Archive for November, 2010
On a stunning summer’s day yesterday at the well appointed Exhibition Hall in Waipuna Conference Centre, overlooking the Panmure lagoon, I was the keynote presenter at Property Masterclass run by NZ Wealth Mentor.
David Leon - Property Masterclass Master of Ceremonies on 27 November 2010
I covered a lot of topics as the keynote presenter, and those attending particularly enjoyed my take on the market, drawing attention to where we are at in this current stage of the property cycle and my predictions for the future in terms of the various Auckland sub-markets. I gave a thorough analysis of all of the key market drivers, showing and interpreting graphs from the economics and research of the major trading banks, Reserve Bank of New Zealand, Statistics New Zealand, Quotable Value and the Real Estate Institute.
In another segment on stage I talked about how we as investors are running a property business and the fact that we have to wear a number of hats. One of the leading property educators in the United Kingdom Gill Fielding talked about the importance of being skilled in a number of different disciplines wear you have a number of buckets to control or hats to wear. I love this analogy so I talked about the various hats we have to wear as property investors in terms of the CEO hat – managing everything in our business; CFO hat checking our bank statements, keeping accounts, monitoring the financial performance of our portfolio, paying taxes, Renovations/Maintenance hat – looking at how we maintain our very valuable assets and renovating to increase our cashflow and equity; Legal hat – when doing due diligence on properties, looking at legislation changes and ownership structures; and Property Management hat on – where you have to manage your tenants or your property manager, to ensure you minimise vacancies, charge market rent and collect your rent and take the appropriate action when tenants are not behaving, I also covered ownership structures, including the key changes in light of LAQCs losing their potency in that they lose the ability to offset losses against personally earned income. The new tax structure the Look Through Company (“LTC”) was introduced too, with Chartered Accountant and my colleague from Deloitte Tax many years ago Amanda Macdonald (Tasman Tax and Accounting Services based in Albany) also presented on this topic being the tax and accounting expert she is.
Finally I gave covered my opinions on US tax deeds and liens that have been promoted in New Zealand heavily over the past couple of years, and I covered the good, the bad and the ugly things about lease options, giving an example of the massive win-win situation created in my last lease option deal that resulted in my tenant buyers settling the property and giving me a giant hug as they achieved their dream of being home owners in New Zealand, as well as the sheer joy of meeting their goal. I also enjoyed presenting on the strategies I am using in today’s market and covered my revamped and intense mentoring programme where I take my mentoring clients out to do deals with me. I have some new clients from this event and am looking forward to training them shortly.
Other speakers
Senior Resource Management lawyer Andrew Braggins talked about the spatial plan for Auckland the Supercity, which highlit the growth areas in the Auckland region, major infrastructure and planning thoughts from the head planner and CEO at Auckland Council, who are in Andrew’s network. This presentation was enjoyed by attendees who were impressed with Andrew’s knowledge and communication skills, as he enlightened them about the hot spots in Auckland.
Andrew also briefly covered how to dispute council fees, levies and contributions both under the Building Act (including seeking a determination from the Department of Building & Housing) and also the Resource Management Act (including a judical review application he recently did on a property he rents out).
Jan Galloway then gave a masterclass in property management, including listing out the issues in relation to the Residential Tenancies Amendment Act with the fines for unlawful acts by Landlords and Tenants all covered – luckily these were included in the comprehensive bound manual we gave our event attendees.
Renovations expert Mark Trafford told attendees about a number of ways not to do renovations in a photo driven presentation.
Gary Hey, a director and shareholder of large mortgage broking firm, Mortgage People, then address the property cycle from a finance perspective. He talked about how lenders’ criteria are changing and it is much easier to get finance for property now (compared to say 6 months, 1 and 2 years ago).
International Rating Agency Standard & Poor’s (“S&P”) has lowered the outlook on NZ’s AA+ sovereign credit rating to “negative” from “stable”. This is not great news for New Zealand borrowers as if New Zealand’s sovereign rating were actually downgraded to only AA our interest costs would rise. This would have an impact on business owners and struggling home owners and property investors, as we continue to navigate our way out of this cyclical downturn slowly but surely.
