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.

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