Relying on Capital Gains

[Don't believe the Hype]

Do you really believe yourself when you say ‘in many cases - there is no gain’?

if Property was simply an inflation hedge there would be far fewer people investing.

Inflation has been 1-2% per year over the past decade, property prices have far exceed that.

I could site longer term examples if more proof it necessary

[eri]

perry's point

which is very valid

is "house inflation"

which is running very differently from our basket of goods inflation

ie it costs less every year to produce a large lcd tv, a pair of running shoes, a salmon steak

but it costs more every year for a 3 bed home

[klauster]

Do you really believe yourself when you say ‘in many cases - there is no gain’?

if Property was simply an inflation hedge there would be far fewer people investing.

Inflation has been 1-2% per year over the past decade, property prices have far exceed that.

I could site longer term examples if more proof it necessary

Perry is totally correct by saying people don’t understand the actual amount of capital gain simply by looking at the difference between buying and selling price. When looking at residential properties you need to see the land and the age of the house. Basic rule is land appreciates, house depreciates!

The house depreciates because of age, wear & tear, incidents like damage etc and that again depends on “rented” or “owner-occupied”.
For those reasons money needs to be spent for repairs, renovation and improvements and not to forget the impact of inflation on those costs. Expenses are paid with taxed income, materials & services taxed by GST and by inflation (tax for govt deficits).

If you add all those costs and expenses to the initial purchase price, you will be amazed. If you over capitalize as I did with my family home (installed central heating, double glazing, insulation and solar ventilation) I lost money even sold above the market price. But the bill for the common interpretation of capital gain would have been huge.

The other aspect is, tell me – why are the replacement costs for only the building (set by house insurers) so high over the market price (remember the market price includes also the land)?

[Don't believe the Hype]

Perry is totally correct by saying people don’t understand the actual amount of capital gain simply by looking at the difference between buying and selling price. When looking at residential properties you need to see the land and the age of the house. Basic rule is land appreciates, house depreciates!

But that’s not what he said or what I challenged.

[Don't believe the Hype]

The other aspect is, tell me – why are the replacement costs for only the building (set by house insurers) so high over the market price (remember the market price includes also the land)?

Not sure... might be that an insurance company can’t manage costs well

we had a quite major house fire. The insurance company wanted to cash settle fairly quickly because they believed they couldn’t repair or replace the house for the sum insured.

we cash settled, cleared the site and rebuilt with money to spare.

My guess is, like HNZ they have people who manage the project who aren’t spending their own money so don’t really look at the quotes. They use big companies who can do the volume of work they need and these companies make good margins on the work.

[Don't believe the Hype]

perry's point

which is very valid

is "house inflation"

which is running very differently from our basket of goods inflation

ie it costs less every year to produce a large lcd tv, a pair of running shoes, a salmon steak

but it costs more every year for a 3 bed home

that might be true but as an investor I’m not looking to trade the property I bought in 1996 for another equivalent house built today. I’m looking to trade it for cash.

In real terms the initial deposit plus any maintenance rates interest and principle etc all inflation adjusted will be below the final sale price.

I will I’ll end up with a sum of money far greater than the amount I invested in real terms.

[klauster]

But that’s not what he said or what I challenged.

Well, he said “The problem with the expression, "capital gains," is that - in many cases - there is no gain” and “an increase in numbers, corresponding to inflation”.

Show me a realistic definition of “capital gain” (we talk about) that excludes inflation, improvement costs and compensation for depreciation (wear & tear).

[eri]

"I will I’ll end up with a sum of money far greater than the amount I invested in real terms."

you intend to sell but i don't

i buy for cashflow, expect to hold, and pass on to my kids

but every now and then expect to fine-tune my portfolio by selling 1 to buy another

however a 33% cgt on sale on the sale of a $300,000 property would only give me $200,000 to put into another property

so the "house inflation" thing is very important to me

and this asset fine-tuning thing seems to be the argument iwi are using to ask for a dispensation from cgt

[klauster]

"

however a 33% cgt on sale on the sale of a $300,000 property won't allow me to put $300,000 back into another property

so the "house inflation" thing is very important to me

and this seems to be exactly the argument maori are using to ask for a dispensation from cgt

And again when the GST increases.