S&P Sovereign ratings credit analyst Kyran Curry stated:
The outlook revision on the foreign currency ratings reflect our recognition of the risks stemming from New Zealand’s projected widening external imbalances in the context of the country’s weakened fiscal flexibility…
New Zealand’s vulnerability to external shocks, arising from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”
Standard & Poor’s stresses, however, that these weaknesses are mitigated by New Zealand’s fiscal and monetary policy flexibility, strong institutions, economic resilience, and its actively traded currency.
The main risk to the ratings would be a significant weakening in the credit quality of New Zealand’s banking sector, which is largely owned by the Australian banks. That said, however, a range of factors ameliorates some of these risks, including a high degree of foreign-currency-debt hedging and an actively traded currency. New Zealand has independent and effective monetary policy settings with a highly traded and free-floating currency that allows external imbalances to adjust. A large portion of the nation’s external debt is denominated in New Zealand dollars, while much of the remainder finances companies with revenues in foreign exchange or is hedged. In sum, we view New Zealand’s financial and capital markets as supportive of the rating.”
The negative outlook on the New Zealand foreign currency ratings reflects the possibility of a ratings downgrade if New Zealand’s external position does not improve. Rising public savings will be an important component of such an improvement.
The rating could fall, too, if New Zealand’s current account weakens because of any higher real cross-border funding costs within its banks. On the other hand, the ratings could stabilize at the current levels upon a sharper-than-expected improvement in the external accounts, led by stronger export performance and higher public savings.
New Zealand needs to tackle its growing government deficit in the light of softening international prospects. We are still borrowing over $200 million a week, which is over $10 billion per year. This has a significant interest servicing cost and the potential to place a noose on future generations of taxpayers.
A major issue is that together New Zealanders always want to borrow a lot more than other New Zealanders are willing to lend. As a result the difference has to be imported, which means that the net international liabilities of New Zealand (note that this is private and not Government debt) at 30 June 2010 was NZ$164 billion.
The private debt our economy has is akin to that of Portugal, Ireland, Greece and Spain (the “PIGS” countries that are stressing global financial markets) and has long been pointed to by the credit rating agencies as a significant problem.
John Key’s thoughts on this
Our Prime Minister John Key thinks that Prime Minister the downgrade in outlook by S&P is because of NZ’s high private indebtedness and S&P’s reassessment of risks following the Irish banking crisis, where a bailout up to $100 billion Euros may be required (similar to the bailout Greece had). Concerns are mounting on Portugal’s debt and to a lesser extent Spain too. As a result S&P felt they had to put us on a negative outlook. John Key said:
In fact the Finance Minister (Bill English) met with Standard and Poor’s two weeks ago, (and) there were no specific issues raised at that point.
With the position in Ireland, that has had an impact on their (S&P’s) assessment of countries that have an over-reliance on debt.
What I will say though is the way it’s been positioned by S&P and other rating agencies to us is, if your [public] gross debt to GDP or net debt to GDP is less than 30%, then you are in a small group of countries for which the rating agencies have no concerns in that regard.
That was absolutely where New Zealand was positioned, with a very small group of other countries – Korea, Australia and one or two others”.
Bill English – Minister of Finance’s View
Bill English issued the following press release to explain the situation and he points out it is private debt and not Government debt which is the issue (as John Key did), and he re-iterated the Government’s commitment to balance the books and return to surpluses by 2016.
Standard and Poor’s decision to put New Zealand’s foreign currency rating on negative outlook highlights the need to reduce our heavy reliance on foreign debt. This is a long-standing problem for New Zealand and has left us vulnerable as a country. The Government is taking steps to reduce this external vulnerability and to move the economy towards savings and exports.
They include the tax changes in the Budget this year and work currently underway with the Savings Working Group. From here, it’s important that our economic programme continues.
Standard and Poor’s praised the New Zealand Government’s commitment to get back to budget surplus by 2016, and it noted that New Zealand had outperformed most other advanced economies in the past two years.
