Author Archive

The past 8 days have been very interesting for me.  On Sunday 29th August I was walking on the new southern lanes of the Newmarket Viaduct that Transit New Zealand had opened for just a few hours.   Then after going to bed unfortunately late at 11:30pm or so, my wife and my sleep was interrupted at 2am on Monday, when she went into labour.  After one of those drives from hell with my wife having those painful contractions in the car on the swift 10minute drive into Auckland Hospital, we had great news that at 5:12am our beautiful baby girl was born – Emily, weighing 3.335kg and 54cm long (I will not use tall as she simply will not be standing for quite a while).

Newmarket Viaduct

Aucklanders reading this blog know how necessary this update is.  From Spaghetti junction going from 4 lanes into 3 was ridiculous, along with the falling debris issues from the aged structure with “concrete cancer”.  However for the non-Aucklanders reading this blog, the Newmarket Viaduct is one of the busiest stretches of motorway in New Zealand that services our nation’s economic powerhouse that is the Auckland CBD.  It was built in 1966 to link the Southern Motorway to the city, the Harbour Bridge and to Spaghetti Junction (as opposed to going up Great South Road and through Broadway in Newmarket Village itself).

Recently the bridge has come under criticism about the fact that debris flies off the viaduct to busy Newmarket below, seismic susceptibility (I wonder what would have happened had the Christchurch earthquake of 7.1 on the Richter scale hit Auckland), the bridge has been separating in sections to create big gaps and there was very little stopping space now the bridge contains the maximum amount of lanes.

In 2009 Government statistics reveal that the Newmarket Viaduct carried 161,490 vehicles per day with the split being; southbound at 83,117 VPD and 78,373 VPD for northbound.  The image below comprises a series of 5 moving renders to demonstrate how the viaduct project is happening – we are in the start of Stage 3 currently (images in this blog are with acknowledgements to Benjamin Paul, AucklandMotorways.co.nz, NZTA/Transit NZ).

I will leave you now with some photos I took from Newmarket Viaduct.  I have to say that the views of our beautiful city Auckland, are simply amazing:

View towards Sky Tower from the Newmarket Viaduct

View to Broadway, Newmarket

View North to Rangitoto Island above Remuera Road

My baby girl

I am delighted to let you know that our family has expanded to four with the arrival of baby Emily. Her brother is currently a shade jealous of her, as she gets a lot of attention, especially from Mummy, but he’s doing so well with a lot to take on board just before he turns 2 years old.

Here’s little Emily doing what she does best:

The sleep deprivation is proving a bit of a challenge, but not an insurmountable one.  I am looking forward to her being able to sleep through the night like her brother did reasonably early on – fingers crossed.  No matter though,  we are very happy to have her and the tiredness is so worthwhile when her little hand wraps partially around my finger and she looks with her dark blue eyes into mine.

Since global financial issues are important to New Zealand, it is important to keep tabs on the largest economy of them all in the United States.  One of the world’s wealthiest companies is the US Federal Reserve (no it is not Government owned like in New Zealand, Australia, United Kingdom and the vast majority of other countries).  Their chairman Ben Bernanke has huge responsibilities and has the unenviable challenge to try to resurrect the ailing US economy.  This cannot be an easy task and it must be hard for Americans to stomach the fact that it is not if but when they will be overtaken by China as the largest economy in the world.  Earlier this month China overtook Japan as the second largest economy in the world.

Last month Ben Bernanke told a congressional committee that the economy was “unusually uncertain”, however importantly he did not predict that it would fall back into recession.  Who am I to argue against Ben Bernanke on the US economy – so I am not panicking and can’t recommend that you sell your assets know.  Far from it, as there are some very good opportunities to those who have the cash to buy them.  I have seen a mentoring student purchase a commercial property at half of its CV on a vacant property, and another student buy a residential rental property at $200,000 below its CV (just over 30% below value its independent registered valuation), and there are some exciting businesses to purchase shares in with different degrees of volatility.

Then earlier this month the US Federal Reserve said it would use the proceeds from its own investments in various mortgage securities to buy longer-term US Government Treasuries.  As a result significant amounts of money will be pumped in to bolster the US economy and companies like Apple and General Electric will continue to enlarge their already massive treasure chests.

Bernanke’s four options for the US economy

At the annual Jackson Hole (Wyoming) symposium yesterday with central bankers, Bernanke said the recovery had slowed to “a pace somewhat weaker” than forecast.  He said that there are four “unconventional” options for the kickstarting of growth in the US economy.  With the US June quarter GDP growth at just 1.6%, a worsening balance of trade position, and continued high unemployment statistics, it appears that there will be a long hard road to recovery over the next couple of years for the United States of America.

