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.

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.

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.

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

My book - in all leading bookstores this week

My book writing journey

I am delighted that my book Invest and Prosper With Property has been released into bookstores. I started writing the manuscript for this book in January 2010 with the purpose of answering my friends and family members questions on how to invest in property successfully.  I wanted to do a good job, so I decided to give a broad coverage of all property investment topics. After several hundred hours of work had been invested I decided I would like to have it published so I didn’t just sell a few hundred copies or have to give them away. I made the decision to seek out the services of a professional publisher. My friend Amy Hamilton-Chadwick was a professional editor and she edited the manuscript and gave me excellent feedback to make it more readable.  Then it was time to brief out my manuscript to publishers and having been told by so many people about how hard it is to get a big name publisher behind you I was expecting it to go the way of most of my offers on properties – rejected.  This was a most pleasant surprise to me and full credit to Jan Riley of Random House who introduced me to the publishing team.

I was most impressed with the professionalism of Random House from the outset, with their large Auckland presence, an enviable list of best-selling books, and their reputation as one of the very best non-fiction publishers (as well as fiction publishers) in New Zealand, and worldwide.  So I choose them and Random House have been excellent in distributing my work through bookstores nationwide.

Topics covered in my book

There are number of topics covered in my book as it is designed to function as manual for those wanting to invest in property or for those who already invest in property and wish to keep their knowledge up.

Chapter Line-up

1. Why should I invest?
2. Why should I invest in property?
3. What do I need to know to get started?
4. Could I really become seriously rich?
5. Should I buy commercial or residential property?
6. What do I need to know to be a great investor?
7. What kind of goals should I set for my success?
8. What investment strategy is best for me?
9. How to get a great deal
10. How to find great properties
11. How do I check out a property?
12. How do I structure my property ownership?
13. What do I do about paying tax or getting tax rebates?
14. How can I find the money to invest in property?
15. What is a revolving credit or offset account?
16. Fixed vs Floating interest rates
17. How can I save money on my mortgage?
18. What type of loan is right for me?
19. How to structure your loan
20. What do I need to know about accounting and taxation?
21. Depreciation: making it as simple as possible
22. Renovate, redecorate and revalue
23. What do I need to know about valuations?
24. Keeping your investment safe
25. Managing your property
26. How to minimise the risks
27. Don’t derail your own success
28. How to prepare an offer
29. Due diligence
30. Education
31. Useful websites
32. Glossary
33. Index

Sunday Star Times Book Review

Leading financial journalist Greg Ninness of the Sunday Star Times reviewed Invest and Prosper With Property in today’s business section:

OF ALL the useful advice contained in David Whitburn’s book Invest and Prosper With Property, one particular paragraph stands out.  It is a section of the second chapter which asks if property investing will be hard work. ‘The short answer is yes’ the book says…

Whitburn now works as a property mentor and is the president of the Auckland Property Investors Association.  The book draws on his experience, and of others he has seen succeed or fail, to provide a guide that should help investors avoid many common pitfalls and structure their activities in a way that will help them succeed.”

Where do I buy Invest and Prosper With Property?

Now this is available in all good bookstores nationwide with official release date being Friday 7 October 2011, but some bookstores have it already.  This is also sold by a few international online bookstores including a couple of physical bookstores in Australia too. Very shortly the book will be for sale on www.investandprosper.co.nz.

I think it will be an excellent investment for anyone wanting to improve their knowledge on property investment at $37.99, so firmly recommend that you buy it.  I also hope that you enjoy reading it as much as I enjoyed writing Invest and Prosper With Property.

David Whitburn – 2 October 2011

The USD:NZD has been extremely volatile so far this month crossing at US 88.3 cents to 1 NZD on fears of the US Congress not approving the debt ceiling to be raised, and then it sunk to US 79.7 cents to 1NZD in the midst of the confusion.  This is nearly a 9 cent swing which normally takes many months, not a week.

Similar volatility has been seen in sharemarkets with 4% wiped off markets in one-day then the next they would gain 3%, only to lose 3% and then gain around 3% again.  Interesting times for sure. Property is simply nowhere near this volatile.