However, it said the negative outlook on New Zealand’s AA+ foreign currency rating reflected risks stemming from its widening external imbalances and relatively low levels of national savings.
As Standard and Poor’s notes, New Zealand’s household liabilities – at about 156 per cent of disposable income – are 50 per cent higher than 10 years ago.
Banks and the Government, which are borrowing in volatile international financial markets, face higher interest costs on their increasing debt. In the past 10 years alone, New Zealand’s net foreign liabilities have jumped from about $90 billion to more than $160 billion.
Bill English also pointed out that, despite the negative outlook on its AA+ rating with Standard and Poor’s, New Zealand still enjoys the highest possible Aaa (stable) rating with Moody’s (another International Rating Agency).
I think we have to watch this space and the international events we are faced with that create an environment of uncertainty. Also consider negotiating some good interest rates on 2 and 3 year fixed rate periods with your lender, as I just don’t see these rates getting materially cheaper (the odd cut up to 0.1% for competition reasons aside may happen) and I don’t see the floating rate being decreased in the short or medium term.
The Centre for Housing Research Aotearoa New Zealand (CHRANZ) has come out with a large report detailing the housing needs for our country’s largest city and economic powerhouse, Auckland. I invest in Auckland, and as President of the Auckland Property Investors’ Association, I was very pleased to read this report. The news is excellent for Auckland property investors as it shows demand for Auckland housing is increasing which will put up values and rents in the long-term, and once we exit the downturn phase of this current property cycle, we will pass into the recovery phase and see a strong wave of rental increases and sound value increases, and then the boom phase will arrive where we shall see very strong capital growth (in excess of 10% per year).
The good news is that Auckland’s strong population is set to continue, and demand will increase from the 431,890 dwellings there are in the Auckland Region (ie. Auckland – the Super City) in 2006 at census time, by 39.3% to 601,420 by 2026. This is a lot of demand that will only help property investors in terms of raising our rental income streams and also getting increases in the value of our properties.
Auckland our Super City - view north from Mt Eden
The world knows that Auckland is a fantastic place to live, as does the rest of New Zealand, even if some are too proud or scared to offend relatives in their former regions they have left to admit it. In a repeat of last year’s result, Auckland was 4th (tied with Vancouver, Canada) in the 2010 Mercer Quality of Living annual survey out of all cities in the world. Interestingly the 2006 New Zealand Census results showed 37% of Aucklanders were not born in New Zealand, and this number is thought to continue its rapid trend upwards. With a lot of Kiwis wanting increased employment, income, business investment and entertainment options in an extremely desirable city, many current Aucklanders were not born in Auckland. With an increased focus on high technology and service related jobs this century, manufacturing and indeed elementary and semi-skilled roles are not as necessary as they used to be. As a result Auckland is getting what it needs younger and skilled migrants. Auckland’s immigrants have a higher employment rate than New Zealand born Aucklanders.
CHRANZ’s Housing Projections for Auckland
The first report CHRANZ released was called Auckland Region Housing Market Assessment: 2006 – 2026. This stated that population growth will continue to strongly drive the Auckland region’s housing demand in this period. This growth will require an extra 169,530 dwellings, which is a 39.3% increase to what we had in 2006. A lot of the demand is from older people, and is for smaller, rental households.
Auckland needs to have a lot more dwellings...
By 2020 some parts of Auckland will not have sufficient residential land available to develop, meaning only one thing for prices and rental levels – they will go upwards as demand outstrips supply. This is particularly so for the central Auckland isthmus (what used to be known as Auckland City – the area subtending the northern reaches of the Manukau Harbour and southern reaches of the Waitemata Harbour, including Auckland’s CBD, going as far east as the suburb of Glen Innes and as far west as Avondale). 51% of the employment growth will be in this subregion, but this area has a maximum capacity of only 32% of the Auckland region’s dwelling capacity. Auckland Council’s planners will have to pay attention to this, as there will be more pressure as people continue to commute into the isthmus from the South, South-East, West and Northern parts of Auckland, and also East by boat from beautiful Waiheke Island.
