Archive for January, 2011
No surprises here that Dr Alan Bollard, the NZ Reserve Bank Governor left the official cash rate unchanged at 3.0%. He noted in question time a slight improvement for future forecasts. We need to remember that the Reserve Bank has three major functions:
- operating monetary policy to maintain price stability;
- promoting the maintenance of a sound and efficient financial system; and
- meeting the currency needs of the public.
In terms of monetary policy the overall goal is price stability, which is laid out in the Reserve Bank Act 1989 and defined and specified by a Policy Targets Agreement. Currently the Reserve Bank must keep CPI inflation between 1–3 percent, on average, over the medium term. This is a good thing on the whole as inflation is rising prices, meaning money is losing its value.
Today’s announcement:
Dr Alan Bollard said:
The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement.
Domestic economic activity was weaker than forecast through the second half of 2010. September quarter GDP declined unexpectedly, and retail spending appears to have fallen in the December quarter.
Forward indicators of activity have firmed somewhat. Trading partner activity continues to expand and New Zealand’s export commodity prices have increased further. Within New Zealand, business confidence, across a range of industries, has picked up and imports of capital equipment have grown. Furthermore, there are tentative signs that housing market activity has stabilised, after having trended lower for some months.
The recent increase in the rate of GST has caused headline CPI inflation to spike higher as expected, but underlying inflation remains comfortably inside the target band.
As noted previously, while interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing.”
My prediction
On looking at the data and the monetary policy targets of the Reserve Bank, I think that they will defer raising the OCR until September 2011. What this means for you is that you should consider floating, or if you get a good fixed interest rate discount a 1 – 3 year rate offers good value. I am an advocate of an interest rate averaging strategy, to hedge future interest rate rises (or falls).
Earlier this week I got back from holiday at the idyllic Otama Beach in the Coromandels. I had a very relaxing time, but something disturbed me in the papers. It wasn’t the article about the dangers of swimming in the ocean for fear of a shark attack.
Life was particularly stressless on Otama Beach in the Coromandels with limited cellphone coverage
Seriously there are millions of sharks in New Zealand territorial waters and there have been millions of swims and swim hours without a shark attack. I know a bit more than this than most having my second degree at a Bachelor of Science majoring in biology, where I did a number of zoology papers, including marine biology. I was lucky enough to have tuition from two amazing individuals Professors John Montgomery and Scott Baker, and being able to spend some quality of time at the University of Auckland’s Leigh Marine Laboratory (the ‘marine campus’) about 100km north of Auckland. I loved my time there and thoroughly enjoyed studying for my BSc (usually more than my law degree in fact).
More New Zealanders get hurt by getting out of their parked cars, than by shark attacks – maybe we need an article on that! Getting to the subject matter of this article and what annoyed me, was the series of articles run in the NZ Herald where tax lecturers in the University of Auckland’s commercial law department, Craig Elliffe and Chye-Ching Huang, proposed the introduction of a Capital Gains Tax. They built upon the ideas set out by columnist Fran O’Sullivan in the NZ Herald article Ten ways to beat our snowballing debt, published on 9 December 2010. Whilst I agree with most of Fran’s ideas, I didn’t like item 5 – introducing a capital gains tax or a land tax.
Elliffe and Huang wrote about how this is a great idea to help reduce Government debt and that it is fair and equitable to have a new tax, and this would not distort investment choices adversely. They were disappointingly emotive in stating that having a capital gains tax would help save New Zealand from ‘fiscal suicide’. Despite being respected academics, particularly Elliffe who has worked as a tax partner in a leading commercial law firm (Chapman Tripp), they have conveniently forgotten that New Zealand’s mountain of debt is mainly not government (or sovereign) debt. In fact New Zealand is an outstanding performer globally when compared to most other countries around the world. Below I have included a graph from visualeconomics.com so you can see where the real debt issues lie. Like Australia and China, we have low levels of public debt. The countries in the red zone (just look at Italy, Japan and Zimbabwe) of the following graphic are the ones with a debt problem. As a country we are in the safe dark grey zone with Government debt at (considerably) less than 30% of GDP.
