So why are the long term fixed borrowing rates so much higher than shorter term rates at present?

5 reasons why there is such a difference now:

1. OCR doesn’t correlate well with long-term interest rates

2. Risk premium for OCR rises

3. Deposit rates:

Statistics NZ Population Projections to 2031

Statistics New Zealand have just released their population predictions out until 2031, 21 years away.  The nation’s economic hub Auckland, is projected to provide for 60% of our country’s population growth and number 1,940,000 people.  I am very excited by this as it doesn’t take a tax lawyer to work out that these nearly 2 million will need houses.  The 2006 census showed that Auckland had 1.37 million residents and Auckland is thought to have just over 1.4 million residents currently.  This means over the next 21 years Auckland will have 570,000 more people and need 211,000 more houses (assuming a 2.7 people per household ratio).  Around 2/3 of this increase is natural (from births exceeding deaths) and the remainder is from migration internally inside New Zealand to our country’s best city, or externally from overseas.  What a great time to be a property investor!

Consent issuance is already lagging in Auckland, some skilled tradespeople are going for better wages in Australia, where there is lower unemployment too.  However

North vs South Island

The population of the North Island is projected to increase by an average of 0.9 percent a year between 2006 and 2031, from 3.19 million to 4.00 million.  Seventy percent of this growth will be in the Auckland region with an increase of 1.4 percent a year.  The remainder of the North Island is projected to grow by an average of 0.5 percent a year during this period.  By 2031, the North Island is projected to be home to 78 percent of New Zealand’s population, compared with 76 percent in 2006.

Aging Population

Mortality

Enjoy the 20/20 Cricket versus Australia tonight and Sunday

PRESIDENT’S REPORT FEBRUARY 2010

Happy New Year and Decade everyone. We trust your are all enjoying another beautiful Auckland summer and are back into the groove. The Auckland Property Investors’ Association (APIA) has a great line-up of speakers for you again this year, and we are planning a special seminar for May this year too, that will be highly topical and popular. We had a large February Keynote meeting and an outstanding presentation with Dean Edgerton, Director of Markets from ANZ National Bank Limited. Dean heads the dealing room of New Zealand’s largest financial institution and was able to shed light on interest rates and their likely direction, and cover why long-term interests are so much higher than floating and shorter term fixed rates.

Market Review

It felt like 2009 went quite quickly, and it certainly was an interesting year for property investors. For Auckland properties we saw rents increase healthily in 2009, particularly in the mid-high socio-economic areas, yet some areas were hit hard by unemployment and towards the end of 2009 a tougher approach by Work and Income New Zealand. Our property values, recovered nicely from the doldrums of 2008. Whilst history provides no guarantee of the future, it can show trends and give strong indication of future direction. So lets take a look back at the decade to see what happened to house prices. In December 1999 the median sale price in Auckland was $235,000, and we closed out the ‘noughties’ decade in December 2009 with our city’s median sale price being $476,500. This represents a 103% increase in capital growth, or an average annual capital growth rate of 7% across the region as a whole. Over the decade the values of residential properties (this excludes residential sections and commercial properties) traded in the Auckland region (through real estate agents) was a massive $125 billion dollars.

So you can see property was a great investment over the decade, and the Auckland Property Investors’ Association was proud to assist you in your decision to take responsibility to become financially free, and to help make decisions that will assist you plan your own retirement – and in many cases we hope an early one! We look forward to servicing your needs and providing a platform for networking with you for another decade.

Tax – The Topical Issue

Normally tax is perceived to be pretty dry and boring, and an area reserved for mega geeks in grey suits with white shirts and black suitcases with packed lunch where they toddle off to work each day, come home, read some legislation, case law or tax information bulletins and then they go back to work in their grey suit, white shirt with their packed lunch and repeat this every day. I know as I used to be a full time tax lawyer working at Big 4 Chartered Accountancy firm Deloitte and then at leading law firm Russell McVeagh, before I saw light of becoming a property investor and immersing myself into the market. However times have changed and tax is cool once again. I can say to my many friends who are tax lawyers and accountants, that tax is very interesting, and highly topical. For many APIA members 2008 and 2009 were tough years. Some members have sadly even hit the wall being smashed in a high tide of debt as the property price wave crashed down upon them. Other members with lower gearing and sound management systems however thrived and been able to put their rents up and found respite with interest rates coming down from cyclical highs and property values recovering last year.