Policy Option	Pro	Con
1. Quantatitive easing (buying up debts).	Worked during the crisis. Holds down long-term borrowing costs.	Hard to quantify effect, and may be less effective when markets are not under stress. Markets may worry about whether the Fed can safely exit its investments. Inflation risk.
2. Communication (promising to keep rates low for longer, or until certain conditions are met).	Should lower longer term interest rates.	Promises cannot be binding, and conditions for raising rates may be hard to pin down.
3. Paying zero interest on banks’ excess reserves at the Fed.	Interest rate cuts are well understood.	The effect on borrowing costs would be small (0.1%-0.15%). A zero rate could undermine the functioning of money markets.
4. Targetting a higher inflation rate.	Could help reverse a prolonged period of deflation (falling prices) like in Japan.	Not popular at the Fed. Makes inflation expectations more uncertain. US is not in deflation, and the risk is rather low.

What option or combination is yet to be seen.  The monetary policy intervention will continue and it has to.  Lets hope the US can recover and that this will spread onto Europe, which is not in great shape either.  As a global financial markets are facing challenging times.  There may be a positive spin-off to this bad news, if you are a borrower in New Zealand in terms of lower interest rates.  It is likely that the US medium and long term swap rates will stay at their current low rates for a significant period of time.

Last Tuesday the 10th of August 2010 I had the sincere pleasure of introducing two of Auckland’s finest sons, in the Honourable John Banks Mayor of Auckland City and Len Brown Mayor of Manukau City, to the stage for the Auckland Property Investors’ Association August Keynote Meeting – the Super City Mayoral Debate.  With Len Brown (29.6%) ever so slightly edging out John Banks (28.7%) in the latest NZ Herald – Digipoll Mayoral Survey, and Andrew Williams the North Shore City Mayor only polling a very distant 3rd at just below 4%, we have a two horse race for the battle to become the first Lord Mayor of a United Auckland.

We had 15 minutes from each of the mayoral candidates, before structured questions from the APIA Board were asked by debate facilitator Andrew King (NZPIF Vice President, best-selling author and a previous APIA President), and then we had questions from our audience of some 270 – 300 people.

The topics were broad and included questions on transport, rates, planning rules, charging water to tenants like all other utilities (telephones, broadband, power, gas, Sky TV etc).  With rates being the second or third biggest expense to most property investors in light of depreciation claims being slashed earlier this year by the Inland Revenue and Government, this is very topical.  The last thing we want to see is big rate rises for property investors.

Len Brown

Len Brown talked of a need for a unified Auckland and that our city needs a Mayor that is a builder and a uniter.  His aspiration was to build the most liveable city in the world.  It would be a place to invest that invests on all great outcomes:

• environmental sustainability and a commitment to be an ecocity
• a powerhouse of an economy
• diverse social communities

The key is to build the city on inclusiveness and on communities, fairness especially in rate setting, and that Auckland needs to regain its “mojo” (eg not building the waterfront stadium and the Queens Wharf issues for the Rugby World Cup 2011 headquartered in Auckland).

John Banks

John Banks gave a strong presentation and his answers to questions gave a strong indication that he has issues with the Auckland Regional Council, and it spending massive amounts of money on legal fees, and building a united Auckland based on:

• opportunity
• security
• prosperity

Banksie wants to make Auckland an even better place to invest your money, make a dollar, pay your taxes and pass on a legacy to your kids.  Banks also rightly said that we would be competiting with cities not nations in the future, particularly our Australian counterparts in Sydney, Melbourne and Brisbane.

Minor skirmishes

Skirmishes in the debate included Len Brown questioning the issuance of over 40,000 fines for vehicles driving in bus lanes in John Banks’ Auckland City, and John Banks trumping Len Brown’s assertion that it is appropriate to have this meeting in the under the shade of Maugakiekie (One Tree Hill) and just down the road (Puriri Drive) of the statute of Sir John Logan Campbell, the founding father of Auckland, by emphatically saying “I wear the robes Sir John Logan Campbell wore”.  There were a few very minor altercations in this debate, but the mayors were of course very well behaved and both spoke excellently and would be fine leaders of the magnificent city that is Auckland.

How the Super City is changing the Local Governance Model for Auckland?

Current Situation	Government decisions
1 regional council 3 district councils 4 city councils 30 community boards (145 members)	1 Auckland Council 20 to 30 local boards (125 – 150 members)
1 chair elected by regional council 7 mayors elected at large, within cities and districts	1 regional mayor with governance powers
13 regional councillors 96 territorial authority councillors 145 community board members	20 councillors 125 – 150 local board members
Local Electoral Act provides for Maori representation if there is community support	Local Electoral Act provides for Maori representation if there is community support
8 Long-Term Council Community Plans (LTCCP – a 10 year plan)	1 LTCCP
7 district plans	1 district plan
2 councils with plans governing waterfront and CBD	1 Waterfront Development Agency
2 rates bills per property	1 rates bill
8 rating authorities	1 rating system
3-yearly terms for elections	3-yearly terms for elections
8 IT data systems	1 IT data system
8 local transport entities	1 regional transport authority*
8 water and wastewater providers	1 water and wastewater provider – volumetric pricing
Limited alignment between central and local government on improving social well-being	Government to find better ways of aligning central and local government action on social well-being

New Zealand’s Building and Construction Minister Maurice Williamson, this afternoon announced that the Government will introduce amendments to the Building Act 2004 that will help cut red-tape and bureaucracy and make builders more accountable.