USA

The world’s biggest economy, the United States of America suffered its first sovereign credit downgrade ever on on 5 August 2011, by leading rating agency Standard & Poors.  The US is now tied with NZ on AA+.  This has increased the cost of borrowing for the US Government and means they will need to take an even deeper look at cutting expenditure (as the Republicans want) and/or raising taxes (as the Democrats want).  There will be much jostling in the lead up to the Presidential election next year.  Unemployment is high at 9.3%, growth is low still. Barack Obama is in trouble with his broken promises in terms of “change is coming” and “yes we can” fix the economy.  He is predicted to lose next year’s election without a republican candidate even being named to stand against him.

I don’t think we will see as much space and military expenditure going forward from the US – the void of being world police, will be taken up by China in the years ahead.

Europe

There have been some very interesting and unsavoury events in Europe recently.  We have seen riots causing tens of millions of dollars in damage in London, and other major cities in the UK.  In addition we have a crisis of confidence hitting all banks, but in particular the French banks.  Fears still reside over the finances of Greece, Ireland, Italy, Portugal and Spain.

We have seen Portugal being downgraded yet again to BBB- with Standard and Poors, meaning their 10 year yields spiked over 13% (now 10.3%) such is the associated risk with buying these.  Unemployment is high at 12.4% and the country’s population is not happy about their growth falling backwards (-0.6% GDP currently).

Spain hasn’t flourished under the European Union.  Its growth has floundered since 1999 when it joined the EU, and employment has been an issue.  Sure their sharemarket and property markets did well from 2002 – 2007, but like many countries they crashed spectacularly in 2008 and now unemployment is a truly massive 20%.  Yes, black money is common in Spain and there will be a number of jobs paid under the table, but certainly nowhere even close to 10% of the workforce will be paid in this fashion. I personally think Spain would be better suited to be out of the EU, so it could devalue its currency to make its exports competitive once again and to have employment and growth on this basis. However this is unlikely to happen. The European Central Bank helped Spain’s Government by buying their 10 year bond yields, which meant the rate dropped from selling at over 6%, down to 5.15%.

Italy is also in trouble.  Unemployment is high at 9.1%, growth remains very low.  Italy I think would also benefit from exiting the Euro and letting its currency devalue. Their Government debt to GDP is 119% and is rapidly climbing. ECB President Jean-Claude Trichet wanted “to stabilise” the fixed-interest rates in buying Italian Government bonds to take the yield from over 6% to 5.3%.

The world’s 6th largest economy (the United Kingdom) is in trouble still.  Any country that has riots like these and youth (16 -24 year olds) unemployment over 20%, has major issues. Many youths are staying in education longer and doing more courses or postgraduate degrees to stave off unemployment. The UK’s public sector net borrowing (annual government borrowing) for 2010/11 was £143.2 billion or 11.7% of GDP. However the good news is that a lot of other countries are doing much worse. Prouds Poms will say the UK haven’t even hit NZ$2 trillion ($2,000,000,000,000) of debt yet, and had much higher debt after World War II. The UK’s growth is a paltry 0.2% of GDP and unemployment is at 7.7%. Here are some pictures of the worst violence in London since this city got trashed by the Germans in World War II:

At least England are now the number 1 ranked test cricket team after annihilating India by an innings and 242 runs, and it is a cheap place to visit with their currency below 2:1 (2 NZD to 1 GBP).

Source: One News - TVNZ / Colmar Brunton Poll, 29 May 2011

Labour are struggling in the polls and are staring down the barrel at a good old fashioned whipping on 26 November this year, similar to what they dished out to a Bill English led National Party in the 2002 General Election. So they need to be a bit more radical to appear relevant. The truth is National has moved further left to become a centre to centre-right party and Act to the right of the political spectrum to National have weakened with a bit of in fighting and are only rebuilding now.  National can govern alone on current polling – a first in this MMP era.