There was keen interest in the property market this summer, but this changes when the Tax Working Group published its findings on 20 January 2010. The relevant recommendations to property investors are:

1) Raising GST to 15% or 17.5%
2) Imposing a Capital Gains Tax on all properties, or excluding owner-occupied housing
3) Imposing a Land Tax at 0.5% of the property’s land value
4) Imposing a Tax on the net equity investors have on their properties (assuming a 6% return on equity invested, and investors would ignore rental income and all expenses, as only the equity invested is relevant) – thanks sharemarket CEOs/fund managers with vested interests recommending this market killer.
5) Removing depreication on buildings
6) Removing loading on new assets
7) Bringing the top personal tax rates down, to be the same as the company and trust tax rates (ideally all at 30%, with perhaps the company tax rate being even lower depending on what Australia do)

These recommendations were praised by the usual suspects that despise residential property investment including the Gareth Morgan (Fund Manager of Gareth Morgan Kiwisaver & Economist), Mark Weldon (NZX CEO & chief cheerleader of NZ’s long suffering sharemarket), Bernard Hickey (interest.co.nz) and the Green Party.

However we had mostly good news last week with Prime Minister John Key’s opening address to NZ Parliament stating:

we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,”

So it appears that there will no land tax, no CGT or that ridiculous and market annihilating risk-free return method imposed on us. However Key said that the Government will “be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget.”

What this means for investors:

It is reasonably good news now with no Capital Gains Tax, Land Tax or Risk-Free Return Method being applied. But still the Government thinks “there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid – in fact the government is actually losing revenue in this sector.”

We would vehemently argue against this as only in 2 of the past 28 years did the Government make a net loss on residential property investment. The 2008 income year was used by the Tax Working Group and that year had cyclically high interest rates (floating rates all above 10%, most fixed rates exceeding 9%) and peak prices in the cycle. Unfortunately the Government do not seem to understand this and are not listening to us. It seems that our depreciation claims will be slashed. It is likely that there will be a 0% rate of depreciation for building structure (residential and commercial), just like land! This is a little absurd. We have members with leaky buildings in their portfolio – try telling them that their property has not depreciated! It is likely that the 20% loading for new assets will not be there either. So we need to wait until May’s budget to find out exactly what is happening. I think members should wait and make an informed decision and not make a hasty decision that is later to be regretted to sell their property.

If you are not impressed about these changes, remember the politicians are their to serve us, and they need our votes next year. So consider lobbying to protect your rights. Do what some other members and I are doing and contacting your local MP. Otherwise email your own personal letter to Prime Minister John Key, Finance Minister Bill English or Revenue Minister Peter Dunne.

David Whitburn LL.B BSc
Vice President
Auckland Property Investors’ Association (Incorporated)

we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,”

The government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid – in fact the government is actually losing revenue in this sector,”

We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget.”

We have to wait and see what happens in May next.  However now is clearly not the time for making rash decisions like selling your long term buy & hold properties.

It’s official, New Zealand has has worst unemployment rate for over 10 years.  Here’s a graph of NZ’s employment vs unemployment from Statistics NZ figures for the past 2 decades:

So whilst the recession is over, unemployment is still rising.  New Zealand now has 168,000 people unemployed.  It seems that a significant number of our unemployed people are new to entering the workforce (finishing secondary or tertiary studies).  Our Prime Minister John Key stated to the NZ Herald that

“unemployment was always a lagging indicator, he said. That means it is slow to reflect downturns and upturns in the economy. The reality is the international economy has been weak and New Zealanders are concerned about their jobs so they are spending a little bit less.”