The planned changes to the Act will be phased in over time.  Some of the incentives to build it right first time to be introduced to Parliament this year include:

• explicitly stating that builders and designers are accountable for meeting Building Code requirements;
• mandatory written contracts for building work above $20,000 that set out expectations, warranties and remedies, and how any disputes will be resolved;
• requiring those doing the work to explain what, if any, financial back-up or insurance they have to remedy any faults.

The planned amendments will also see some minor, low-risk work, exempted from the need for a building consent.  Examples of such exempted work will include:

• Replacement or alteration of internal wall and floor linings and finishes in a dwelling.
• Adding lightweight stalls (eg, used at fairs and exhibitions) to the current exemption for tents and marquees.
• Fabric shade sails and associated structural supports that do not exceed 50 square metres in area (with limitations on matters such as the level on which the sails are installed and distance from a legal boundary).
• Installation, replacement or alteration of thermal insulation in existing buildings (excluding exterior walls and fire walls). This clarifies that retrofitting ceiling and underfloor insulation will not need a consent.
• Penetrations with a maximum diameter of 300mm (including associated weatherproofing, fireproofing and any other finishings) to enable the passage of pipes, cables, ducts, wires, hoses and the like through any existing building. This clarifies that for example a heat pump can be installed without needing a consent, although the wiring must be done by a registered electrician.
• Signs and associated structural supports where the sign is no more than 3 metres high and the face area of the sign does not exceed 6 square metres.
• Height restriction gantries (e.g. a vehicle height warning in a car park).
• Private playground equipment used in association with a single household where no part of the equipment extends more than 3 metres above the ground.

Mr Williamson says the Government can only make changes to the building consent process to reduce costs once it has confidence in the quality of what is being built.

The Government is proposing to introduce a ‘stepped’ approach to building consents and inspections after mid-2012 once the other improvements are in place to drive quality, including the licensing of building practitioners.

You can read the Minister’s media release and find out more on the Department of Building and Housing’s website at: www.dbh.govt.nz/buildingactreview

The Residential Tenancies Act 1986 was been amended with its third and final reading passing in Parliament yesterday (20 July 2010).  It will shortly receive the Royal Assent from the Governor General Sir Anand Satyanand to make this law.  I think that this is good legislation for residential landlords in that it brings in a new concepts of “unlawful acts”.  These unlawful acts also carry fines, and include:

• failure to leave the premises (when the tenancy is over)
• using the premises for an unlawful purpose (eg. P-lab, gang house, brothel, significant business etc)
• harassment of other tenants or neighbours
• exceeding the maximum number of persons
• abandonment of premises

Previous draft legislation included having tenant advocates (a bit of a nightmare in Australia where tenants had skilled legally trained representatives making a landlords life extremely tough), having to disclose if a property had previously been a P-lab (deemed unnecessary since a Cleansing Order and rigorous investigation was required to ensure that the house was suitable for habitation), and proposing to limit tenants liability for damage – including willful and reckless damage to 4 weeks rent.  This is great as these would have been a significant risk and skew the balance of power to tenants in the Landlord – Tenant relationship.

Full Announcement from Phil Heatley – Minister of Housing:

Changes to the Residential Tenancies Act passed by Parliament today will better meet the needs of landlords and tenants in today’s rental market, Housing Minister Phil Heatley says.

The changes to the Act include clearing up confusing processes around terminating and renewing tenancies, and introducing new financial penalties for tenants harassing neighbours of up to $2,000, or for landlords providing sub-standard housing of up to $3,000.

“These changes respond to significant change in the residential renting market since the first Act’s inception in 1986,” Mr Heatley says.

The Act has also been extended to cover boarding houses. This means that tenants who have never had any protection or certainty of week to week accommodation will now have access to the full range of tenancy services.

“Boarding house landlords will now generally be required to give tenants 28 days notice that a tenancy is being terminated. The Tenancy Tribunal will also be able to order boarding house landlords to carry out necessary repairs or maintenance,” Mr Heatley says.

“Over recent years, the private rental market has been increasingly important in housing those who choose, or need, to rent their homes for lifestyle or affordability reasons.

“It is therefore imperative the legislation governing the sector supports adequate provision of stable, good quality rental housing,” he says.

