Archive for April, 2010
Floaters and short-term fixed rate borrowers can breathe a bit easier in the knowledge that their pockets will not be adversely effected, with the Reserve Bank today announcing that he will leave the Official Cash Rate (OCR) unchanged at 2.5 percent. Reserve Bank Governor Alan Bollard said:
The New Zealand economy is recovering broadly as expected and growth is predicted to pick up further through 2010.
Trading partner activity has recovered more quickly than we expected. Growth in Asia has been particularly strong. Consistent with this, export commodity prices have increased close to their 2008 peak. At the same time, risks to the global outlook remain elevated.
Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued. Similarly, business spending is weak and firms continue to reduce debt.
On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2 percent for the past year, is expected to track within the target range over the medium term.
As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected. [emphasis added]
The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve, is expected to make OCR increases more effective than in the past. Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles.
My Interpretation and Predictions
I think that ANZ National Bank Limited’s Chief Economist, Cameron Bagrie’s prediction for no rise in the OCR until September 2010 to hold true. This is because of the wording which I put in bold to emphasis it. Governor Bollard has bought the Reserve Bank time, and now is very unlikely to raise the OCR to 2.75% at the 10 June 2010 OCR review. I believe that the recovery New Zealand is experiencing is going somewhat slowly and a lot of business owners, property investors and home owners are unfortunately still feeling the ‘pinch’. As a result I also consider it slightly unlikely at this stage, that the OCR will be raised on 29 July 2010. This fits into the time-frames that Governor Bollard suggested with his oft repeated statements early last year, that the OCR will not be raised “until the latter part of 2010″.
As an update to my blog on the evening of Anzac Day, the poll on www.billenglish.co.nz has got a lot busier. The news for the Government is not good with 79% of respondents (at 11:45am on 27 April 2010) voting NO – I do not support tax changes to property.
The big "NO" vote: from 64% to 79% in one and a half days
Perhaps unsurprisingly I am one of these voters. However I am pleasantly surprised at the number of people voting at 1,710. Dr English should take a lot at the plethora of comments in relation to his poll. There is some really interesting feedback there, including from former Deloitte Consulting Partner Paul Kane, and a number of investors in not just property.
Focus on the real issue – the NZ Government Overspending
I am not impressed at the Government losing around NZ$240 million each and every week and the fact that we are forecast to lost over NZ$10 billion per year for nearly 6 more years! We raise this money typically on the Global Debt Market. It is interesting to note that New Zealand is a ‘company’ listed on the New York Stock Exchange (see our SEC financial statements). Looking at how much our debt is on the Reserve Bank’s C3 Aggregates is a bit frightening. It is $205 billion dollars! Someone has to service this debt – guess who that is? Of course it is us, as New Zealand taxpayers. And we will be servicing this debt for decades to come.
It is time to cut Government spending now. Dr English’s knows from Inland Revenue that around 10,000 property investors have tax losses and then use Working For Families tax credits – this must stop. But why not get rid of this middle class welfare and Government dependency that Labour introduced towards the end of its 9 year long reign of overspending?
Friends in MFAT and Government departments in Wellington (including the big ones of health and education) say numbers of staff can be chopped, and there is a perception that it is far “cruisier” to work in a Government department than for a private commercial entity.
Private companies and individuals are making big cuts – shouldn’t our Government be doing the same?
In a fascinating development since my last blog, the Minister of Finance put up a poll on his own website at www.billenglish.co.nz asking:
Do you support tax changes to investment property”
The interesting thing is that out of 863 votes at 7:07pm Sunday 25th April 2010, that 548 people voted no. That’s a massive 64% of the total vote. Whilst this poll has a small sample size and cannot be said to be scientific like most web polls, even with a massive margin of error of 13.9%, it would still have more people not supporting tax changes to investment property.
64% of voters do not support tax changes to property investment
This is a very interesting result indeed as this Government doesn’t want to do something its followers don’t like. National cannot govern alone, and with ACT not guaranteed to win Epsom or get the magic 5% threshold in next year’s election, nor the continued support of the Maori party – I view that the Minister of Finance may have to retract his words he mentioned on NewstalkZB and just keep the tax changes to 1 thing only, depreciation. This vote is an indication that these tax changes are going to be unpopular policy – obviously to the many tens of thousands of property investors New Zealand has.
So why don’t you have your own say at www.billenglish.co.nz before the poll closes. I will continue to monitor developments in the lead up to the all important 20 May 2010 budget with the legislative sword looming over property investors heads.