In addition those toughest hit were young people 18 – 24 years of age with 18.4%, Maori people 15.4% unemployment, and Pacific Island People at 14% unemployment.  These figures compare with just 4.6% of NZ European’s being unemployed. If you think New Zealand is doing it tough spare a thought for Spain’s youth with over 40% unemployment there, which beats Lithuania’s current predicament.  Spain’s unemployed number nearly the entire population of New Zealand, and they are close on 20% unemployment.  At least Spain can take some comfort in arguably being the world’s greatest sporting nation with its top ranked and European Champion winning National soccer team, the best soccer club in the world in Barcelona FC, it’s tennis players (Rafael Nadal, Fernando Verdasco, Tommy Robredo, David Ferrer, Juan Carlos Ferrero, Nicholas Almagro, Albert Montanes, Maria Jose Martinez Sanchez, Anabel Medina Garrigues, Carla Suarez Navarro etc), its Formula One Drivers, strong volleyball, basketball, hockey, atheltics etc.

The Victoria University of Wellington Tax Working Group’s (“TWG”) Report has got much media attention, whether on Television, newspaper, radio or the internet.  The report is interesting and whilst I admire the aims of striving to provide a “fairer” tax system, with a consistent top tax rate amongst companies, trusts, PIEs and individuals, there are some gaping holes in it.

Firstly here are the estimated costings of what the TWG has proposed:

The Reserve Bank Governor, Dr Alan Bollard has just announced that the Official Cash Rate (“OCR”) is to remain unchanged at 2.50%.  This move was widely expected by economists.  On discussions with my business banking contacts they say that they have already factored in a 0.5% increase into fixed rates by 30 June of this year.

Dr Bollard’s press statement interestingly said that:

the New Zealand economy continues to recover…

The economy is being assisted by both monetary and fiscal policy support…

If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010.”

As a result I predict that the major banks will not change their floating rates, but perhaps edge up their 1 – 3 year rates a little bit further.  The floating rates will rise when the OCR rises.  I predict that the OCR will stay unchanged on March 11, April 29, but then rise by 0.25% on 10 June 2010.

MARGARET WARREN

(10 February 1918 to 21 January 2010)

After nearly 92 years of a fantastic life, my Grandmother passed away last Thursday.  She was not just a grandmother but a great friend too, someone I lived just a 6 or so minute drive away from, and a real fighter with so much love for her family and her many friends.  We could all do a lot by following in her footsteps and holding true to core values and principles of love, honour, integrity, duty and respect.

Here is my eulogy that I delivered at the All Saints Chapel of Purewa Cemetary and Crematorium in Meadowbank, Auckland this morning.  It is not one of sadness, but one of remembrance:

Today is our chance to say goodbye to a truly special lady.  Granny brightened our lives, and was truly blessed to be granted a full life. Granny was an amazing lady, with so much love for her family and friends.  I never heard her complain or whinge, right up to 2 hours before her peaceful death.  That was when I last spoke with her, to get her shopping list for the week, with Mum and Dad away in Melbourne.  Even then she was asking how Liam was, and what Bridget and I were doing for the day.

My sister Sarah and I loved being able to walk just a couple of hundred metres from Cornwall Park Primary School to see Granny and Granddad at Maungakiekie Avenue to play on their tennis court with them, or in their beautiful garden; to go to Ngaiwi Street in Orakei to throw a ball around, as I did with Grandad just before he died in May 1991.  I will always treasure the memories of her cooking, the delicious chocolate fudge, self-saucing puddings, shepherds pies, I had with her  - she was an outstanding cook.

Granny was so very excited about Sarah’s engagement to James. She was keenly awaiting their June 19th arrival back to Auckland for good, and their March 2011 wedding. Granny and I had just spoken about how great Sarah was at sending her postcards pretty much every week. Granny had amassed a beautiful collection from most of the 80 or so countries that Sarah had visited since she goes travelling most weekends, that gave her so much pleasure and joy.

I could always visit and talk to Granny about sport – she always kept up with netball, rugby and cricket results – and I enjoyed having her over sometimes to watch our Auckland netball and rugby teams, on my big screen TV so she could actually see the ball! She was very fond of her great-grandson Liam, even when he ate her ornaments and leaves off trees in her garden!