Key changes to the Act include:

• Clearer and fairer processes for terminating and renewing tenancies, including clarifying what happens when a fixed-term tenancy expires and the process for terminating a tenancy due to non-payment of rent and other breaches;
• Measures to encourage landlords and tenants to comply with their obligations under the Act;
• Enhancements to dispute resolution, including increasing the monetary jurisdiction of the Tenancy Tribunal from $12,000 to $50,000, so that most tenancy disputes can be resolved quickly, fairly and cost effectively;
• Improvements to the enforceability of Tenancy Tribunal orders.

The new laws will come into force later this year once supporting regulations have been approved and published.

For more information, visit the Department of Building and Housing website at www.dbh.govt.nz/rta-review or phone 0800 TENANCY (0800 836 262).

There’s a lot happening with interest rates at present, with many severe interest rate movements.  Also I have heard financial commentators on the radio, read in newspapers and seen on TV about how interest rates are going up, interest rates are going down and interest rates are going to stay relatively stable.  This is causing confusion amongst many borrowers.

The thing is all the commentators may be right.  This is because there is no such as the one interest rate.  For example if you went to your lender to get a loan right now, if approved you would be offered the choice of a floating or fixed rate.  If you choose a fixed rate, you would be offered the chance to fix this for 6 months, 1 year, 2 years, 3 years, 4 years, 5 years and if you are with BNZ, you have the additional choice of a 7 year fixed interest rate for maximum certainty.  For my overseas readers, we sadly do not currently offer the 10, 15, 20, 25 and 30 year fixed interest loan periods that many other developed countries and in particular the USA have.  I am hoping for a 10 year fixed interest rate in the near future – but I got told by a leading banker that this is unlikely.

Current interest rates

Leading financial website Tarawera Publishing Limited lists all interest rates from their providers.  I would highly recommend all serious property investors bookmark their interest rates page:  http://www.mortgagerates.co.nz

The average floating rate across all major banks is a smidge over 6% (when acknowledging the Westpac Choices rate discount).  The fixed rates for when you lock in a certain defined interest rate for a set period of time, have a strong yield curve currently.  That is the rates of interest you pay as the length of time you fix go up sharply.  It has to be noted that this yield curve is now flattening (visually you can see this here).  Floating rates have gone up a bit, and the longer terms rate down a lot lately.

From last Thursday to today all the major banks dropped their 2- 5 year fixed interest rates.  We saw a week or so after the Official Cash Rate was put up 0.25% by the Reserve Bank that the floating rates went up by around 0.25%.  The OCR doesn’t strictly control interest rates.  It however is highly influential on short term (variable, 6 month and 1 year fixed rates).  On longer term fixed rates (3, 4  and 5 year) it is not very influential at all.

These longer term fixed rates are driven more by the returns NZ term deposit savers expect, and thanks to the Reserve Bank’s rules in June 2009, banks are not permitted to raise as much ‘hot money’ that they got from institutional foreign lenders – this was short term money typically rolling over every 90 days.

What Borrowers Should Do?

As mentioned in previous blogs on financial topics, do not have all your borrowings on one rate. Split your borrowings across a variety of interest rate periods.  Just like I advise having different banks as your property portfolio grows (to avoid the one bank trap – thanks Kieran Trass for teaching me this in 2003), it is imperative to split your borrowings at times like this.  Consider having a property schedule like I do and all my mentoring students do, where they have the loans on their properties set out including the fixed period expiry date.  Then graph this to split your borrowing and have an interest rate averaging strategy (“IRAS”) for your borrowings.   Imagine if you have total loans of $600,000.  You split them in this way:

1. $100,000 floating at 6.00%
2. $100,000 1 year fixed at 6.50% fixed interest rate period expiring 5 July 2011
3. $100,000 2 year fixed at 6.90% fixed interest rate period expiring 5 July 2012
4. $100,000 3 year fixed at 7.30% fixed interest rate period expiring 5 July 2013
5. $100,000 4 year fixed at 7.60% fixed interest rate period expiring 5 July 2014
6. $100,000 5 year fixed at 7.80% fixed interest rate period expiring 5 July 2015

In one years time your loan when the one year fixed rolls over, ie loan 2, you fix this loan for 5 years so it expires on 5 July 2016.  That way you have 6 loans all expiring at different times.  This does give you some protection in that if interest rates move up suddenly by 3% in one year (unlikely but possible), you only suffer an average rise of 0.5% in this way (as opposed to suffering all 3% rate increase if you were floating).  Conversely if interest rates fall 3% in one year, you would only get 0.5% saving, than if all your interest rates were floating.  This IRAS also makes choosing your next interest rate period quite easy!

Now of course life isn’t that simple and you can’t expect to be able to do this exactly – I don’t.  In fact like my mentoring students who I professional advise I am overweight to loans expiring around March 2014.  I broke this IRAS when the 5 year interest rates were so fundamentally cheap in March last year – I just couldn’t help myself!  The result of this is the saving of hundreds of thousands of dollars in client wealth from the number of people I was able to convince 6.5% for 5 years was a great deal.  It wasn’t a hard sell either – the catch is you have to follow financial cycles and interest rate movements.

