tree on it, a footpath etc if you don’t do your due diligence properly;
- There is mention of being able to buy tax liens for as cheap as US$1 on a webinar, yet there is not a single deal done for remotely close to that price for a tax lien course subscriber of nearly 1 year;
- Risks of not buying anything at all and blowing US$5,995 – investors at Property Gurus that had purchased the Tax Liens course run by Steve Goodey in NZ, and by Phil Jones & Dan Ekelman (DANE Wealth Academy) in the USA have said that they have been trying to buy tax liens & deeds for months on eBay and following the techniques taught by the Millionaire Mastery/DANE training. 8 months later of genuine trying and they told me still no tax liens. Other investors trying every couple of days for 3 months have not been able to secure any deals either;
- If it were so good why can’t more of the 305 million Americans purchase tax liens, rather than getting 4.3 million New Zealanders to purchase them;
- Why would an investor want to become a debt collector for US counties – many counties collect the easy debts themselves, and pass the hard ones onto investors;
- If you were a lender owed US$250,000, would you rather pay out a US$1,200 tax lien to protect your security in the event legal foreclosure notice is served by the lien holder?;
- Dean Letfus published on 9 March 2009, on the public PropertyTalk Forums that they are “they are snake oil, complete with white shoes and wagons” (source: published already on the internet at http://www.propertytalk.com/forum/showpost.php?p=168276&postcount=5). Dean Letfus then expanded on this to say how dodgy they really are (source: Published on the internet already at http://www.propertytalk.com/forum/showpost.php?p=168389&postcount=8);
- There is a 100% satisfaction guarantee on www.cashflowliens.com that appears not be honoured – in fact I am informed that the promoters try to shirk it.
We guarantee to teach exactly how to earn between 16% and 25% returns on your money and give you the exact step by step processes for buying real estate up to 90% BELOW MARKET Value in the USA AND we will show you precisely how you can do this from the comfort of your home where ever you live in the World without ever having to leave your own Country!
So for me, tax liens and tax deeds are a no go zone. They may work if you are in the US and can commit time and knowledge to becoming a tax lien/deed expert. It is my honest opinion that they will make the majority of NZ investors poorer than if they hadn’t invested in them at all. So my advice is to read this great article by Rob Stock, who is one of New Zealand’s finest and most respected finance journalists, in the widely circulated Sunday Star Times on tax liens and tax deeds: http://www.stuff.co.nz/business/personal-finance/1762855/Beware-of-lien-returns. Stop the promoters like Dean Letfus, Steve Goodey and Shaun Stenning from getting rich at your expense and don’t invest in them.
That’s all from me – stay focused and don’t go down distraction lane. Stick to your knitting and enjoy the rest of your week.
Kind regards
David Whitburn
We are in a very interesting phase of the property cycle at present. There is no mistaking the fact that we are still in the downturn phase of this current property cycle. New Zealand business confidence has not returned, there is an international environment of some fear with Greece, Spain, Portugal, the State of California in the USA, all having serious credit default issues. Employment figures and the amount of mortgagee and indeed fire sales are hardly rosy news for the property market right now. What’s worse is that there is a lot of fear in the market particularly amongst property investors with interest rates forecast to rocket up and uncertainty over tax changes.
As a result there is little wonder that house prices are slightly reducing, and the number of days to sell a property has been increasing in many areas across the country. Uncertainty creates fear, and the manifestation of this emotion is to make excuses to defer a property based decision (such as buying or developing an investment property). I think that we are in a W shaped recovery, and we are heading down towards the second V (of the W). Fortunately this V is less unpleasant than 2008′s deep V, that we recovered from in 2009.
Revenue Minister Peter Dunne’s Comments Today
There is currently a lot of conjecture about just what the Government will do on 20 May 2010 in the budget. Peter Dunne has suggested to a meeting of the Internal Fiscal Association at Christchurch (as reported in the NZ Herald), that:
This is not an attack on landlords, as some have protested, but a rebalancing act designed to address the concerns highlighted by both the Tax Working Group and the Governor of the Reserve Bank over the years about distortions favouring property investment over other forms of investment
There are also likely to be lower personal taxes across the board – not just for the top end of the income scale as some allege – to encourage productivity, investment and saving.
The proposal that GST be lifted to 15 per cent, would only go ahead if appropriate compensation was provided for those who need it, while no exemptions for specific items would be introduced.”
Anti-property commentators like Bernard Hickey will be very happy to hear of these tax changes, but still will no doubt be disappointed that the changes didn’t go far enough! That said we all need to wait and see what the budget holds for us. I agree that there needs to be a balance, but the reason for the perception of property investment being the best asset class in New Zealand is only a comparative one. There is significant under performance in our shares and managed funds. Some of this is indeed not helped by Government policy. If we had a company tax rate lower than that of Australia and other countries in the world would we have had so many of our companies delist from the NZX. Being a smaller country means that we cannot really afford to lose Nufarm, Fletcher Forests, Fletcher Paper, Fletcher Energy, Lion Nathan, companies have reduced the available pool of investment.
The simple fact is that the Australian Share Market is a much better performer than the New Zealand Share Market with better opportunities in for diversification, and in general growth. Additionally the Australian Property Markets have also risen faster than those in New Zealand – that is capital growth rates are slightly higher than in New Zealand.
So why are so many bashing property?
Sadly it is all too common in New Zealand that if someone or something does well we try to knock it down a peg or two, to become “normal”. The most unfortunate thing is that we should all be trying to bolster the lame ducks that are the share and managed fund industries in NZ. Lets encourage and foster growth in shares and managed funds, rather than trying to slam property investors.
An example of the misinformation is that property investors make a net tax loss. This is total fallacy. Information sourced by the New Zealand Property Investors Federation from NZ Inland Revenue proved that in only two of the past 28 years did property investment make a net tax loss. Yet the Tax Working Group and NZ Government still think property investors cost the country money.
Opportunities available
Whenever there is fear, there are also opportunities. There are an enormous number of investors hurting and some banks are stockpiling mortgagee sales, as if they released them all the market would come tumbling down, along with their security values! With less investors looking to buy, rents are likely to go up. With some pessimistic investors thinking that losses will be ring fenced (disallowed), and some business owners and people in general really feeling the pinch, some amazing deals have happened. I know of an investor in West Auckland getting a property with council valuation at $625,000 (the registered valuation would be around $600 – 620K), for just $440,000. Vendor finance, and options to purchase property in the future are becoming more popular options.
As a result I would encourage you not to be scared of the May 20th budget. If you have a safety buffer and can get a pre-approval, consider buying an investment property now. Get the best cashflow you can get, but buy well below value (aim for at least 20% of the value) and that way you will be buying a safe investment.
I remember what happened after September 11, in 2001, where the market stopped for a fair few days. Some homeowners freaked and firesold their properties. Those buying the properties had snapped up absolute bargains and also benefitted from the biggest boom in NZ history from early 2003 to mid-late 2007.
So gather all the information that you can, make the smart decisions and carpe diem.
