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NELSON PROPERTY INVESTORS ASSOCIATION
SEPTEMBER 2017 NEWSLETTER
PO Box 198 Nelson
Our sixth meeting of the year is being held at Honest Lawyer Monaco on Tuesday 12 September 7:30 pm. We commence with our regular pre meeting meal at 6 pm followed by the meeting proper starting at 7:30 pm.
Daryl Fisher from Hamilton is coming to speak to us. Daryl is the president of the Waikato PIA. A decade or so ago he was the National President of the NZPIF. He is a major property investor, real estate agent, and skipper of an ocean going yacht. I notice he has been speaking at a number of PIA associations around the country. Sure he is operating at a higher level than most of us mum and pop investors but he is an interesting person who we can learn lots from. Waikato and Auckland are at times a different world to ours. They set the course and we follow in their wake. By observing their waves we might avoid taking a bath.
Send me your bookings for the meal. They are good value and it is always fun chatting to other investors
LAST MONTH’S SPEAKER MICHAEL REDDELL
A huge crowd turned out to hear Michael last month. What he has to say and writes about always strikes a chord with me. I recorded the whole meeting on my new iPhone. I managed to get the 7Gbit file uploaded to iCloud but exceeded my file capacity on Drop Box. So I have hit another technology wall. Help is there someone out there who can help me!
JUST IN CASE YOU HAD NOT NOTICED
IT IS ELECTON TIME AGAIN.
I recently attended the local Labour candidate’s housing evening. It was a struggle but I kept my mouth shut so I could listen to what Phil Twyford had to say. They said they were going to increase the taxes on property investors.
We all know that National has been in power for the last 9 years. They came in promising to discourage investment in property and to encourage investment in more productive enterprises. Those of us that have been around for a while will have seen many different government schemes trying to achieve this or that. We have seen government moves on education, health, child welfare, law and order, Maori housing and income, and local body governance. I am sure everyone in New Zealand regardless of our political views would agree that by and large all these schemes have missed the mark. However the change of taxation introduced by the incoming National Government nine years ago has been an outstanding success. We can see millions more cows on our farms and property investors have stopped or slowed down building rental houses. This is evidenced by the fact that the vast bulk of new dwelling consents have been for larger homes of 200 sq m or larger. Some people would call this a housing crises. Some will blame the sell down of social housing creating this shortage. However private houses vastly outnumber social houses by a factor of 10 to1 so changes in the total stock of social houses make very little difference to the overall number of rentals in the market.
Stopping depreciation on buildings increased the tax take by about one billion dollars per year. There are 500,000 rentals in New Zealand so that equates to $2000 per dwelling. Depending on how you do the sums most tax payers would need to earn an additional $3000 per year to pay that tax which amounts to $60 per week rent increase. Now residential investment properties are normally valued on a gross rent basis. The average gross return on rentals is 5% so naturally the value of the average rental has been wound up by around an additional $150,000. Little wonder the increased prices of rentals have not deterred investors.
But this is not the full story. Dr Nick Smith said to me a few years ago that everyone knows that buildings do not depreciate (go down in value). Tax depreciation on houses, fishing boats, and tractors was never a hand out from the Government. The tax write offs were retained in the accounts and paid back when selling at more than depreciated book value. Any gain in value is a tax free gain. If the item was sold for less than book value that is called a capital loss by the IRD. So over a long period as the old investment properties got to their used by date there is a serious tax penalty for demolishing and replacing with new. Now, a decade after introducing this tax change, we are gradually seeing it becoming harder to justify investments involving brown field developments. I wonder what impact this policy is having on the increasing cries of rental properties being cold, damp, and unsanitary.
These changes have not been all bad. My personal cash flow in from rents has gone up. The turnover of tenants has gone down due to lack of alternative rental choices. The down time between tenancies has dropped due to high demand from tenants. The capital value of all residential properties has gone up significantly. In many cases maintenance based improvements have been possible due to improved profit margins.
So what can be done to address this problem? Changing the Government will not reinstate the tax depreciation laws. Labour’s solution is to add even more taxes. We all know who will eventually carry that burden.
The Government needs to introduce financial incentives to encourage the provision of new high grade rental dwellings.
WHAT THE BANKERS ARE SAYING ABOUT OUR WORLD.