Issues

There is a risk of a double dip recession.  Lets face it, whilst we are out of a recession the market is hardly booming.  I see Mortgagee Sales slightly rising, the number of days to sell a house rising, more fear in the market as to house price drops owing to fears investors will sell up with reduced returns thanks to the ETS, GST rises they cannot pass on (residential rental income is excluded from GST, as are interest costs, but rates, repairs & maintenance, property management fees etc are all subject to the GST increase).

With floating rates rising and scheduled to rise over the next 18 months, their may be some benefit fixing your rates.  The 4 and 5 year rates at around 7.5% – 7.85% now are looking more attractive (they simply weren’t at 8.5% or so).

The 2 and 3 year rates at 6.74% – 7.3% are other good possible options.  No-one has a crystal ball.  I think house prices will continue their slight decline to be down around 5% for the calendar year 2010.  This is on thin volumes too.  There is no doubt that we are in a property market downturn stage of the property cycle.

Talks of a recovery are too swift.  You only need to drive around Albany, down Wairau Road, around the back of Lynnmall in New Lynn, along Marua Road and to talk to commercial property investors and agents, look at the share price and annual financial reports of the listed property trusts to see that the commercial property market is struggling.  Taking depreciation off commercial property owners (including many owner occupiers) as well as residential property investors hasn’t helped things either.

Without trying to sound too special, I did say fix your borrowings last March in my blog titled Why are you floating – FIX LONG NOW!  If you didn’t consider my opinion and thought that you could outsmart the financial markets, and were proved wrong, you may have cost yourself and your families many thousands of dollars in extra interest paid to your bank.  That is ok, everyone makes mistakes including me.  However there is little point trying to fix it by floating everything now.  Spread your risk and spread your borrowing across a variety of interest rates, floating and various fixed terms.

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The material on this website does not constitute advice and you should not rely on any material in this website to make or omit to make any decision or take or omit to take any action.

Before I jump into my next blog on New Zealand house prices, we have scored a remarkable 1-1 draw against Slovakia.  The highlight for me was the perfect Shane Smeltz cross and then a powerful Winston Reid header to score this vital goal in the World Cup, which meant that the mighty All Whites claimed New Zealand’s first ever FIFA tournament point.  I’m supporting our country in the football World Cup, and know most readers will be doing so too.  Our next game is at 2:00am Monday 21 June against Italy – thank goodness for replays and MySky.

Now it’s time to review what the market has been doing recently.  Here are the latest house prices to May 31 as reported by the Government Valuation agency, Quotable Value.  Over the past 12 months from 1 June 2009 to 31 May 2010, New Zealand’s average house sale price has gone up by 5.6% to $403,070.  This is an interesting statistic as it shows a decline in the rate of annual change, meaning last month nationwide house prices fell.

It was the first decline in the annual change since March 2009, since the rate of annual change was 6.1% to in the 12 months to April 30th.  Nationally, values are now 4.1% below the market peak of late 2007, which is also down from the 3.9% reported from the 30 April 2010 statistics.

Regional Breakdown

Region	House Price Change (1/6/09 – 31/5/10)	Average House Sale Price
Whangarei	-0.7%	$339,999
Auckland Region	8.8%	$534,639
Hamilton	1.7%	$350,722
Tauranga	0.4%	$409,376
Rotorua	-0.8%	$262,347
New Plymouth	6.9%	$346,852
Napier	6.5%	$344,934
Hastings	3.3%	$320,672
Palmerston North	6.7%	$295,685
Wellington Region	6.0%	$454,625
Nelson	6.3%	$380,313
Christchurch	6.2%	$359,597
Queenstown	0.8%	$574,636
Dunedin	4.8%	$269,848
Invercargill	5.4%	$216,938

My prediction is for a cold winter both temperature wise and house price wise.  The Reserve Bank is raising the OCR which will cause interest rates to eventually rise relatively sharply, and credit criteria with our lenders is very tough, especially when compared to the prevailing conditions of late 2003 – early 2007.  There is a lot of fear and uncertainty around still in light of the continuing global financial crisis, particularly in light of Greece being downgraded to ‘junk bond’ status and fears of defaults by large banks and countries in the Euro zone.

Where are we in the Property Cycle?

I would note that we are in the downturn phase of the property cycle, and there is still much more time to go.  Property market researcher Kieran Trass and Author of Grow Rich with the Property Cycle (whom I worked with and got a lot of advanced property investment mentoring from, in 2003 – 2004), showed me research that every property slump or downturn, laster longer than the boom immediately preceeding it.  Leading economists from ANZ National Bank Ltd – Khoon Goh and Chief Economist Cameron Bagrie have written and spoken in the past comparing the events of the last 15-20 years, including the last two property cycles.  They have predicted this downturn to last for several more quarters.  I am picking the recovery to begin in late 2012, and currently I predict that the next boom will begin in late 2013.