I was listening to the country’s leading radio station (NewstalkZB streaming live) on my computer now and I heard the Minister of Finance Bill English talk about tax reform with host Larry Williams. English said that the tax regime has a more favourable impact on property investors. As a result he foreshadowed the May 20th budget speech, by stating that he would make property investment less attractive. English stated that there will “be more than one change”, so we investors can expect depreciation alone will not be tinkered with. This is to ensure that there aren’t enormous benefits to having “highly leveraged property speculation”.
English went further to say just now that anyone who owns a property will still be able to deduct the repairs and maintenance expenditure, however my interpretation of the Minister’s statement is that depreciation on building structure will be 0% (and not the 1% I had previously anticipated). This is to ensure that there is a tilt in the playing field towards business owners, job creators, and other productive investments.
If there is to be more than one change – then what else?
It looks like the writing is on the wall and that our depreciation on building structure will be lost. However English said just 5 minutes ago (6:20pm 21/4/2010 Newstalk ZB interview) that there will be more than one change.
Could this be highly geared investors worst nightmare of (1) ring-fencing property losses; where properties that make losses are not able to be offset against personally derived income (ie. they are ring fenced until the property becomes profitable). Otherwise could we see (2) thin capping interest deductibility; where interest on servicing a loan will only be able to be deducted if the investor has a loan to value ratio of say 65% of lower, or will it be something else?
Perhaps there will be a real (3) tightening of the revenue account rules to catch all investors who buy a property and sell it within a period of time (say 5 years) for a profit, so this gain would be brought into the income tax net (‘brightline’ test). Previously this gain would in the vast majority of cases be capital and therefore not taxed.
Quick Thought – Interesting Blog on Interest.co.nz:
We eagerly await these changes. In the meantime, have a look at Gareth Kiernan’s (from Infometrics) latest blog on www.Interest.co.nz as it makes interesting reading. He says property investors have vested interests and makes accusations against internet marketer and self-proclaimed property investment guru Dean Letfus:
The comments are quite interesting, particularly from my friend and passionate property investor Andrew King (NZPIF Vice President).
Winston Peters is making a comeback and is starting to sow the seeds for his New Zealand First party for the General Elections next year. He is going to be seeking the votes from the 65 plus year olds – the age bracket he now just fits into himself. Peters is worshipped by many elderly voters as a handsome man and commanding public speaker, that stands up for what he believes in. He will be focussing on healthcare, and will seek to extend the Super Gold Card (which he championed its introduction), to include one free Doctor’s visit per year, and a maximum payment of $10 per visit to the Doctor if you are over 65.
Whilst I am a big fan of a healthy population, like everything it has its cost. With dozens of friends in their early/mid 30s in the United Kingdom, Australia, Singapore, USA and to a lesser extent other countries, we clearly have a mobile labour force in New Zealand. Unless the Government dramatically cuts its expenditure, it will have to raise taxes to keep meeting its debt obligations. Remember that the NZ Government is bleeding to the tune of well over $200 million each and every week, and is forecast to be running budget deficits and have to borrow offshore for 6 more years.
So it is a timely debate, and a good follow up to my blog a couple of weeks ago on the ageing population in Japan, to consider to continue not listening to Winston Peters, and to raise the retirement age, since we are living longer and with a greater quality of life than those in the 65 and over age bracket in decades gone by. If we are to maintain our population of young New Zealanders, in the global environment that we are increasingly becoming part of, we need to be focus on sustainable policies.
To explain it better than I could, here’s Bernard Hickey’s (Interest.co.nz) thoughts on why New Zealand and the World cannot afford their Gold Plated Pension Schemes:
Congratulations to HSBC, the world’s largest bank, who have led the market with some significant rate drops. Already HSBC were the cheapest at the 1, 2, 3 and 5 year fixed terms. Now they have cut all fixed rates across the Board. Here are HSBC’s hot new rates:
The 6 month HSBC rate at 4.99% is amazing, with clear daylight until their next closest competitor National Bank at 5.70%. The 1 year HSBC rate becomes even cheaper at 5.49%, with National Bank and Westpac at 6.15% retail (you can usually negotiate 0.1% off this rate from these two banks by just asking). The 2 year HSBC rate at 6.49% is well cheaper than BNZ, ANZ and Westpac’s 7.10%, and the 3 year HSBC rate at 7.29% beats the BNZ classic rate of 7.50% (with the other lenders off the pace at 7.70%). The 4 year HSBC rate at 7.69% and 5 year HSBC rate at 7.99% are not pushed by any main tier lenders. They average 8.20% for 4 years and 8.50% for 5 years, with Sovereign offering 8.65% to fix for 5 years (although you would probably say no thank you to this rate). The next best competitors for the 4 year rate are actually the Public Trust at 7.99% fixed for 4 years and AMP Home Loans at 8.10%.
