Posts Tagged ‘depreciation’
Wishing all my blog readers an extremely happy new year, as we say goodbye to 2010 and welcome in 2011. The fireworks from three levels up Auckland’s mighty Sky Tower and on two barges in our beautiful Waitemata Harbour lit up the Auckland night sky for 10 minutes. It was an amazing display and a fabulous way to bring in the new year.
Looking back at 2010
This was a year with many highlights. On the sports field there were many magical moments, the property market slid along, and a lot of things happened to many people, and a lot of people made things happen.
Sporting Highlights
I loved Brendan McCullum’s century against Australia in the second T20 cricket international in Christchurch. He scored 116 runs (not out) in 56 balls in an innings laced with boundaries (he scored eight 6s and twelve 4s) including his famous McScoops where he scooped deliveries bowled at over 150kph over the wicket-keepers head for 4s and 6s. It was a stunning innings for its brutality, effectiveness and entertainment. Amazingly Australia equalled our score (largely thanks to Cameron White’s 64 unbeaten runs off 26 balls) then Tim Southee bowled an amazing super over with just 6 runs scored, that Martin Guptill and Brendan McCullum got in three balls to give us the win. The All Whites were sublime in the Football World Cup ending the tournament as the only unbeaten team and holding 2007 Champions Italy to a 1- 1 draw, leading them for a while after a superb Shane Smeltz goal. In rugby union the All Blacks had a fantastic season winning the Grand Slam (by beating England, Ireland, Scotland and Wales) and going through the Tri Nations unbeaten. We only lost one meaningless test against Australia in Hong Kong when we already had the Bledisloe Cup in the bag. It is looking good for the Rugby World Cup.
"McScoop" by Brendan McCullum in a T20 international, All Whites at the Football World Cup, All Blacks trouncing Australia again
Major Events
The Christchurch Earthquake of Saturday 4 September 2010 and numerous aftershocks were a major event to hit New Zealand, along with the Pike River coal mine tragedy which resulted in the loss of 29 lives, and the Pike River Coal Company being put into receivership which hurt the West Coast economy hard.
In politics, Conservative party leader David Cameron was elected as the new Prime Minister of the United Kingdom, and is charged with changing their unaffordable welfare state into a leaner and meaner economy that doesn’t rely on borrowing from overseas to fund current needs. For most property investors, the year was not the most interesting one. The 20 May 2010 budget announcement to take depreciation on building structure away from 1 April 2011 onwards, and in April the Inland Revenue Interpretation Statement IS10/01 which deemed various items that were depreciated as separate assets by a vast number of investors now being treated as building structure (tiles, vinyl flooring etc), were not well received. Otherwise the year in property was not exciting with interest rates barely changing (longer term fixed rates came down a bit and shorter term rates went up a little), in general rents crept up a bit, and values rose slightly. On a personal note my grandmother passed away just short of her 92nd birthday, and my second child Emily was born this year – her birth was the highlight of my year!
Other highlights were my visits and presentations to events in Malaysia, England and Australia, and becoming the President of the Auckland Property Investors’ Association in June.
My predictions for 2011
More of the same is expected for 2011, although I believe that towards the end of this year rents will boom in some of the most desirable areas of Auckland. One of the very best events of the year will be the Kevin Green Wealth Systems weekend. Kevin was featured on the BBC Secret Millionaire series has around a NZ$80 million property portfolio and is coming to Auckland, New Zealand on the 16th and 17th of April. The All Blacks will win the World Cup and the super talented Rafael Nadal will win the French Open and two more tennis grand slams this year.
Make sure that you position yourself to make 2011 your best year yet!
Quotable Value, the Government Valuation agency released statistics today showing that we are still in the downturn phase of this current property cycle. Property values have declined by 1.1% since 31 March of this year. Values however are 3.1% above where they were on 31 August 2009, but this is 5.0% down from the peak of the last boom in 2007.