This will happen on the back of house prices reducing very gradually across the country over the next part of the year. Then wage inflation will help, combined with increased immigration (and indeed internal migration will continue to help Auckland), easing bank credit criteria once the global financial crisis is over, simple supply and demand with the under-building of houses (especially in Auckland where the majority of immigration is to), affordability easing in slight of slightly lower house prices & increasingly higher wages, and higher rents.

The Minister of Revenue, Peter Dunne yesterday announced that the NZ Government intends to repeal gift duty.  This is on the basis that concerns around creditor protection and social assistance targeting can be addressed.  Practically speaking this means that the typical family trust which has an own home in it, sometimes a bach and other personal or real property, will be asset protected a lot quicker.  Soon it will be quite likely to not have to draft deeds of reduction of debt and prepare gift statements to forgive $27,000 per year (per Settlor) – instead the whole amount will be forgiven in one document.

This will save the average person a lot of money in accounting and legal fees, as unfortunately most Kiwis don’t get professional structure advice before they purchase their own homes, and then they build up significant equity in them and have a larger amount to gift (as the value of their house goes up over many years) and they can run low in time to gift the money.  I would expect a 5 year stand-down or clawback period or perhaps something slightly shorter to protect creditors, and social welfare needs.

Here are the current gift duty rates in New Zealand:

From this table you can see why everyone targets $27,000 as that is the maximum “gift” allowed before gift duty is payable.

Here’s the statement from the Honorable Peter Dunne’s ministerial website:

Officials have been reviewing the gift duty rules for several months, and a strong case has emerged for repealing the rules altogether.

Gift duty was originally introduced to prevent people from circumventing the estate duty rules.  When estate duty was abolished, with effect from 1992, gift duty was retained to prevent people from gifting away large assets, where doing so may undermine the interests of creditors, minimise income tax liability or enable access to social assistance.

The use of gifting programmes ensures that gift duty is not paid in most situations.

For example, assets are sold at market value, usually to a trust, in exchange for a debt which is progressively forgiven.  This means that the vast majority of gift duty statements that Inland Revenue receives are not liable for duty.

The result is that very little revenue is being collected, but at a significant cost to Inland Revenue and to the private sector in compliance costs.

The alignment of the top personal tax rate with the trustee tax rate announced in Budget 2010 will significantly reduce the motivation to minimise tax obligations through gifting to trusts.

However, there are still some valid concerns around preventing gifting which may undermine the interests of creditors or which enables access to social assistance.

Officials have been talking to relevant government departments about these issues and possible new protection measures.

There will be further consultations over the next few months, and if gift duty is to be repealed, I intend to include it in a tax bill to be introduced in November this year,” Mr Dunne said.

Mr Dunne said that as leader of UnitedFuture he was especially pleased that gift duty looks likely to be abolished, as removing gift duty has long been UnitedFuture policy, he said.

This is a policy of UnitedFuture that I really like.  Subject to a reasonable (say 3 – 5 year) stand-down or clawback period to ensure creditors needs are not able to be compromised and social welfare/aged care benefits aren’t too easy to qualify for, then I am a huge fan of this proposal.  I look forward to updating you when this is put into a tax bill in November.

The OCR has been raised today by 0.25% to 2.75%.  This is the first movement in the OCR since 30 April 2009, and the first raise since 26 July 2007 (when it was at a massive 8.25%).  Expect floating and short-term interest rates to go up.

Here’s what Reserve Bank Governor Alan Bollard said as report on the Reserve Bank website:

The economy has entered its second year of recovery with growth becoming more broad-based.

The recovery in trading partner activity is continuing, with growth in Asia particularly strong. Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets. Against this backdrop, New Zealand’s export commodity prices have increased sharply over the past few months, boosting export incomes.

In contrast to signs of global economic recovery there has been renewed turmoil in financial markets. Currently, we expect the main impact on New Zealand to come through continuing upward pressure on the cost of funds to the banking system.

In New Zealand, growth of around 3½ percent is expected this year and next. The main drivers of this outlook are higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment. However, we expect households to remain relatively cautious, with the housing market and credit growth staying subdued. This moderate household spending contributes to some rebalancing in the economy.

Underlying CPI inflation is expected to track within the target range even as the economy expands further. That said, headline CPI inflation will be boosted temporarily by the announced increase in GST and other government-related price changes. Provided households and firms do not reflect this price spike in their wage and price-setting behaviours we do not expect a lasting impact on inflation.

“Given this outlook and as previously signalled, we have decided to begin removing some of the monetary policy stimulus that is currently in place. The further removal of stimulus will be reviewed in light of economic and financial market developments.

The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative to previous cycles.”