Cut Government Spending
I don’t think for a minute that it is smart for our Government to borrow $300 million each and every week. This figure has gone up over the past year as the tax take reduces, and we have more pressures for Government spending. Whilst there have been arguments made about the ballooning of credit that we used for investment properties, farms, credit cards over the past decade, we clearly have a spending problem at the Government level. So instead of increasing Government income by raising taxes, which makes things tougher for people choosing to work and striving to get ahead, we should consider something even simpler. We should just cut Government spending. After all how prudent is it to run a household that spends a large percentage more than what it earns, and plans to do so for over 6 years? In our electoral system we voters have the chance to elect Governments and we are supposed to tell them what we want, and they as our servants (hence the term public or civil servants) carry out these tasks for us. Do we want to borrow several billions of dollars every year until 2016 and create a noose for the taxpayers now, our childrens’ and grandchildrens’ generations in terms of servicing the interest on this debt?
That is not a New Zealand I want to life in. So why we persevere with a universal pension at 65 years of age, when the statistics show that we are living much longer healthier lives in general, and that we can’t afford to keep funding it is beyond me, but for one thing – fear of being turfed out of Government in this MMP consensus style of politics with a very short 3 year electoral life cycle.
How else can we cut Government spending? Let me give you just a few of my ideas to explore further as this is already a long blog:
- Cut the number of MPs down to around 80 people
- Cut MPs perks and benefits
- Cut the entourage MPs have
- Change the Electoral Act to have a longer term of Government (4 or 5 years) to encourage longer term thinking
- Dispose of MMP and its costly consensus based politics (foreshore and seabed anyone?)
- Reduce central government bureaucracy
- Reduce local government bureaucracy (including the sheer number of civil servants and focus on customers needs, not council’s needs)
- Sell non-core Government assets that have a poor return (on asset value – eg. Power Companies, Accident Compensation Corporation)
- Make the benefit system a hand up not a hand-out (remove the ability to choose whether you work or not)
- Question the doctors who certify people (including a past tenant) as medically unable to work, except they can lift kegs of beer with their “severe back injuries” and go fishing, and put an end to those vast numbers of people rorting the costly invalid’s benefit (note the sickness benefit is the temporary and short term one)
- Raise the tax on cigarettes so they cost at least $25 per packet (that will stop a great number of smokers and therefore save a lot of money on our pressured healthcare system)
- Ditch Working For Families
- Cut the silly subsidies (did billionaire Sir Michael Fay’s daughter need a $50,000 NZ on Air grant?, revisit the SuperGold card free trips to Waiheke Island subsidy, having TVNZ + TV3 + Maori TV bid all subsidised is rather ridiculous and put the bid prices up for the International Rugby Board without any additional benefits to NZ taxpayers – we could watch private broadcasters TV3 for free or even pay for the Sky Sport service for 2 months)
- Cut spending on tertiary education (but maintain the student loan scheme)
- Charge interest on student loans
- Don’t let people leave NZ until they have paid off their student loan (as chances are you will not get it all back)
No More New Taxes
We need another tax, like Rafael Nadal (world number 1 and holder of 9 grand slams at just 24 years of age) needs to be told how to play tennis. The idea of a new tax really offends me. It smacks of arrogance and a neanderthal like ‘big Government is good’ mentality without really thinking about it. Do we really want to live in a country that seeks to strongly impact on an individuals liberties and intrude further on their personal freedoms? Do we want to run the risk of more good Kiwis going overseas?
Lets encourage and praise those that want to make a better life for themselves and not be dependent on the Government for hand outs. Lets salute those patriots of New Zealand who own assets and contribute from paying for returns on those assets (eg term deposit holders in taxes on interest income; rental property owners in taxes on rental income and land rates; home and secondary property owners who pay land rates; share owners/managed funds/Kiwisaver funds who pay taxes on dividends etc).
I want to live in a New Zealand that rewards those who receive income, pay tax on this income and don’t spend all of their net income, so they have this money left over to built their asset base. That is after all how I like thousands of others of New Zealanders have built our property investment portfolio and retirement nest egg. It is a simple fact of life that many older New Zealanders don’t want to or can’t manage or don’t want the additional hassle of having ownership of their rental properties as the move into their 70s, 80s and 90s, so they sell them. Sometimes proceeds are used to pay down or pay off debt, at other times term deposits are created. Some even invest in high yielding shares. Again these asset owners are making income which is taxable, to help Governments of the day, and they are far more self-sufficient than most Kiwis that own no assets. So why is punishing these people with a capital gains tax a good idea?
Impact on Housing New Zealand?
Also if there was a capital gains tax in New Zealand, I wonder how many people would invest in Australia (that has a Capital Gains Tax with some exemptions). Australian cities and towns have a higher capital growth rate than that of New Zealand over the years and they have a higher population growth forecasts than other New Zealand cities (apart from our financial hub Auckland).