Lets take a look at the past 5 years to process the QV statistics graphically:
You can see the market growing relatively rapidly (and not just because the left hand axis starts at 70% and not 0%) from August 2005 to August 2007 and then reaching a plateau like Table Mountain in the Coromandel Ranges that I used to like tramping in. Then in April 2008 to April 2009 the market retrenched nearly 10% from the peak.
I Love Auckland – New Zealand’s Super City
I feel it is important to focus on Auckland as I am an immensely proud born and bred Aucklander, and the fact that Auckland is our nations economic hub and New Zealand’s biggest city by far. Interestingly Mayor of Auckland City, and leading Super City (Auckland region) Mayoral Candidate John Banks said in his address to the Auckland Property Investors’ Association (APIA) last month that people are looking at migration decisions (both immigration – coming into Auckland or emigration – leaving it) as being an issue between cities and not countries. Therefore it is important to know where we our leading city stands. Mercer, an international recruitment and consultancy firm, publishes an annual survey of all the leading cities in the world. In the 2010 Mercer Quality of Living Survey Auckland defended its 4th position (equal with Vancouver in Canada). Wellington deserves an honourable mention at 12th this year too.
The statistics for the Auckland region show a fairly similar story to the rest of the country which is unsurprising since Auckland property sales make up over a third of the index, so it is most heavily weighted in Auckland’s favour. However the statistics do show that Auckland suffered a slightly deeper decline than the rest of the country in 2008 and into mid 2009 before an encouraging recovery to be at 31 August 2010, only 2.4% down from its late 2007 peak:
Is it right to lump all of Auckland together?
From a personal perspective the statistics need a little bit of fair review and criticism here, as it is perhaps unfair to lump a city of over 1.4 million people together as one market. We could be more relevant and break Auckland down into the CBD to include our apartment market, into East Auckland, which is so different from South Auckland, yet united by being part of Manukau City, West Auckland, Central Auckland (again so large that this should be split up as the more affluent areas are so different from the middle of the road areas), the North Shore, Papakura etc. I wish QV would break down the statistics in this fashion – after all these sub markets are far bigger than small cities like Dunedin and Hamilton, and both Auckland City and Manukau City (South & East Auckland) are bigger than both Wellington and Christchurch. Since I don’t have this data for these sub areas, or separate housing markets of Auckland, I will have to give you my own take on things.
Interestingly last year some self proclaimed Property Gurus and real estate agents mistook the mid to mid-late 2009 price increases as being a sign that we are in the boom. They got it wrong. This in actual fact was only a slight recovery after a severe decline in 2008 and early 2009 – the statistics from QV above clearly show this. My mentor in 2003, Kieran Trass of the Hybrid Group, showed me that in each of the previous four property cycles that the slump (or what I like to call downturn) phase of the property cycle lasted longer than the boom immediately preceeding it. APIA’s principal sponsor ANZ, had Craig Moffat stating at the NZPIF Conference in 2009 the very same thing. I currently believe that we will be in the downturn phase for at least another 2 years, before the recovery begins.
I want to share with you my story which comes from helping my younger sister purchase her first house. I have been to many centrally located auctions in Auckland over the past 12 months or so with Barfoot and Thompson’s Wednesday afternoon ‘mega’ auctions at their lovely Chancery Court building in the CBD, and onsite in homes in Epsom, Mt Eden, Ellerslie, Remuera, Parnell, Kingsland, Ponsonby, Westmere, and Grey Lynn. There were many people going to auctions and some crazy prices bid, particularly towards the end of last year and early this year. However now in these centrally located affluent suburbs of Auckland there seem to be fewer buyers than before and in general the bidding isn’t silly, but the prices achieved are often pretty good. This is an interesting “market depth” issue as the volume of sales is very low (see graphs from Realestate.co.nz Limited below for 1. New Property Listings which are well down, and 2. Inventory – the number of weeks to sell all of the listed property. Note that Auckland has a 36 week inventory as a region, so we are not as bad as the 46 weeks graphed which is the NZ overall inventory):
The reported sales for July from REINZ were 4,411 which was the lowest July on record, down 27% from July 2009.