This article is borrowed with thanks from Tony Alexander BNZ
Ironies and Changes
We all hear and read a lot about how things are changing around us all the time. Sometimes it is disruptive technologies, other times societal shifts in attitudes toward and treatment of particular groups, the changing behaviour and challenges for different generations, new governments, new conflicts, and so on. In the field of economics everyone jokes about forecasting errors and the absurdity of trying to pick the future with accuracy. Yet people still like to believe that we economists do know something important and that we are worth listening to.
Fine. But it pays to acknowledge that a lot of what we postulate is based upon assumptions about how the world around us will develop. Often these assumptions prove wrong and in our field currently there are probably more such assumption/trend changes occurring than we have ever seen.
Here are a few of them.
USD Demise
No. The USD was supposed to be eclipsed by other currencies. But it remains solidified as the globally favoured store of value, medium of exchange and currency of denomination for commodities. The potential Euro replacement has fallen out of favour following talk of the zone breaking up. The Yen ceased being a serious candidate two and a half decades ago. The Chinese Yuan remains a managed currency of an increasingly controlling and assertive single party state which uses trade as a tool of influence on behaviour in/of other countries. Note that this underlying support is outside the current market reality where a pullback in expectations for US growth and monetary policy tightening is causing the USD to fall in price against other currencies.
House Price Collapse From Boomers Selling
No. For two or three decades people have wondered to what extent average house prices would decline as a result of retiring Baby Boomers downsizing and selling their housing assets. The opposite has happened and they are now partlyblamed for pushing prices higher. (Before that it was insufficient land supply. Before that Chinese buying. Wonder who the finger will point at next.) Their buying has been spurred by a search for
alternative assets with better complete yields than term deposit rates at 1960s levels, and assets to help finance retirements expected to last a decade longer than the previous generation.
NZD Long-Term Decline Because of Falling Terms of Trade
No. Up until dairy prices soared a few years back the almost unanimous view was that the Kiwi dollar would trend downward over time to reflect falling export prices compared with import prices (the terms of trade). A former Prime Minister in 1988 described farming as a “sunset industry”. But now our terms of trade are set to soon hit a record high above 1973 levels and the world seems envious of our trade differentials. Namely, we export quality food products for which global demand is rising. We import increasingly cheap manufactured goods benefitting from the price impacts of the global supply chain, cheap labour, robotisation, etc., and increasingly cheap energy.
Lowest Mortgage Rates Since The 1960s a Boon For New Home Buyers
No. Just the opposite. Low rates have brought a wave of investors into residential property seeking yield and first home buyers have been squeezed out not just by high prices, but since late-2013 by new credit controls aimed at controlling house price risks. Having said that, those rules have mainly impacted upon investors – but the price rises have already become locked into the market and continued low interest rates mean there is little pressure on existing investors to sell and address cash flow issues.
Peak Oil
No. No-one uses this term which up until a couple of years ago cropped up in most environmental, economic, and energy discussions. Now the popular term is “peak demand” – the soon to come year when demand for oil maxes out and then falls as users switch to alternative energy sources such as wind, solar, and gas assisted by improving battery storage.
Printing Money Causes Hyperinflation
No. Money printing by the Bank of Japan, Federal Reserve, Bank of England, and European Central Bank appears instead to have brought or accentuated the risks of deflation. This has happened because a world awash with cash and investors seeking anything with yield has allowed businesses to find finance and remain in business in spite of weak product demand for a lot longer than would normally be the case. Money printing has produced excess capacity and over-supplies of many manufactured goods, causing price declines.
Unitary Plan To Radically Boost Auckland House Construction
No. While the plan does provide space for enough intensification and new land to allow construction of 420,000 dwellings, in reality construction of sufficient volumes is prevented by insufficient labour resource and a cutback in property development finance from banks. Unfortunate timing.
Export Dependence Upon Farming Means Net Migration Losses
No. The migration trend has changed to ongoing gains. Export dependence upon primary exports remains as great as ever. But other sectors have boomed and export prices have been trending upward since the 1990s.
Communication Technology Means Most People Working Remotely
No. Instead more and more people are crowding into existing big cities – a process known as agglomeration (not the same as urbanisation). This is because technology is not static. Changes are swift and business competition is greater and faster. To stay near the forefront of developments people need to work in ever-changing teams, collaborate in ways not done previously, and try to develop and lead technology changes rather than be affected by them. The technological revolution is promoting aggregation of populations, not dispersion.