This blog talks about Labour’s new policies and gives me take on them.  I have been interviewed by the NZ Herald and also Radio Live on this today, and suspect with NZ Property Investors’ Federation President Andrew King away that I will get more media attention to cover off the all important property investors’ perspective.

Own Your Future – Labour’s New Financial Policies

So this is the backdrop to the Labour Party’s Own Your Future electioneering.  They need to do something radical to appear relevant and to get noticed by the media.  So this afternoon David Cunliffe stated the Labour Party’s financial policies in this video below:

Labour Leader Phil Goff said that the NZ Government is borrowing $16.7 billion this year on Campbell Live (TV3) this evening, and criticised National of simply borrowing and hoping.  He then talked about Labour’s tax plans to raise Government income.  Lets have a look at what they are:

• Increase tax on higher income earners – introducing a ‘special’ tax rate of 39% for those on incomes over $150,000
• Ensure the first $5,000 of earnings taxed at 0% (ie. tax free, and this includes increasing benefits by $10 a week)
• Introduce a Capital Gain Tax (“CGT”) of 15%
• Boats will be exempt from the CGT
• A farm house will be exempt CGT, but not the farm itself
• Jewellery will be exempt from CGT
• If you are over 55 years of age and have owned a small business for at least 15 years then the first $250,000 of capital gain is tax free
• Fresh fruit and vegetables will be exempt GST

My take

Read my lips – “no more new taxes”. We do not need capital gains tax.  It is not aspirational, not necessary and surely the wrong question is being asked.  I believe that the quality of one’s life is determined by the quality of the questions we ask.  If we are asking how we (the Government) can afford to keep over-spending and borrowing $16,700,000,000 this year?  Then the answer would be increase taxes and keep all state owned enterprises, if you were in the Labour party.  Might as well bring in some refugees with no English language skills and poor health while we are there too!

Phil Goff confirmed to John Campbell that the own home is sacred and will not be taxed.  This will lead to “castle building” since own homes will be sheltered from this tax, you may as well add tremendous value to it and get a larger capital gain.

Exemptions

Exemptions are not a smart feature of a tax system.  If I invest in a start up company WXYZ Manufacturing Ltd with no capital initially, employ lots of unskilled people that would otherwise be dependent on the Government as beneficiaries and then sell it say 15 years later for $200,000, I would have to pay $30,000 CGT on this under Labour’s proposal.  Yet if I buy my wife jewellery like an expensive diamond ring for $400,000 which I sell for $600,000 giving me a $200,000 profit, then I would not have an CGT to pay.

Does this exemption make sense or sound fair to you?

Defining the farm house as opposed to the farm itself is going to fun, particularly for tax accountants and lawyers.  Boats being exempt CGT is interesting too – perhaps this is because too many boats depreciate in value, meaning refunding CGT.   With beach houses and secondary homes subject to CGT, could we see a positive for the luxury boat industry if CGT comes in!

No GST on fresh fruit and veges is a strange exemption too.  Australia does silly things like tampering with exemptions and as a result have a massively larger GST Act than we do.  Are dried apricots fresh fruit?  Are exported coconuts fresh?  Is coconut ice fresh?  Are bounty bars covered?  How do frozen peas and veges fit into this exemption?  Will retailers have to spend a lot of money complying with the act, changing their accounting and IT systems to cope with this awkward change?  I think Labour should stop thinking about tampering with a good piece of legislation and instead focus on raising the quality of life and incomes for all New Zealanders.

Envy Tax – a smile back to tax accountants and lawyers faces

So that leaves the 39% tax rate on those who have personally succeeded and earn incomes over $150,000.  This is an increase of 6%, and hardly rewards our nations most valuable taxpayers.  I think that it is unnecessary and very disappointing when many of these earners have the ability to go 3 hours west to Australia and earn more.  The lower tax rate here helps keep some of our country’s largest taxpaying citizens who we need to maintain the tax base and welfare state we have developed.  Why punish high income earners?  I think those that pay tens of thousands in tax per year, as opposed to consuming tens of thousands per year should be rewarded.  With all the healthcare, medical, pharmaceutical, diet advances and lifestyle changes we are living a lot longer, which places a great burden on the taxpayers.  With the pension age of eligibility only at 65 years of age, we just cannot afford to lose high income earners.  Also this tax will mean a lot of people become companies, partnerships and trusts and be contractors not employees, and perhaps billing their would be employer’s subsidiary companies to get around the inevitable restrictions that would be imposed.  Again tax accountants and lawyers will win.