So from around April 2009 onwards the Auckland prices had a slight recovery but there is downward pressure again without much wage inflation, with a necessary change in mindset to reduce debt and to get away from the I want it now mentality and going back to needs and not wants. Also investors are shortly going to feel a bit of a pinch with depreciation changes and paying 2.5% more on rates, insurance, property management fees and repairs & maintenance costs. That is counterbalanced somewhat by receiving some personal tax cuts, but the positive impact of tax cuts combined with the negative impact of depreciation expenses being decimated plus GST rises mainly provide a net benefit to investors with small portfolios (1 – 2 rental properties). There will be a spin-off for houses in medium and higher value areas as they will have a vast number of people earning over $70,000 per year and having their personal tax rate slashed from a very high 38% to 33%. More money will be spend on improving housing, new kitchens that were held out for the past two years, upgrading that cracked driveway, improving the gardens, and some more consumable spending like getting that new 55in LED TV will happen as well. My sister is still looking for a home with her fiancee in central Auckland near her CBD office.
Increase Your Rents
I got called earlier this afternoon by the New Zealand Property Investor Magazine to talk about rents in Auckland. I talked about splitting Auckland up into sub markets as above, and noted the performance in particular of the North Shore which has had strong rental demand in general. The pressures to increase rents are present, but are stronger in the more affluent areas – the tax cuts tenants will be receiving, plus landlords facing increased expenditure from GST rises, the ill fated Emissions Trading Scheme and the slashing of our depreciation expenditure mean tenants acknowledge that they will be facing rent increases. Since like the rest of New Zealand the Auckland Property Market is still in a downturn, waves of capital growth aren’t coming anytime soon as we have yet to even reach the recovery phase of the property cycle. So lets not let our tenants down! Give them the rent increases they expect.
Acknowledgements: www.realestate.co.nz and www.qv.co.nz for their excellent statistical collection and compilation
I was listening to the country’s leading radio station (NewstalkZB streaming live) on my computer now and I heard the Minister of Finance Bill English talk about tax reform with host Larry Williams. English said that the tax regime has a more favourable impact on property investors. As a result he foreshadowed the May 20th budget speech, by stating that he would make property investment less attractive. English stated that there will “be more than one change”, so we investors can expect depreciation alone will not be tinkered with. This is to ensure that there aren’t enormous benefits to having “highly leveraged property speculation”.
English went further to say just now that anyone who owns a property will still be able to deduct the repairs and maintenance expenditure, however my interpretation of the Minister’s statement is that depreciation on building structure will be 0% (and not the 1% I had previously anticipated). This is to ensure that there is a tilt in the playing field towards business owners, job creators, and other productive investments.
If there is to be more than one change – then what else?
It looks like the writing is on the wall and that our depreciation on building structure will be lost. However English said just 5 minutes ago (6:20pm 21/4/2010 Newstalk ZB interview) that there will be more than one change.
Could this be highly geared investors worst nightmare of (1) ring-fencing property losses; where properties that make losses are not able to be offset against personally derived income (ie. they are ring fenced until the property becomes profitable). Otherwise could we see (2) thin capping interest deductibility; where interest on servicing a loan will only be able to be deducted if the investor has a loan to value ratio of say 65% of lower, or will it be something else?
Perhaps there will be a real (3) tightening of the revenue account rules to catch all investors who buy a property and sell it within a period of time (say 5 years) for a profit, so this gain would be brought into the income tax net (‘brightline’ test). Previously this gain would in the vast majority of cases be capital and therefore not taxed.
Quick Thought – Interesting Blog on Interest.co.nz:
We eagerly await these changes. In the meantime, have a look at Gareth Kiernan’s (from Infometrics) latest blog on www.Interest.co.nz as it makes interesting reading. He says property investors have vested interests and makes accusations against internet marketer and self-proclaimed property investment guru Dean Letfus:
The comments are quite interesting, particularly from my friend and passionate property investor Andrew King (NZPIF Vice President).
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)