Auckland's Waiheke Island
Key findings to help your Auckland property investments:
Other key findings from this Auckland housing report include the fact that renting continues to be increasingly popular. Home ownership has reduced from 70.7% in the 1996 census to 66.9% in the 2006 census. The fact that demand for rental accommodation (63.5%) will continue to greatly outstrip demand for owner-occupied dwellings (26.2%). Affordability will be an issue with 39.6% of all renter households and 49.4% of all privately rented households (excludes Housing NZ) having to spend more than 30% of their household’s total gross income on rent and other housing costs (eg. water rates). The size of the Intermediate Housing Market (‘IHM’) which is the number of private renter households that have at least one member in paid employment who cannot afford to purchase a dwelling at the lower quartile sale price, assuming standard bank lending criteria are applied, has increased from 39,700 to 77,100 households between 2001 and 2009. Interestingly housing demand will be particularly shaped by the growth in older, couple-only and single-person households and will increase demand for smaller one and two bedroom dwellings.
Auckland Map
Lower demand for home ownership amongst younger households
In CHRANZ’s second report they covered the patterns and dynamics of housing demand among younger Auckland households.
It said the younger households age group (20-40 year olds) had experienced New Zealand’s biggest fall in home ownership rates between 1986 and 2006, with Auckland once again leading this national trend:
- 17.9 percent among 25–29 year olds;
- 17.7 percent among 30–34 years olds; and
- 15.5 percent among 35–39 year olds.
On Saturday the 27th of November 2010 I will be the keynote presenter at NZ Property Masterclass – a full day seminar at Waipuna Hotel & Conference Centre in Mt Wellington, Auckland (near Sylvia Park on the edge of the Panmure Basin), with standard tickets at just $29, and gold tickets at $98.
Improve your financial knowledge, get updated on the current market and learn what strategies I am using for wealth creation for the remainder of this year and in 2011.
My topics covered
Come hear me present live at NZ Property Masterclass event, where I will be talking about:
- Loss Attributing Qualifying Companies (“LAQCs”) being abolished and introducing the new tax structure, the Look Through Company (“LTC”)
- a Market Update with my opinions on where the market is heading for 2011 backed up by graphs and facts
- the untold truth about US Tax Deeds and Liens to follow up from my popular blog in March
- the good, the bad and the ugly with Lease Options, and a number of lease option promoters
- how you can create wealth in 2011, using the strategies I am successfully using on NZ properties in the current market.
Also included in the low $29 ticket price is access to 5 other fantastic speakers.
Your other speakers
Speaker #2: ANDREW BRAGGINS LL.B, BSc - Buddle Findlay
1. Local government, environment & resource management, litigation and dispute resolution expert
2. Andrew advises a range of clients, including developers, network utility operators, local authorities and financiers
3. Andrew has an in-depth insight into how local authorities work, having spent 3 years as a local government in-house council, and acting for many councils
4. Member of the Resource Management Law Association & Water NZ
5. Barrister & Solicitor of the High Court of New Zealand
Learn all you need to know about how to deal with councils, the structure of the new Supercity and the Supercity’s impact on you as a property investor.
Speaker #3: JAN GALLOWAY BA Cert. Crim (Criminology) - Corinthian Management
1. Principal Corinthian Property Management
2. Over 25 years as a property manager
3. Multi-millionaire property investor
4. Managed a leading central auckland property management division
5. Auckland Property Investors Association Board Secretary
6. Multiple award winner (property management related)
Jan knows all you ever needed to know about tenancies and the issues that arise from them.
Speaker #4: MARK TRAFFORD - Owner of Renovate to Profit
1. Principal of Renovate to Profit and Maintain to Profit
2. Renovating properties for over 20 years!
3. Accomplished Property Investor
4. Regular Contributor to Property Investor Magazine
5. Sought after speaker
Mark is an excellent property investors knows everything there is to know about renovating properties having done many dozens of properties. He is an excellent project manager with unparalleled networks of quality tradespeople. Join us and learn more about creating wealth through smart renovations!