With Granny passing away a special bit of my life goes. I will always cherish her memories of the past, including what our magnificient city used to be like, her childhood, going to Waiheke Island in 9 different decades, all the special times with Granddad, and her friends both here today and those she will now join in heaven.

I hope today that we can set aside the sadness and instead celebrate all that Granny was, all that she did, and all that she lived for.

I love you Granny, I always will, and I miss you so much already.

Finally to remember yet another extremely happy time (of which there were so very many); here’s a photo of Granny at Bridget and my March 2007 wedding:

The Tax Working Group (TWG) reported their findings yesterday afternoon (20/1/2010) at:  http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf

Summary of the TWG’s findings

The main recommendations in the report are to:

1. Align the company, trust, portfolio investment entity and top personal income taxation rates (to 30%)
2. Increase GST to 15% (but provide tax incentives to those on lower incomes)
3. No exemptions to GST (keep its broad application)
4. Make NZ’s company tax rate competitive with Australia (ideally lower than that of Australia)
5. Bring in more taxes to “broaden the tax base”
6. Not to implement a Capital Gains Tax (which Inland Revenue said was notoriously hard and inefficient to administer)
7. Strongly consider bringing in a tax on equity invested in property – “risk-free rate of return method” (as property is an “unproductive investment” according to the TWG, and we need to invest more in the NZ sharemarket, managed funds and in term deposits).
8. Consider removing the 20% depreciation loading on new plant and equipment (eg new curtains, appliances, carpet on your rental property would no longer gets a 20% loading to the depreciation rate)
9. Consider removing tax depreciation on buildings (building structure) on rental properties if empirical evidence shows that they don’t depreciate in value
10. Change the thin capitalisation rules by lowering the safe harbour threshold to 60% from 75%, to minimise interest expense costs to offshore parents companies
11. Keep the imputation credit system (for company dividends)
12. Reducing Government (over) spending was not looked at by the TWG

What is the TWG?

The TWG is a group of corporate tax practitioners, academics, businesspeople, and high ranking Inland Revenue and Treasury officials, that was established by Victoria University’s Centre of Accounting Governance and Taxation Research.  Whilst Bill English (Minister of Finance) and Peter Dunne (Minister of Revenue) didn’t actually request that this group be formed, they were supportive of it.

They held 6 sessions from June 2009 to December 2009.

My initial thoughts

• There was no consideration given to reducing Government expenditure.  We are bleeding over $200 million a week ($10 billion per year) by New Zealand spending more than we earn.  As part of a decent civil society we want to provide a roof over every New Zealanders’ head that wants it.  This is Housing New Zealand’s role – they need private landlords to house the poorest Kiwis.
• There was no-one from the New Zealand Property Investors’ Federation (NZPIF), Property Council or gigantic commercial property owner (like Goodman Property or AMP) to represent property investors’ interest.
• Martin Evans NZPIF President and Andrew King NZPIF Vice President were charged $200 each to attend the last session!  Others including media and managed fund observations were not charged this.
• It appears that there was an orchestrated attack on property investors, with them not there to speak for themselves.

I will research more, do a summary table of what the TWG suggests and then read the full report (73 pages) and speak with colleagues in my network to give you my full thoughts on this.

HAPPY NEW DECADE

Wishing you all an extremely happy decade as we warmly welcome the “tens”.

Whether we call 2010, “twenty ten” or “two-thousand and ten”, it doesn’t matter.  What is important is that we step back and reflect over what happened last decade.  Did things in life happen around us, as if we were merely a passenger, or did we make things happen.

Lets commit to making 2010 a good year, and this decade to being an excellent one, where you right down some long term goals and work to achieving them.  If you need help in this regard, you should get a tried and tested mentor.

Contact me if you need help with goal setting and smart wealth creation (or maintenance) strategies for the coming decade.

My Highlights of the Noughties

Well another decade has come and gone.  It has been an interesting and fun one filled with highlights.  This is a log of highlights of the Noughties Decade where I name a few of them for me:

1. My Wedding to Bridget

A very happy day and special occassion.  I had been going out with Bridget since October 2000, and we got engaged in December 2005, so my March 2007 wedding was good timing.

