Archive for the ‘General’ Category

Insurance premiums are increasing.  These are two-fold with company premium increases happening and also the EQC levy being raised recently.  You will need to re-adjust your budgets upwards to allow for this.  From 1 February 2012, the EQC levy on personal home and/or contents insurance will increase from 5c to 15c per $100 of insurance cover.

The maximum total levy that a policy holder will pay per residence is $150 for home policies and $30 for contents policies, (excluding GST).

The increase will apply if you:

•  Take out new personal home and/or contents policies on or after 1 February 2012 or
•  Have an existing annual policy with a renewal date within the 12-month period from 1 February 2012.

These changes have long been signaled by the Government and it is common-sense after EQC’s piggybank was shattered by the various Christchurch earthquakes.  What was perhaps a little surprising to some is that the insurer’s (company) insurance premiums are increasing and also the re-insurer’s premiums are increasing too as they strive to recoup costs from these earthquakes and global catastrophes (Queensland floods, Japan earthquake and tsunami, etc) in 2011, and of course to increase their earnings to make better returns for their shareholders.

Source Facebook: Christchurch as viewed at 12:51pm on 22 February 2011

Christchurch insurance challenges

You shouldn’t be too disappointed in your premiums going up, as family and friends in Christchurch are have faced insurance increases of over 300% since the February 2011 earthquake, and with significant enough aftershocks still continuing most insurers are not wanting to expose themselves to such a high level of risk, so they are not wanting to increase their exposure to Christchurch – in fact I know from a senior underwriter, that they would love their business to greatly minimise their exposure to Christchurch.  This is frustrating the progress of property investment in Christchurch along with delays in getting consents from the Christchurch City Council, as they struggle in their mission to rebuild their beautiful city.

The Result

The Electoral Commission has released the final results of the 2011 General Election including special votes:

Whilst on the face of this vote, it looks like an absolute trouncing National gave its opposition.  However if you add the left wing Green and NZ First party vote to Labour’s vote, and similarly ACT’s very poor 23,889 votes to National’s over one million votes, you have only a slim victory to the centre-right.  The most interesting fact is that Labour polled their worst result for nearly 90 years, and failed to get even 25% support of the eligible voters.  There will be speculation as to how Labour lost votes with the charisma issues faced by Labour leader Phil Goff versus the more dynamic John Key.  However the New Zealand public votes based on policies and the perceived impact they will have on themselves and their families.

This is where Labour had engagement issues with poor policy formation.  Their most unpopular policy which helped lead them crashing in this election was trying to introduce capital gains tax.

Labour proves CGT is political suicide

Labour tried to raise a Capital Gains Tax (“CGT”) put this was not popular as New Zealand have become a nation of small business owners (hundred of thousands) and we have over 167,000 households owning rental properties in New Zealand.  CGT proved so unpopular that Labour’s strategy team told Phil Goff not to bring it up in the debates and as policy in their last two weeks of their campaign.  John Key’s political rating worm went up whenever he attacked the CGT policy with comments like this will also impact many tens of thousands of home owners, that have a home-office.  It is not an aspirational policy at all.  Want to get ahead – well if you do, we’ll tax you on your equity as well as your capital.  A blatant and unwanted infringement of private property rights in the eyes of hundreds of thousands.  It was not a political smart policy to introduce – and any self-respecting National led Government would simply repeal it immediately anyway.

All political parties would serve themselves well to remember that CGT was a cornerstone of Labour’s political campaign.  CGT was confirmed to be political suicide in New Zealand.

As I predicted today’s OCR announcement was a non-event and it stayed the same at 2.50%. Also unsurprisingly Dr Bollard the Reserve Bank Governor said the European issues are weighing heavily on the global economy and there is very little upwards pressure on interest rates currently. This is great news for borrowers. Some property investors argue that we have amongst the very highest Official Cash Rate in the OECD, which is correct.  However this has been the toughest economic time in terms of growth of our economy since the Great Depression finished in the 1930s.

The majority of investors who are still floating their loans will be happy that they will have low interest rates, and fixed rates have been creeping down a bit too.  The recent upwards move in the ANZ Flexi (revolving credit) facility to be at 5.86% and BNZ’s TotalMoney (pooling and offsetting account) base rate to be at 5.75% have taken effect to a number of investors.  It may well be prudent to fix a little bit more debt for longer terms like 2 or 3 years when good rates come up.  I have just fixed some 3 year debt at 5.95%.  Great discounts from banks are available to purchasers of my quality ~250 page property investment master course which I launched today.

