Archive for November, 2011

ASB have just offered some very well priced interest rates for 2 and 3 year fixed terms if the loan is drawn down prior to 11 December 2011:

• 2 year fixed rate = 5.80% (usually 6.00%)
• 3 year fixed rate = 5.95% (usually 6.30%)

With the results of the election out, I am very happy to see that there will be no introduction of a Capital Gains Tax for property and business owners, as well as no ring-fencing of tax losses brought in for the tens of thousands of property investors that make tax losses on their portfolios.

These were an important part of Labour’s Own Our Future policy.  Not only did the majority of voters reject them on Saturday with Labour’s lowest polling in their 95 year long history, but Labour’s campaign strategy team (led by Trevor Mallard) pulled any mention of these for unpopularity reasons in the leaders’ debates, and Phil Goff focused on stopping asset sales instead.

My take on introducing CGT is that if it wasn’t political suicide why then didn’t Helen Clark and Michael Cullen implement them in their 9 years of Government, particularly after Labour crushed a weakened Bill English led National Party in 2002 (National got just under 21% of the party vote back then).

 

Capital Gains Tax is a poor policy that “would lead to hoarding of property, would take a long time to have any effect and would discourage property investment and push up rents”.

Ring-fencing tax losses isn’t political suicide as most people don’t understand it – however this is the very policy Bob Hawke (PM) and Paul Keating (Treasurer) implemented for the Australian Labour party in 1985, only to rescind it 2 years later in face of their supporters backlashing against higher rents.

Labour will need to learn that you can’t legislate into prosperity half the population, by striving to legislate the ‘rich’ out of prosperity, hence the attempts at demonising John Key as a merchant banker with no social conscience and envious attacks based on his wealth.  Looking at the National led Government, with support from ACT (John Banks) and United Future (Peter Dunne) guaranteed, there are 62 votes, with a maximum of 59 votes against them.

It is likely the Maori party (3 seats – Turia, Sharples and Flavell) will however play an important part in Government to give 65 seats for, 56 against, as National need to look at multiple coalition partners to retain power in the 2014 election.  As a result the policies of the centre-right including the status quo of having no Capital Gains Tax and no ring-fencing of tax losses will remain in place.

Lets look at what this means for property investors.

Impact on Property Investors’ Cashflow

Slightly Positive - there will be cashflow gains from a stronger economy that doesn’t take on as much debt as Labour would for its increased Government spending campaign. After the very dark clouds over Europe move away, business confidence will be restored, hiring will begin and with National’s more friendly employment policies (eg. not raising the minimum wage to further punish elementary or semi-skilled younger workers), there should be higher employment.

This in turn will lead to steady rent increases and hopefully a reduction in the amount of cases going to the Tenancy Tribunal – The Department of Building and Housing tell me approximately 75% of cases they hear are for rent arrears.

Auckland’s constrained housing supply with the large costs of development and urban limit will be maintained. Perhaps the most entertaining thing would be to have John Banks as Minister of Local Government, or Minister for Auckland to keep an eye on the Supercity Praetor Len Brown.

Almost perversely Labour’s ring-fencing of tax losses policy would have meant a number of investors would have sold their properties, and this would have reduced supply increasing rents even further. This would have been a nice cashflow transfer payment as the middle and lower income New Zealanders would have been given transfer payments (increased benefits, accommodation supplements and such like). A lot of property investors love Labour – just look at how well the property market did in 2002 – 2007.

The most important thing though is not to have NZ given a Sovereign credit downgrade again, as this would push up interest rates and restrict access to credit that help underpin property as an excellent investment choice for many.

This means the Government will have to look closely at borrowings, and I believe have to revisit the retirement age of 65, which is simply too early in this day and age.  It was fine when implemented in 1898, but in 2011 people live a lot longer with medical, pharamaceutical, healthcare and diet advances and a more sedentary lifestyle with lower rates of smoking (both my grandmothers were in their 90s when they died).

Other good news is that the Tenancy Tribunal will be less busy and have shorter wait times with redirection of Government transfer payments (benefits and accommodation supplements), so they are paid directly to landlords.

Since Housing New Zealand has limited funds, many Landlords take up the slack and invest in lower value areas providing a kind of social housing service to tenants. It is great to be paid by the Government who are generally far more reliable than individual low income tenants. Up until now this has been up to the discretion of individual WINZ case managers. From speaking with many other APIA members who hold a number of properties, tenants couldn’t say the landlord wanted the rent direct credited, the best way was for the tenant to say something like: “I struggle in paying my rent, so would really appreciate you helping me out by paying my Landlord directly”.  Some Tenancy Tribunal waiting times for a hearing have been unacceptably high – so this will be a welcome respite.

Impact on Property Investors’ Equity

Neutral - The status quo is being maintained and other market drivers are more at play.  Capital Gains Tax and ring-fencing of tax losses would have reduced house prices, as investors sold off properties because of the tax impacts.  This would in the long-term equal out, but not without short and medium term pain.  I think the National Party should have said that if CGT were introduced that they would rescind it when they returned to power as it is not part of a more aspirational and brighter future.  The real equity gains come from another boom in a property cycle.  That is not anytime soon.  However a recovery is already underway in some parts of Auckland, particularly in the higher decile areas led by home-owners and immigrants into Auckland.