As with so many people, it came and went so fast and to be brutally honest I can’t actually remember that much of it, apart from the fact it was a great day!

The honeymoon to the Yasawa Island’s in Fiji was amazing – thanks Dean Letfus for the recommendation to go to Nanuya Island Resort on Nanuya Lailai Island – home of the Blue Lagoon – yes the very place where the movie of the same name was filmed, where Brooke Shields became a household name.  We spent the rest of the time at the Sheraton on Denarau Island – super stuff.

2. My son being born

Well I didn’t know quite what to expect with my first child – I got told a lot.  Being squeamish I fainted once in hearing about the delivery process, but I managed to hold my nerve and was able to talk property investment with our midwife and specialist O&G surgeon that we had on the ‘case’ during delivery and numerous consultations and scans.  The result is one fantastic baby boy (now nearly 14 months old), Liam Whitburn, who can already run up our hallway with a full size rugby ball and trip up and score a try.  He likes eating food on our plates that he lunges for whilst we are eating, as well as soil and leaves from our garden too, so he’s a real omnivore!

3. NZ Property Market

The Property Boom of 2002 – 2007 was New Zealand’s biggest highlight for me.  This is where we saw several thousand millionaires made in our country.  Yes unfortunately 2008 and 2009 tail end the decade as badly as it began in 2000 and 2001 with negative equity recorded in the 2000 and 2008 calendar years.

I am a big statistics fan and researcher, even did a stats paper at Auckland University in 1997 as part of my BSc degree. As a result lets look back at the decade’s property prices in January of each year as laid out on my blog here.  We had a 109% increase in New Zealand overall in the period from January 2000 to November 2009.  That is pretty special, and we could easily see similar growth in this coming decade.

4. Hitting my goal and becoming a millionaire in my 20s

I wrote down a very aggressive goal when I was 24 – to become a millionaire before I hit 30.  The great news was that I did it!  In addition I turned 30 in time lock in my million before the downturn and reduce my loan to value ratio to safe levels.  Fortunately my portfolio was well presented and in good locations so I had tenants the whole way through the downturn, bar 17 days in one property, and the value I lost that year has more than come back.  It’s a great feeling to have hit my goals.

5. Sporting Highlights

There are just so many to choose from with the Silver Ferns win in 2003 Netball World Championships in Jamaica (beating Australia 47 – 45 in the final), the League Team winning the World Championships in Australia in 2008 (beating overwhelming favourites Australia 34 – 20 in the final) and on an individual note Scott Dixon’s Indy Car racing successes this decade including the title in 2008, Valerie Vili’s shotputting feats, Hamish Carter’s glorious Athens Olympic Gold and Nathan Astle’s 222 off 168 balls – still the fastest double century in international cricket (including 28 fours and 11 sixes).  Michael Campbell’s 2005 US Open victory at Pinehurst (by 2 shots over the legendary Tiger Woods) was a memorable success too.

However for my decade runner up I am choosing an obscure highlight of Andre Adams securing an impossible victory for Auckland over Northern Districts chasing 161 in the 20/20 game at Seddon Park, Hamilton on 28 January 2007.  Auckland needed 12 runs to win off the last ball – usually this would be thought impossible, but not for the big hitting uber talented Aucklander Andre Adams, and Graeme Aldridge bowling a waist high full toss (a no-ball) which was slammed for 4.  Then Auckland needed 6 off the last ball – surely he couldn’t achieve the dream…  However Aldridge’s bowling and Adams clean hitting ensured that defeat was snatched from the jaws of victory, as Adams absolutely pounded the ball for a big six over long off to guide Auckland to an amazing win.

The Decade Winner has to be the All Whites who qualified for the World Cup for the first time since 1982.  Despite Rory Fallon heading home the goal just before half time from an expertly taken Leo Bertos corner, and Mark Paston saving an amazing kick from the penalty spot, the whole team played like a bunch of heroes.  Well organised, structured and solid – can we mix it on the World Stage at the 2010 World Cup in South Africa.  We are drawn against Italy, Slovakia and Paraguay – can we be in the top 2 teams of this pool to qualify for the 2nd round?