Speaker #5: GARY HEY BCom - Mortgage People
1. Owner and Director of Mortgage People, a leading Auckland based mortgage broking firm
2. Bachelor of Commerce, member of the NZ Mortgage Brokers’ Association
3. Commercial, Industrial and Residential developments advisor as well as residential investment properties financing expert
4. Sought after speaker having a background in education
The banks and other major lenders criteria are changing and it is easier to get finance for property now. Gary loves finding funding for your deals. Bring on your best questions forward and he and his team will be there to assist you.
Overview of key topics covered during the day
1. The current market cycle – using current & historic data to identify our current position & determine where, when & how to purchase your next property deal
2. LAQCs & LTCs & what it means to your investment portfolio
3. Practical strategies to increase your rent easily in the current market
4. Hot strategies for 2011 – the strategies NZ Wealth Mentor’s principals and mentoring are using to make money from NZ property today, and how you can meet your financial goals in 2011
5. Understanding the new paradigm for obtaining finance – How to get banks to lend you $$
6. Where are the best strategies to use in 2011?
7. The untold truth about US Tax Liens & Lease Options – what you must know before you ever think of investing on them.
We will discuss all the current hot topics so that you can leave the event well informed and ready to invest successfully.
2 Ticket Options
There are standard tickets priced at just $29 which don’t include lunch or any extra. The Gold Tickets however are priced at $98 and these include a delicious buffet lunch in a private room with David Whitburn and many of your presenters. You also get a portfolio review and wealth plan by NZ Wealth Mentor’s head of property mentoring and Auckland Property Investors’ Association President, David Whitburn, to help you set and reach your financial dreams.
So are you going for GOLD???
In NZ Wealth Mentor we want to make sure you get all your financial goals. If you book online before November 20th we will also include our “Financial Mastery Success Plan” in the ticket price. Financial Mastery Success Plan is designed to look at your financial situation today to build a brighter future. It retails at $175 and you will get it for free as a part of this time constrained offer (3 days to go). Make sure you don’t miss out and book your gold seat (select from the menu) for NZ Property Masterclass today.
The US Federal Reserve as expected announced that they would buy an additional $600 billion of US Treasuries, setting a variable pace of around US$75 billion of purchases per month up to June 2011, to extend the rescue package and seek to reduce unemployment and avert deflation. The US central bank kept its pledge to hold interest rates low for an “extended period.” Xerox Corporation announced they would be cutting 2,500 jobs around the time of this announcement, so there is a lot of recovery still to be had in the US.
US Federal Reserve to print US$600 billion to counter deflation and raise employment
There has been an impact on currencies markets like this as money printing challenges credibility in the perception of America’s global trading partners and money markets. In currency terms the US Dollar is unsurprisingly weaker with the ‘Aussie’ going past parity and reaching a 28 year old high of 100 Aussie cents to 100.68 US cents overnight, before closing still stronger than the US Dollar at 1 AUD to 1.0048 USD.
The New Zealand dollar surged to its highest level since 2008 after a government report showed employers added more jobs than economists estimated, boosting expectations for the central bank to raise interest rates. The Kiwi (NZ Dollar) gained a percent to 78.78 U.S. cents as from 77.99 cents in New York yesterday. It reached 78.86 cents, the most since June 2008. The kiwi also advanced 1 percent to 63.86 Yen.
Statistics New Zealand said the unemployment rate dropped to a seasonally adjusted 6.4 percent in the third quarter, compared with the median estimate of 6.7 percent in a Bloomberg survey of economists. This is a good result and has left me unchanged in my prediction that the next OCR rise will be a 0.25% rise in March 2011, and floating rates amongst major trading banks will rise by a similar amount. The NZ two year swap rate which is closely (but by no means perfectly) correlated with the 2 year fixed rate rose to 4.04% last night. So I would consider looking at the 2 and 3 year fixed rates for value right now if you don’t adopt an interest rate averaging strategy. That said I strongly believe that you should have some money floating is fantastic if you are using a facility like BNZ’s Total Money where you can pool or offset balances, or a revolving credit facility properly.
PS> I have updated my blog on Paul Henry’s inappropriate attacks to include a handwritten thank you letter I received from the Right Honourable Sir Anand Satyanand, our Governor General – thanking me for my comments and support.