Taking the Mickey Out of Property Investment

I was interested to read an article on Interest.co.nz today with Bernard Hickey’s article entitled All Aboard the Property Rort by Devil S. Advocate. It starts off with:

There’s never been a better time to borrow up to the hilt and buy property.”

Whilst it is not a bad time to buy good property at present, there is little pressure for a house price boom in at least the next two years. Therefore a return towards the fundamentals and investing for positive cashflow is prudent, which may mean keeping realistic loan to value ratios when borrowing and look at ways to create positive cashflow.  I think buying property in 2000 – 2002 would arguably have been a better time to buy property, as this was just before the largest property boom in NZ’s history which lasted until late 2007, before a large reduction in house prices over 2008 and then the Global Financial Crisis hit and there has been a recession followed by a slow and stalling economy recovery with some extremely expensive earthquakes that have devastated the beautiful city of Christchurch and left our Government’s finances in poor condition with not much room to move.

The article went on to state reasons why property is a great asset:

Interest rates are at record lows and they’re about to go lower. Europe’s turmoil is brilliant because it will force central banks to cut interest rates. This means we can all afford to borrow more and pay higher prices. Banks are also desperate to lend again, even offering 95 per cent loans.

National has just won a second term and Prime Minister John Key will never do anything to hurt property-owners. During the past three years, he has argued against anything that would have a drastic effect on land or property prices. He is particularly reluctant to force the banks into fire sales of houses and farms in case it drives prices down.

He’s also doing very little to improve the supply of land. This has the effect of pushing up prices and creating tax-free capital gains.”

That of course is mainly correct as National unlike Labour this election appreciate the fact that home-owners, property investors and businesses using their homes as collateral or direct security for their businesses need to feel safe that their property prices will not collapse. That is part of the reason why National got a strong vote and Labour got one of their worst results in their proud 95 year history. Proposing a CGT was proven to be political suicide. We need to point out the factually incorrect part of Hickey’s assertion that John Key will never do anything to hurt property owners.  National slashed our depreciation expense claims by over $40/week per property according to the New Zealand Property Investors’ Federation studies that took effect on 1 April 2011 as announced on the 20 May 2010 budget by Bill English.

Safe as houses

The statement property is a great asset is of course correct.  This is not because of European turmoil, banks or the National party winning another election to confirm its place in Government for at least 3 years. It is because having a roof over your head is a basic human need. Even in the poorest countries in the world most people still have a roof over their head.

But do people in the poorest countries in the world own their own shares in listed companies, have mutual funds, have managed funds, bonds, have bank accounts let alone term deposits – NO, is of course the answer. They do not have insurance annuities, or simple term life insurance, critical trauma policies, health insurance or income protection insurance. They will not own silver, gold, platinum, or derivative products like weather bonds with the compensation linked to a certain pre-determined weather crisis happening! The have a shelter, nothing glamorous but shelter nonetheless. Food and water are there two other basic needs and they usually get just enough of this – but certainly not always sadly.

Everyone needs a home

So everyone needs shelter – a property that gives them a roof over their and their family’s heads. Shares, bonds, commodities, term deposits, managed funds, Kiwisaver, insurance annuities and policies and derivatives are nice – but you do not absolutely have to have them to survive. Yet you will most likely die in the heat of the Saharan summer without shelter or the cold and wet of a Laotian winter in the hills without shelter. You need a property to live.

The property market is insulated by the fact that:

• home-owners dominate it (around 65% of the market – and they don’t care about return on investment, discount to valuation etc)
• it takes a long time to market and then settle a property transaction (so losses take a while to come through, yet you can lose $100,000 in milli-seconds on the FX market for example)

There is money to be made in being an accommodation service provider. That is not a bad thing. If you are borrowing well over $200 million per week this financial year and have had a sovereign credit rating downgrade, then the last thing you want to do is borrow more money.  This is exactly what you would have to do to pay for more state houses.

History is on the side of property investors

I am not saying property investment is risk-free.  There are risks and some properties have gone down in value in the short and medium terms.  There are some rare example where people have lost a lot of money in property, but when they look back they made mistakes, eg. buying houses in areas suffering massive population decline, or buying a leasehold apartment towards the peak of the boom off the plan with a really high valuation figure attached to it.