Regards
Glenn
SEPTEMBER 2017 NEWSLETTER
PO Box 198 Nelson
Our sixth meeting of the year is being held at Honest Lawyer Monaco on Tuesday 12 September 7:30 pm. We commence with our regular pre meeting meal at 6 pm followed by the meeting proper starting at 7:30 pm.
Daryl Fisher from Hamilton is coming to speak to us. Daryl is the president of the Waikato PIA. A decade or so ago he was the National President of the NZPIF. He is a major property investor, real estate agent, and skipper of an ocean going yacht. I notice he has been speaking at a number of PIA associations around the country. Sure he is operating at a higher level than most of us mum and pop investors but he is an interesting person who we can learn lots from. Waikato and Auckland are at times a different world to ours. They set the course and we follow in their wake. By observing their waves we might avoid taking a bath.
Send me your bookings for the meal. They are good value and it is always fun chatting to other investors
LAST MONTH’S SPEAKER MICHAEL REDDELL
A huge crowd turned out to hear Michael last month. What he has to say and writes about always strikes a chord with me. I recorded the whole meeting on my new iPhone. I managed to get the 7Gbit file uploaded to iCloud but exceeded my file capacity on Drop Box. So I have hit another technology wall. Help is there someone out there who can help me!
JUST IN CASE YOU HAD NOT NOTICED
IT IS ELECTON TIME AGAIN.
I recently attended the local Labour candidate’s housing evening. It was a struggle but I kept my mouth shut so I could listen to what Phil Twyford had to say. They said they were going to increase the taxes on property investors.
We all know that National has been in power for the last 9 years. They came in promising to discourage investment in property and to encourage investment in more productive enterprises. Those of us that have been around for a while will have seen many different government schemes trying to achieve this or that. We have seen government moves on education, health, child welfare, law and order, Maori housing and income, and local body governance. I am sure everyone in New Zealand regardless of our political views would agree that by and large all these schemes have missed the mark. However the change of taxation introduced by the incoming National Government nine years ago has been an outstanding success. We can see millions more cows on our farms and property investors have stopped or slowed down building rental houses. This is evidenced by the fact that the vast bulk of new dwelling consents have been for larger homes of 200 sq m or larger. Some people would call this a housing crises. Some will blame the sell down of social housing creating this shortage. However private houses vastly outnumber social houses by a factor of 10 to1 so changes in the total stock of social houses make very little difference to the overall number of rentals in the market.
Stopping depreciation on buildings increased the tax take by about one billion dollars per year. There are 500,000 rentals in New Zealand so that equates to $2000 per dwelling. Depending on how you do the sums most tax payers would need to earn an additional $3000 per year to pay that tax which amounts to $60 per week rent increase. Now residential investment properties are normally valued on a gross rent basis. The average gross return on rentals is 5% so naturally the value of the average rental has been wound up by around an additional $150,000. Little wonder the increased prices of rentals have not deterred investors.
But this is not the full story. Dr Nick Smith said to me a few years ago that everyone knows that buildings do not depreciate (go down in value). Tax depreciation on houses, fishing boats, and tractors was never a hand out from the Government. The tax write offs were retained in the accounts and paid back when selling at more than depreciated book value. Any gain in value is a tax free gain. If the item was sold for less than book value that is called a capital loss by the IRD. So over a long period as the old investment properties got to their used by date there is a serious tax penalty for demolishing and replacing with new. Now, a decade after introducing this tax change, we are gradually seeing it becoming harder to justify investments involving brown field developments. I wonder what impact this policy is having on the increasing cries of rental properties being cold, damp, and unsanitary.
These changes have not been all bad. My personal cash flow in from rents has gone up. The turnover of tenants has gone down due to lack of alternative rental choices. The down time between tenancies has dropped due to high demand from tenants. The capital value of all residential properties has gone up significantly. In many cases maintenance based improvements have been possible due to improved profit margins.
So what can be done to address this problem? Changing the Government will not reinstate the tax depreciation laws. Labour’s solution is to add even more taxes. We all know who will eventually carry that burden.
The Government needs to introduce financial incentives to encourage the provision of new high grade rental dwellings.
WHAT THE BANKERS ARE SAYING ABOUT OUR WORLD.