Leaky Buildings are an extremely topical issue at present.  There are so many home owners and investors in New Zealand that have leaky buildings, and the costs to repair can be astronomical.  Leaky building issues cause a lot of stress and there a lot of uncertainty around the issues.  As a result I couldn’t think of anyone better to answer these questions than the Managing Director of Step Up Group, Ian Holyoake.  The Step Up Group have been around a long time and have excelled nationwide in providing leaky building owners, body corporates and other interested parties with state of the art technologies, in Building Weathertightness Risk Managment, Building Inspection & Monitoring, Property Planning, Remediation and Dispute Resolution.

In light of the Leaky Homes Compensation Plan announced by the Government, and my comments in leading global newspaper, the Telegraph, I wanted to get some clarity on more of the issues surrounding leaky homes.  As a result we have the following guest blog from Ian Holyoake, answering two questions:

1. How to do the right due-diligence to prevent buying a leaky building?
2. How to fix a leaky building?

How to do the right due diligence to prevent buying a leaky building?

Let the seller provide you with what could be termed ‘proof of product’ – remember the Russell Crowe & Meg Ryan movie Proof of Life – if a seller is serious they should table openly the state of the building – why should you pay to have there building tested. What you should ask for and in this order is:

• What treatment does the framing have? Poorly treated timber is what is rots from leak events. Therefore a robust building is one with high durability protection. Regrettably treatment levels have been reducing since the late 1970’s so its hard to find well treated timber outside our old State Homes. So settle for H3 (tanalised) or highly treated boron. I have underlined ‘highly’ as this is referenced to levels like the current standard H1.2 which equate to boron concentrations of 0.4% BAE which are useful to slow down rot for around 5 years only – so if the building is more than 5 years old more information is needed. I require at least 4 samples for testing from each elevation and each floor level including studs, base plates and lintels as timber is often mix and match – timber supplies are not consistent with deliveries. Get the owner to supply these test results and if they don’t have them organize for them to be done at the owner’s expense – why should you pay for testing there home?
• Is the wood decayed? Unfortunately every building leaks so those constructed with perishable wood will already have some decay in them. The secret is finding where the damage is and then determining whether the decay warrants major cost to reconstruct. It’s not illegal to have decayed framing – but if it could collapse and cause harm then council has a duty to issue a safe and sanitary to protect the occupants. The rule is its stupid to get yourself into this situation so ask for sampling results. Samples of framing can be examined (without destruction) taken from Mdu PROBE installations under every ‘at risk location’. The at risk locations are the same places water would accumulate if the building leaked – and buildings leak where complicated details are eg decks, flashings, roof and wall connections, penetrations through claddings, internal gutters, hidden gutters, high ground lines, cracks etc so obviously the more complex the more sampling is required. An average building requires around 80 samples, so more some less. The samples should be fresh ie taken within the last year otherwise more damage could have arisen. Never never let so called experts cut or drill the cladding. If they insist get the insurer to cover the building with a leak indemnity content before they start so if it leaks in the future you are covered. After all its holes in the cladding that cause leaks. Councils often require full reclads after these holes are made. Another useful test is strength testing to establish if the framing wood is suitable for the home. One major wood supplier has been found guilty of supplying under strength timber to homes. This can result in early decay (extra sugar for fungi as wood is sapwood) and extensive cracking of claddings and sealants leading to unexpected leaks.
• Monitoring of moisture over time: Never be fooled by point in time moisture checks. No single moisture reading event is reliable – and certainly not if you are to spend your money. What we discover is summer investigations find less than 10% of winter leaks – its obvious – why would it leak in summer when its not raining. Unless the target is too good to be true (which it probably is) it’s a sucker’s deal to buy on thermal or scan results or point in time assessments. Always ask for the past 2-3 years of monitoring results – including summer and winter. It’s normally the variances that are of interest. Think of this as if you were buying a car – would you pay money if it had no dash board full of gauges. If the owner has chosen not to install monitoring it is for a very good reason – they have their head in the sand – you don’t. The simplest way to monitor is to read the permanent Mdu PROBES twice yearly. Owners who look after their buildings value will be installing monitoring – so they are available.
• Maintenance plan: This is basic sense. What you want is evidence they have conducted maintenance. This starts with a maintenance plan. If they don’t have one then the chances are they haven’t a clue on what there responsibilities are to look after the home – ie is it treated, does it have decay and what are the moisture contents. A useful maintenance plan has monitoring as its cornerstone with response actions in place should leaks occur – coupled with visual condition assessments of building products – this can be done by pre-purchase inspections – but again should be at the owners cost – why should you do their maintenance? If you are considering purchasing an apartment or unit you should request full disclosure from the bodies corporate of the maintenance plan and monitoring results. Also ask if any of the buildings have had leaks or if investigations have been carried out. Be very wary if nothing is available – it shows denial and head in the sand approach.
• Who pays to get this information? If your negotiations get bogged down and you still want to proceed I find a useful thing to do is agree with the seller before any costs are undertaken that if the tests above all come up positive you will pay but if not they will pay. That puts the onus on them to think it through. They will already be thinking – you may get a pre-purchase inspector who isn’t that good and uses point in time assessment technologies so will likely miss discovering what they fear is happening hidden behind the walls. Not every expert is trained in this and don’t have the expertise in weathertightness training – and many who claim they do want to cut holes or remove the cladding first – or apply limitations on there reports yet still charge tens of thousands.
• What is on the council file? The home may already have been repaired – or it may be listed as a damaged home or a claim under WHRS been initiated. Always seek the council property file.
• Ask the seller to disclose the history of the home. This is the representations that you are entitled to rely on. If the owner says things like ‘never leaked whilst we owned it’ then write that down as that information is useful if you do discover the building is actually a leaker after you purchase it.
• Buying at auctions is fraught with problems – you may have no recourse against the seller or the agent – and it is unlikely the seller wants disclosure of anything about their property. This is where you should think ‘buyer beware’ before you buy.