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Reserve Bank of Australia Governor Glenn Stevens yesterday raised the Benchmark Rate (the equivalent to New Zealand’s Official Cash Rate) by 25 basis points to 4.75%, whilst the Melbourne Cup was on. It was the first interest rate rise in 6 months. This is interesting in that Australians already face higher interest rates, and whilst the Global Financial Crisis in mid-late 2008 did impact their housing markets, they haven’t had a recession and many experts view that Australian property is in for a very rough ride over the next year or two.
Interestingly the Commonwealth Bank of Australia (owner of ASB Bank and Sovereign in New Zealand) raised their floating rates by 0.45% (20 basis points more than the benchmark rate was raised), drawing consternation from Australian Treasurer Wayne Swann, with this is “a cynical cash grab” by an ‘arrogant’ bank. Also the Australian Dollar (Aussie) reached a new height with $1 Australian Dollar buying $1.0024 US Dollars at its overnight peak. The Aussie is forecast to go much higher against the Dollar as the US Federal Reserve is planning a second round of Quantitative Easing. They are predicted to print at least US$500 billion of money (using it to buy long-term securities). Will this buy happiness on “Main Street”, possibly but probably not. What it is more likely to do is cause the Dollar to continue to spiral down against many other currencies including the Aussie and Kiwi, and have large inflationary pressures. The announcement from the US Federal Reserve is due shortly.
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Soon Gift Duty will be a thing of the past, as it gets abolished in New Zealand on 30 September 2011
Today’s Gift Duty Announcement by the Honourable Peter Dunne
The Minister of Revenue, the Honourable Peter Dunne has just today confirmed the Government’s intention to abolish gift duty, saying the decision would be welcomed by taxpayers generally as the rules were resulting in a high level of compliance costs and were no longer raising any significant revenue.
“Earlier this year I announced the Government’s intention to remove gift duty if concerns regarding creditor protection and social assistance targeting could be addressed.
Since my announcement there has been considerable work done by officials across government to assess the concerns. This work has revealed that the protection that gift duty offers in the areas of income tax, creditors and social assistance has only ever been incidental and very limited.
Furthermore, the limited protection that gift duty offers does not outweigh the significant compliance costs, estimated at approximately $70 million per year that gift duty imposes on the private sector.
There is a broad range of other existing legislation that will provide adequate protection to mitigate the identified risks following the abolition of gift duty. Government agencies will monitor the impact of the changes and a post-implementation review will ensure there are no unintended effects,” said Mr Dunne.
The abolition of gift duty will be included in legislation to be introduced in November 2010 and will be effective from 1 October 2011.
My Interpretation
This is great news as this was a costly and time consuming task for Governments and private citizens with Trusts alike. Only 0.4% (as per Inland Revenue) of the 430,000 entities (mainly family trusts) for which gift statements were filed from 1 July 2001 and 28 May 2010 actually paid gift duty upon filing their return. This means that 99.6% of entities had strong “gifting programmes” in place and paid no gift duty at all. What a complete and utter waste of time and money.
This was a very expensive revenue stream to administer and the net revenue foregone is projected to be less than $5 million of the next 5 years from abolishing gift duty. The annual gifting chore of having to pay professionals $180 – $500 to prepare a deed of reduction of debt (ie. gift) and gift statement, will be a thing of the past for many people and as a result some general practice and trust lawyers and accountants will see reduced fees. Lets face it, this wasn’t a “productive” aspect of work for New Zealand’s economy and despite having done more than my fair share of gifting as a tax and trust lawyer, I am glad it is gone. It will be of huge administrative convenience to do one deed of reduction of debt for say $270,000, rather than having to do 10 gifts of $27,000. I act a trustee for more than 3 clients with over $1.5 million still to gift. I know that they are extremely happy this duty is being abolished. They think this is long overdue and I couldn’t agree more!
I think that this is fantastic legislation and that the Peter Dunne (United Future party) and the National party should be praised for. I look forward to reading the Bill when the legislation is tabled for reading in Parliament.
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