With New Zealanders investing in Australia, how much pressure would this put on Housing New Zealand to borrow more money to buy houses for our nations poorest individuals? This social aspect of property investment is an invaluable one and is often overlooked. It has not been taken into account by Elliffe and Huang again either.
Raising Government income by its own means?
If it was not politically achievable to cut Government spending that is disappointing. However we could always have fun like other Governments are doing with interfering with money supply, eg. quantitative easing (money printing) or do what we have already done and get our Reserve Bank back into trading the New Zealand Dollar to suppress it to help our exporters for an export led recovery, and to make billions of dollars in FX gains. Baring disaster there will be pressure in 2011 for the Pound (GBP) to hit 0.5000 vs the NZD, and for the US Dollar (USD) to hit 0.8000. The Reserve Bank can buy some of these currencies when our dollar is high against them, and sell them as it gets low. Other countries do this too – why can’t we? New Zealand needs a capital gains tax as much as we need the plague to strike us.
Wishing all my blog readers an extremely happy new year, as we say goodbye to 2010 and welcome in 2011. The fireworks from three levels up Auckland’s mighty Sky Tower and on two barges in our beautiful Waitemata Harbour lit up the Auckland night sky for 10 minutes. It was an amazing display and a fabulous way to bring in the new year.
Looking back at 2010
This was a year with many highlights. On the sports field there were many magical moments, the property market slid along, and a lot of things happened to many people, and a lot of people made things happen.
Sporting Highlights
I loved Brendan McCullum’s century against Australia in the second T20 cricket international in Christchurch. He scored 116 runs (not out) in 56 balls in an innings laced with boundaries (he scored eight 6s and twelve 4s) including his famous McScoops where he scooped deliveries bowled at over 150kph over the wicket-keepers head for 4s and 6s. It was a stunning innings for its brutality, effectiveness and entertainment. Amazingly Australia equalled our score (largely thanks to Cameron White’s 64 unbeaten runs off 26 balls) then Tim Southee bowled an amazing super over with just 6 runs scored, that Martin Guptill and Brendan McCullum got in three balls to give us the win. The All Whites were sublime in the Football World Cup ending the tournament as the only unbeaten team and holding 2007 Champions Italy to a 1- 1 draw, leading them for a while after a superb Shane Smeltz goal. In rugby union the All Blacks had a fantastic season winning the Grand Slam (by beating England, Ireland, Scotland and Wales) and going through the Tri Nations unbeaten. We only lost one meaningless test against Australia in Hong Kong when we already had the Bledisloe Cup in the bag. It is looking good for the Rugby World Cup.
"McScoop" by Brendan McCullum in a T20 international, All Whites at the Football World Cup, All Blacks trouncing Australia again
Major Events
The Christchurch Earthquake of Saturday 4 September 2010 and numerous aftershocks were a major event to hit New Zealand, along with the Pike River coal mine tragedy which resulted in the loss of 29 lives, and the Pike River Coal Company being put into receivership which hurt the West Coast economy hard.
In politics, Conservative party leader David Cameron was elected as the new Prime Minister of the United Kingdom, and is charged with changing their unaffordable welfare state into a leaner and meaner economy that doesn’t rely on borrowing from overseas to fund current needs. For most property investors, the year was not the most interesting one. The 20 May 2010 budget announcement to take depreciation on building structure away from 1 April 2011 onwards, and in April the Inland Revenue Interpretation Statement IS10/01 which deemed various items that were depreciated as separate assets by a vast number of investors now being treated as building structure (tiles, vinyl flooring etc), were not well received. Otherwise the year in property was not exciting with interest rates barely changing (longer term fixed rates came down a bit and shorter term rates went up a little), in general rents crept up a bit, and values rose slightly. On a personal note my grandmother passed away just short of her 92nd birthday, and my second child Emily was born this year – her birth was the highlight of my year!
Other highlights were my visits and presentations to events in Malaysia, England and Australia, and becoming the President of the Auckland Property Investors’ Association in June.
My predictions for 2011
More of the same is expected for 2011, although I believe that towards the end of this year rents will boom in some of the most desirable areas of Auckland. One of the very best events of the year will be the Kevin Green Wealth Systems weekend. Kevin was featured on the BBC Secret Millionaire series has around a NZ$80 million property portfolio and is coming to Auckland, New Zealand on the 16th and 17th of April. The All Blacks will win the World Cup and the super talented Rafael Nadal will win the French Open and two more tennis grand slams this year.
Make sure that you position yourself to make 2011 your best year yet!