Refinancing
I refinanced away from Sovereign (a second tier lender with comparatively poor interest rates) last week to ANZ. I got a good $500 contribution towards legal fees to compensate me for the transfer costs, and I will save many hundreds of dollars each and every by not being with Sovereign. No valuation was required as I could use the CV and I have always been a little bit conservative with debt doing this transaction at 70% of loan to CV (which would be a little bit less than a registered valuation in my case). ANZ just made things so easy for me.
Many investors do not know that Sovereign pay amongst the very highest rates of commission to mortgage brokers, so it is not totally surprising that many property investors have loans with Sovereign, given the commission cuts and some banks refuse to deal with brokers over the past few years (BNZ, HSBC, Kiwibank to name a few). Sure Sovereign have a sound product, but they are really not the market leaders with interest rates and they do seem to follow ASB (same parent company – the Commonwealth Bank of Australia) with a premium loaded on!
So perhaps it is time for you to review any loans you have with Sovereign or any second tier, third tier or alternative lenders. If you are in good financial shape like many investors unknowingly are, then consider refinancing to HSBC Premier, or at least a main tier bank interested in lending. I am well connected to people in the banking industry and understand that banks are still lending, they are just being picky, and can afford to be. However different banks have different credit policies at different times. You want to be the master of your own financial destiny. If you are not getting the best interest rates and/or loan features that you want, it may be worthwhile considering a change. Don’t hesitate to contact me on david@davidwhitburn.com if you want some good banking referrals to help strengthen your own portfolio – I am not a broker myself, but a property mentor wanting people to achieve all they can through property investment.
Technical Note – HSBC Premier criteria (at 7 April 2010):
As sourced from HSBC’s website:
- A minimum value of NZD500,000 in home loans with HSBC in New Zealand (facility limit not outstanding balance); and/or
- A minimum value of NZD100,000 in savings and investments with HSBC in New Zealand; and/or
- If you’re an overseas HSBC Premier customer, you’ll automatically qualify for Premier customer status in New Zealand
Note: Once you become a qualified HSBC Premier customer minimum home loan values no longer apply, although other home lending criteria may still need to be met. Ie. When you buy your $2.5 million Kohimarama dream home in Auckand eastern bays with views of the Rangitoto and the North Shore, and you pay down your mortgage to below $500,000, you are not suddenly excluded from being an HSBC Premier customer and subjected to loaded interest rates (usually 0.5% premium).
You can find out more by calling into an HSBC branch, emailing premier@hsbc.co.nz, or contacting the HSBC Premier Call Centre on 0800 028 088 (within New Zealand) or +64 9 368 8557 (outside New Zealand).
Disclosure of Interest: Related parties of mine that I could hold a beneficial interest in have minuscule shareholdings in HSBC (FTSE UK), and all Australian Banks (CBA, NAB, Westpac, ANZ).
Glenn Stevens, the Governor of the Reserve Bank of Australia (“RBA”) has just raised the Australian Offical Cash Rate 0.25% to 4.25%.
This is important to New Zealand as sadly we do tend to try to follow our big brother country and closest neighbour, Australia. Now we don’t have the same pressures as Australia do in terms of our economy still struggling a little bit. We are out of recession, but business is hardly booming. Unemployment is still high, and house prices are not taking off, and moving upwards as they did in 2009.
As a result on 29 April, our Reserve Bank Governor Alan Bollard will in all likelihood leave our OCR unchanged at 4.25%. On 10 June currently I am 75% confident that he will also leave the OCR unchanged. Unfortunately our economy is not currently as good as Australia’s economy, and nor has it been for quite a while.
RBA Governor Stevens was worried last week that house prices were “getting too high”, and in response to questions about inflicting pain on home owners and property investors through causing higher short and medium term rates:
Interest rates to most borrowers nonetheless have been somewhat lower than average…
With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.”
New Zealand is very much a different country to Australia, and currently we have few inflationary pressures, cyclically high unemployment and very low house price growth, and an already high currency (higher interest rates tend to mean overseas investors buy NZ Dollars to invest for the good yields they can get), we have far less pressure on us to raise our interest rates.
See the NZ Herald article for more details.