However lets look at New Zealand property investment over history. My great-grandfather bought around 40 acres of beachfront land and rolling hills 98 years ago in Eastern Waiheke Island, Auckland for £13. Unfortunately the vast majority of it has been sold over generations, however it would have been worth around $13 million in today’s money. That is the power of long-term property investment. An older member of the Auckland Property Investors’ Association bought their first rental in Auckland’s North Shore 1968 and got $45/week in rents. 43 years later it rents out at over $530/week. The property market is cyclical.  But over longer terms (a great number of years) the property market grows, and over the longer term it grows extremely handsomely.

They slowly but surely bought a property every 3 – 5 years Investment in real estate has proven itself to be time and time again an amazing performer. Even after two world wars, the Great Depression of 1929, the Global Financial Crisis at its 2008 peak, the Napier Earthquake of 1931, the Christchurch earthquakes of 2010 and 2011 the property market has stood up well.  There are too many days to count on the sharemarket where falls in price were far greater than those of the Napier earthquake, and Christchurch earthquakes. Bernard Hickey suggested that John Key would do nothing to harm property-owners.

All Governments are good for property investors

However it is not just the National party that does well for property investors. The Labour party were at the helm in the years preceding and during the greatest property boom in our nations history from 2003 – 2007.  The policies Labour had with accommodation supplements, taking people off the domestic purposes benefit onto invalid’s benefits with a recategorisation and all the transfer payments from the Government to low income earners really helped solidify the rental payments and underpin cashflow returns for property investors. So there is no point in only blaming the National party.

My conclusion

You really can Invest and Prosper with Property in New Zealand if you focus on the smart and savvy strategies in today’s market.  You should not have all your eggs in one basket, but I firmly believe and in fact am living proof that in New Zealand, property investment really is the best basket.  I would dearly love our equity markets to get bigger and better, and to have a fraction of the success of Australia’s sharemarket.  I would love commodity trading, FX trading, derivatives to be less risky, and bonds and term deposits to give a better return. However the insulation that home-owners give to the property market combined with a lack of liquidity from much slower transaction times are what makes it a far safer place in the perception of the majority of New Zealanders.

With over $80 million of car thefts per year in New Zealand, we have a big problem with crime. One tool to help arrest this is the NZ Police’s new webpage: http://www.police.govt.nz/stolen/vehicles

You can enter the vehicle’s registration number, engine or chassis number or VIN and it will list whether the vehicle is reported as stolen or not.  If you are buying a second hand car, not from a licensed motor vehicle dealer (LMVD) you can help protect yourself by this very quick check.

An investment banker colleague of mine has just informed me that leading global credit ratings agency Standard and Poor’s (“S&P”) has just downgraded the credit ratings of our big four Australian banks and their new New Zealand subsidiaries by one notch from AA to AA-. This impacts ANZ and its sister bank National Bank, ASB, Westpac and BNZ.  S&P have cut Macquarie Bank’s rating by two notches to BBB.  However the impact is mitigated as S&P has undergone a ratings methodology change and downgraded virtually all banks around the world.

These seem big moves and could mean it costs a little bit more to fund our banks with a greater perceived risk meaning lenders to the banks will want a greater return.  This could push interest rates up slightly.  We will need to eagerly watch this.

S&P Ratings Methodology Change

S&P has cut these rating as part of its global review of bank ratings.  We have seen Belgium’s credit rating cut to AA this week by S&P, and the two other leading global ratings agencies Fitch and Moodys have been busy too.  Fitch cut Portugal’s debt to junk status and Moodys did the same for Hungary’s debt.  Greece’s debt has been junk for a while: >29% yields on their 10 year Government stock, but who wants to take on that level of risk to buy that!

The real issues in the Eurozone are not these smaller economies, but Spain and Italy that have over 7% yields on their 10 year Government stock implying a lot of risk from huge Government debt as a percentage of their country’s GDP.

OCR review next week

Our OCR gets reviewed next week and as I said in my interview to World TV two days ago, this is very likely to remain at 2.50%, however their is a reasonable chance it could be lowered to 2.25% and it is exceedingly improbable that the OCR would be raised!  I will blog on this on Thursday.

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.