Final thoughts on the election

Whilst I still prefer a four year election cycle to better encourage longer term thinking, we have a three year cycle and the popularity contest means Labour have a lot of work to do to win the 2014 election, including getting a new leader more palatable to the country and to move that party towards the right to get votes off National and NZ First.  The poorly worded and overly confusing voting system question for the referendum should have simply asked which voting system do you prefer and listed 4 or 5 choices.

Some polls were remarkably accurate, others didn’t fare so well.  John Key’s “show me the money” line to Phil Goff on how much revenue CGT will bring in was a highlight of the campaign, and the poorly handled teagate incident at Urban Cafe in Carlton Gore Road, Newmarket was a lowlight.  It also brought back Winston Peters and Andrew Williams who some in the media have affectionately termed the “leaky mayor”.  It will be interesting to see the impact that NZ First have in Parliament.

The recovery of our great nation’s economy is what we are striving for.  The economy underpins our housing market, not the other way around despite what others may tell you.  When our economy is performing strongly, there is good money to be made in being an accommodation service provider.  Congratulations to all those elected MPs, to National on winning another election, the Green party for getting their highest party vote ever and to NZ First for returning from the dead.  All the best to Phil Goff and Don Brash for the future as they step down from the leadership of their parties, and best wishes to their replacements.  Now we have voted in a Government and they will try to support and improve the system and framework we have to live our lives – the hard work is now up to us to live and improve our lives.

Disclaimer: All information provided in this blog is provided on a best-endeavours basis, and is generic information. It doesn’t constitute financial, legal, accounting, taxation, building or any other advice. The author encourages all readers to obtain the appropriate financial, legal, accounting, taxation, building or any other advice from a suitably skilled professional before making any decisions that could impact you financially.

We have a general election in a week and half’s time and I want to do into further depth than my contribution to the Herald on Sunday article.  The major policies are the introduction of Capital Gains Tax (CGT) and amending the income tax laws to ring-fence tax losses (ie. prevent losses from rental properties being offset against personally derived income).

Basically the parties and their policies with likely impacts on rents and house prices are:

National Party

• Not going to implement a CGT
• No plans to implement ring-fencing of tax losses
• Minister of Housing the Honourable Phil Heatley is on record as saying Government analysis is that rents will rise if a CGT is introduced.

National party’s likely impact on the Property market if re-elected

• No impact to mildly positive.

Labour Party

• Will implement a CGT at 15% on all rental properties, holiday homes and also owner-occupied homes to the proportion it is used as a home-office
• Will introduce legislation to ring-fence tax losses on rental properties

Labour party’s likely impact on the Property market if elected

• Significant impact to rents rising, house prices will go down a bit (not a lot as home-owners are approximately 2/3 of the market in number and even higher by value).

ACT Party

• Not going to implement a CGT
• No plans to implement ring-fencing of tax losses

ACT party’s likely impact on the Property market if in a position of power

• No impact or mildly positive

Green Party

• Will implement a CGT at 15% on all rental properties, holiday homes and also owner-occupied homes to the proportion it is used as a home-office
• Will introduce legislation to ring-fence tax losses on rental properties
• Will introduce compulsory rating of home’s energy performance (HERS scheme) so older homes like many rental properties will get hit with low ratings that must be advertised to tenants and home-owners alike, creating a new industry of assessors, and an eco-insulation obsession.

Green party’s likely impact on the Property market if in a position of power

• Rents will go-up, house prices down.

NZ First

A bit sketchy on policy details from my review of their website: www.nzfirst.org.nz.  I could see nothing on CGT or ring-fencing, so have assumed the status quo.  They are however not immigrant friendly and in the research I did on my book Invest and Prosper with Property net migration figures are very well correlated the house price growth.  With Auckland being a large city of nearly 1.5 million people that is built on migration, this would harm Auckland house prices the most.

• No plans to introduce a CGT
• No plans to introduce legislation to ring-fence tax losses on rental properties
• Anti-immigration stance will hurt rental and house-price growth

NZ First party’s likely impact on the Property market if in a position of power

• Slightly negative owing to their immigration policies

Maori Party

• No plans to introduce a CGT
• No plans to introduce legislation to ring-fence tax losses on rental properties

The Maori party’s likely impact on the Property market if in a position of power

• None to slightly positive

Other Parties

Invest and Prosper with Property in the media

Invest and Prosper with Property has now hit best-seller status and I have been delighted with some of the reviews.  I have helped contribute to a very useful article in this month’s Consumer magazine, which mentionned the book, but the leading magazine for property investors, New Zealand Property Investor was even better with me contributing to the magazine with one of the best deals I did (I still hold this today), and a great book review from experienced book critic Margie Macalister.

NZ Property Investor Magazine – Book of the Month:

Here are some excerpts from the book review by NZ Property Investor Magazine:

He has written a comprehensive text that that will be invaluable to those starting off in property investment or ready to take their investing to the next level.  Because it is the first property investing book covering the changes introduced in the 2010 Budget it will also help the most experienced investors trying to come to grips with the changed landscape.

This is a sensible book full of information to help you through the highs and lows of being a property investor.  As well as showign you how to be successful there are cautionary words to prevent you derailing your success by throwing away the rule book once you get a first taste of success.

You could buy a book on property management, a book on investing strategies and a book on mortgages and finance but you don’t need to; it’s all in here.”

So if you haven’t bought your copy of the book to add or start your property investment library yet, you must do so.  It is $37.99 with the leading property bookstore: Intelligent Investor.