[Don't believe the Hype]

"I will I’ll end up with a sum of money far greater than the amount I invested in real terms."

you intend to sell but i don't

i buy for cashflow, expect to hold, and pass on to my kids

but every now and then expect to fine-tune my portfolio by selling 1 to buy another

however a 33% cgt on sale on the sale of a $300,000 property would only give me $200,000 to put into another property

so the "house inflation" thing is very important to me

and this asset fine-tuning thing seems to be the argument iwi are using to ask for a dispensation from cgt

i’m pretty sure I read about a timeframe of reinvest whereby if you reinvest you won’t be liable for the tax. This is critical to ensure people don’t just hold assets for eternity vs. doing what you’re talking about.


your definition of ‘house inflation’ is market price growth which you can’t deny will have a capital gain over the long term ahead of what you paid in real terms.

[Perry]

Do you really believe yourself when you say ‘in many cases - there is no gain’?

Yes.

Inflation has been 1-2% per year over the past decade, property prices have far exceed that.

The notion that inflation has been at that figure for that long is a fantasy of NZ gummint's (and gummint dept's) imagination.

Plus it's a matter of debating the figures. Some time ago, some one posted a list of differing CPIs for different socio-economic stratas of NZ society. That's another factor which makes hard-and-fast figures difficult.

Here's a RBNZ chart that relates to the CPI:


Here's a RBNZ chart that relates to the HPI:


Forty-four percent versus four percent, for the same period.

Inflation has been 1-2% per year over the past decade, property prices have far exceed that.

Say you bought a house for $400,000 in quarter one of 2014 and sold it for $574,782 in quarter one of 2018. Were you to buy another similar-in-most-respects dwelling in that same 2018 quarter, would you not pay $574,782 for it? If so, where was the gain?

So you are quite right - in one way - but I'm less sure about the other.

[Don't believe the Hype]

Perry - there is no argument that if you sell a house today and you go to buy a similar house you will pay similar money. They have both appreciated by similar amounts. You can’t sell your place today at 2019 prices and buy the one you want at 2008 prices. But that doesn’t mean they have not appreciated in value. Where the owner can sell that asset for a higher price than they paid (in real terms) there has been a gain.

of you earn $100 for an hours work growing potatoes and then want to buy $100 worth of apples you will pay tax on your $100 of potatoe farming so will need to earn $130 farming potatoes to buy $100 of apples.

how is this different to your example of selling a home for x the not being able to spend x on your next purchase

[Don't believe the Hype]

Your attack on the inflation measure continues. I for one am fooled by the global conspiracy on how to measure inflation. Similar to the global ruse of weights and measures.

Occasionally I’ve been fined for traveling over 100km/h in my reality I want over speed, the measure wasn’t right.

This is proven by the other cars that were going past me at the time

[Wayne]

however a 33% cgt on sale on the sale of a $300,000 property would only give me $200,000 to put into another property

Must have purchased for nothing for the whole $300k to be taxed.
You only get taxed on the GAIN.

[Wayne]

Perry - there is no argument that if you sell a house today and you go to buy a similar house you will pay similar money. They have both appreciated by similar amounts. You can’t sell your place today at 2019 prices and buy the one you want at 2008 prices. But that doesn’t mean they have not appreciated in value. Where the owner can sell that asset for a higher price than they paid (in real terms) there has been a gain.

Many years ago I built a house - total cost to build was $300k including section.
8 years later I sold that house for $635k - nice wee gain that.
I built a replacement house in the same area, of a similar size and quality.
It cost me $630k to build including section.
So did I make a gain of $335k on the first house? I did if I didn't want to replace the house.