How to Fix a Leaky Building?

Fixing a leaker has become an expensive matter – mainly because the remediation industry is trying to limit there risk into the future. It’s uncertain how well leakers can be dealt with – follow the tests above – what to look for after the repairs. For example if the repair method doesn’t provide for ‘highly’ treated timber it will continue decaying. Without monitoring how can we be sure it’s been fixed – and who says so – would we trust that person or would we want some physical proof like ongoing moisture contents. All buildings leak so it’s no surprise that repaired buildings will again leak. This is one reason that repaired buildings carry the stigma even after money has been spent attempting to fix it. So the things that are important in repairing leakers are:

• Discover: Getting adequate information before you make decisions and start spending. I see too many owners agree to large capital spends after getting a WHRS report or assessments based on single point in time assessments. If your money is that easy to come by then go ahead – but investigation techniques have moved on from these old style approaches. If your building has been cut apart by one of these people we will assist you recovering costs fixing the damage they have caused. A good value assessment will include the 3 steps above – checking the treatment level, taking numerous samples (non-destructively) to examine for decay and monitoring the moisture over time. We call this the ‘discovery’ phase. Spending time on this saves money and avoids over spending. A useful thought is its better to take 100 small 1% steps than try for the single 100% improvement.
• Making a plan: By slowing the decision making down and getting the discovery phase done a professional plan with options to satisfy owners objectives can be developed to address the requirements of the Building Act (which is that occupants shall be protected from harm and the home shall be healthy) and your plans for the property. You do not have to fix leaks or remove decayed framing unless the occupant’s health and safety are under threat. What is best is to build a ‘long term maintenance plan’- we call this the ‘building lifecycle plan’ so today’s decisions can be reviewed ongoing. Where damage is minor ‘tags’ are placed on timber for future removal, or cladding improvements may be required for drying (which may involve recladding a wall – but not all walls by default) and to lessen future spend changes in design may be useful – like removing complex details that are expensive to keep in good condition.
• Involving the Council: It is always useful to involve council, so you would show them this plan. After all they have become the insurer of the defunct builder in what is called the last man standing rule. Another important aspect is it is in your interests to have that plan on council files as it becomes your disclosure document if you decide to sell in the future. Council often over step the mark and want extra things like – maybe a full reclad. If you are in time (within 10 years of build and have lodged a claim and are eligible) it’s advisable to take 2 options along. One for what is termed targeted repairs and the other a reclad. If council intimate they would not accept targeted repairs then get that in writing with councils reasons – this is useful later in the claim process. If you are being forced into spending along one option path and council has chosen to blatantly ignore reasonable consideration and process adjudicators may well award greater compensation especially for stress.
• Manager: Get an outside manager not the contractor to manage the plan. Once the plan is consented always seek an independent onsite manager to avoid the trappings of the ‘variations clauses’ that inevitably result in escalating costs. You also need an independent weathertightness expert to manage council inspections.

So what does a good plan look like? There are two types of plans emerging. Plan 1 is if you have a claim you rebuild the whole house out of the respondent’s pocket. With the new Government package we are unsure of how long this will last – and respondents are starting to wake up to this. Plan 2 is the minimum spend possible to avoid over capitalization. Most plans fall in the middle ground. Its really up to you – it’s your money. For investors the sensible plan is building the maintenance plan to its extreme so all repairs are fully tax deductible. Where not then it’s a matter of funds available. At a minimum all the building needs is for the occupants to be safe and healthy. Don’t forget that fact. Everything other than that is discretionary spending. For example a new kitchen may be more important than some minor decay in the garage that is not threatening life or limb. This is where the RotStop injection system is useful as it stops rot from getting worse. This allows you time to create an affordable and appropriate plan that you and your partner can live with.

Ian Holyoake

Managing Director – Step Up Group

I would advise all clients and readers of my blog that have leaky buildings to consider their options and to talk to experts like the Step Up Group.  They are available on www.stepupgroup.co.nz and 0800 STEP UP.