This article is borrowed with thanks from Tony Alexander BNZ
Ironies and Changes
We all hear and read a lot about how things are changing around us all the time. Sometimes it is disruptive technologies, other times societal shifts in attitudes toward and treatment of particular groups, the changing behaviour and challenges for different generations, new governments, new conflicts, and so on. In the field of economics everyone jokes about forecasting errors and the absurdity of trying to pick the future with accuracy. Yet people still like to believe that we economists do know something important and that we are worth listening to.
Fine. But it pays to acknowledge that a lot of what we postulate is based upon assumptions about how the world around us will develop. Often these assumptions prove wrong and in our field currently there are probably more such assumption/trend changes occurring than we have ever seen.
Here are a few of them.
USD Demise
No. The USD was supposed to be eclipsed by other currencies. But it remains solidified as the globally favoured store of value, medium of exchange and currency of denomination for commodities. The potential Euro replacement has fallen out of favour following talk of the zone breaking up. The Yen ceased being a serious candidate two and a half decades ago. The Chinese Yuan remains a managed currency of an increasingly controlling and assertive single party state which uses trade as a tool of influence on behaviour in/of other countries. Note that this underlying support is outside the current market reality where a pullback in expectations for US growth and monetary policy tightening is causing the USD to fall in price against other currencies.
House Price Collapse From Boomers Selling
No. For two or three decades people have wondered to what extent average house prices would decline as a result of retiring Baby Boomers downsizing and selling their housing assets. The opposite has happened and they are now partlyblamed for pushing prices higher. (Before that it was insufficient land supply. Before that Chinese buying. Wonder who the finger will point at next.) Their buying has been spurred by a search for
alternative assets with better complete yields than term deposit rates at 1960s levels, and assets to help finance retirements expected to last a decade longer than the previous generation.
NZD Long-Term Decline Because of Falling Terms of Trade
No. Up until dairy prices soared a few years back the almost unanimous view was that the Kiwi dollar would trend downward over time to reflect falling export prices compared with import prices (the terms of trade). A former Prime Minister in 1988 described farming as a “sunset industry”. But now our terms of trade are set to soon hit a record high above 1973 levels and the world seems envious of our trade differentials. Namely, we export quality food products for which global demand is rising. We import increasingly cheap manufactured goods benefitting from the price impacts of the global supply chain, cheap labour, robotisation, etc., and increasingly cheap energy.
Lowest Mortgage Rates Since The 1960s a Boon For New Home Buyers
No. Just the opposite. Low rates have brought a wave of investors into residential property seeking yield and first home buyers have been squeezed out not just by high prices, but since late-2013 by new credit controls aimed at controlling house price risks. Having said that, those rules have mainly impacted upon investors – but the price rises have already become locked into the market and continued low interest rates mean there is little pressure on existing investors to sell and address cash flow issues.
Peak Oil
No. No-one uses this term which up until a couple of years ago cropped up in most environmental, economic, and energy discussions. Now the popular term is “peak demand” – the soon to come year when demand for oil maxes out and then falls as users switch to alternative energy sources such as wind, solar, and gas assisted by improving battery storage.
Printing Money Causes Hyperinflation
No. Money printing by the Bank of Japan, Federal Reserve, Bank of England, and European Central Bank appears instead to have brought or accentuated the risks of deflation. This has happened because a world awash with cash and investors seeking anything with yield has allowed businesses to find finance and remain in business in spite of weak product demand for a lot longer than would normally be the case. Money printing has produced excess capacity and over-supplies of many manufactured goods, causing price declines.
Unitary Plan To Radically Boost Auckland House Construction
No. While the plan does provide space for enough intensification and new land to allow construction of 420,000 dwellings, in reality construction of sufficient volumes is prevented by insufficient labour resource and a cutback in property development finance from banks. Unfortunate timing.
Export Dependence Upon Farming Means Net Migration Losses
No. The migration trend has changed to ongoing gains. Export dependence upon primary exports remains as great as ever. But other sectors have boomed and export prices have been trending upward since the 1990s.
Communication Technology Means Most People Working Remotely
No. Instead more and more people are crowding into existing big cities – a process known as agglomeration (not the same as urbanisation). This is because technology is not static. Changes are swift and business competition is greater and faster. To stay near the forefront of developments people need to work in ever-changing teams, collaborate in ways not done previously, and try to develop and lead technology changes rather than be affected by them. The technological revolution is promoting aggregation of populations, not dispersion.
Regards
Glenn