Then again they always do under Labour.  Remember the 25% superannuitant surcharge, and differential tax rates under Labour from 1999 – 2008.  National is shortly going to strip lawyers and accountants gravy train of annual gifting $250 – $550 fees for signing a template document and IRD form to forgive $27,000 of debt off your own home (and other assets) each year in favour of your Trust.

Labour’s Policy Rating

I will be generous and give them a solid 1/10 for making an effort.”

 

• Greece’s debt crisis – Greece had its sovereign credit rating downgraded 3 notches from B to a total junk rating of CCC by Standard and Poors this week.  They are looking likely to default and will need an European Central Bank loan, investors in Greek Government bonds to take a hair cut, combined with Greece’s efforts of implementing higher taxes and slashing Government expenditure (hence the massive scale riots in Athens this week).
• weaker Australian job growth - Australian employment numbers released last week showed 7,800 jobs were added in May whereas 25,600 where expected.  Australia’s unemployment rate stayed at 4.9% (New Zealand is at 6.6%, USA is struggling still at 9.1%).  The Australian Dollar has been hit by international markets because of this.  The other impact is that this means the Reserve Bank of Australia is under less pressure to have the RBA raise the cash rate from 4.75% over the coming months.
• Japan’s continued struggles – these have been compounded by their devastating 9.0-magnitude earthquake and ensuing tsunami that devastated the north-east cost of Honshu Island on 11 March this year.  I watch CNBC a fair bit and note the comments by their Japanese correspondent, economist Takuji Okubo who has warned of political unrest in light of Japan continuing to have the highest level of public debt of all developed countries at over 200% of GDP.  Combined with deflation persisting, a reliance on exports to drive growth, and an aging and shrinking population are major long-term challenges for the economy.  The IMF has predicted Japan’s growth to shrink by 0.7% this year.

There is confidence coming back to NZ businesses, and the rural sector continues to be buoyed by very strong commodity prices. There should be an excellent turnout (well over 100,000 people) at Fieldays in Mystery Creek, Hamilton this weekend.  The NZ housing market is again being led by Auckland with another quarter of stronger sales, and prices having risen 4.1% in Auckland in the past 3 months.  Construction is heading into a deepening recession.

From meeting with Presidents at other property investor associations from around the country and looking at the QV and REINZ regional data, outside of Auckland house prices are essentially doing nothing.  Rents are moving up strongly in Auckland, and you are likely to be under-renting your 3 bedroom house in South and West Auckland if this is rented at less than $350/week.  With the OCR staying at 2.50%, there were fears of inflation meaning this would have to rise by the end of 2011. Whilst this of course could still happen it is less likely to in light of yet another significant Christchurch earthquake.

It doesn’t take a tax lawyer to work out what direction rents and house prices will go in with demand like this, and continual undersupply.  I will be going into detail for this at the NZ Wealth Mentor Advanced Investment Strategies event this weekend for our mentoring clients.

Residential Loan Expiry Dates at 31 March 2011

This is not a graph of NZ political parties in Parliament.  The excel doughnut chart I used to plot the data from the Reserve Bank gave me these colours as a default.  For the first time in a great many years there is a higher value of residential loans ($84.6 billion) on floating rates, than residential loans ($83.1 billion) on fixed rates.

There were only $35.9 billion of residential floating loans 2 years earlier in March 2009, and fixed interest loans with greater than two years to expire amount to less than $10 billion.  This will please the Reserve Bank hugely as the OCR will have much faster effect when it eventually rises (which in my opinion will not happen within at least the next 6 months).  The OCR is exceptionally strongly correlated to floating rates and short term (say < 18 months) interest rates.