By David Whitburn
My love of property has been enshrined from a young age with games like monopoly, and visiting open homes with my parents. We all live in property, whether houses, apartments, units or caravans. It is something we can touch and understand. There has been an obsession with owning houses world over, and on the back of real estate, a finance industry has been born.
This has not been a bad thing as without finance only the upper class would own property as happened centuries ago. However world-over many trillions of dollars of property have been borrowed, and in too many cases over-borrowed. It is about being smart and not excessively leveraged.
A quick note for the legally minded readers that I use the term “property” to mean “real property”, as in real estate, not shares, term deposits, commodities and other types of property. Like hundreds of thousands of fellow New Zealanders I have found property to be a wonderful tool to generate cashflow and equity. However it is not the silver bullet for all, and certainly is not a get rich quick scheme for the overwhelming majority of property investors.
Property – the safest investment?
Despite hiccups along the way, property has proven to be a very safe investment in the overwhelming majority of cases. This is because the market is underpinned by home-owners. In New Zealand nearly two-thirds of the market is owner occupiers. When buying a home, the rental yield or discount to valuation is far less relevant to the colour of the carpets, schools in the area or proximity to the local shopping centre. Emotion is the main driving factor at play here.
This comes down to the dream of being a home-owner, which becomes the dream of being a home-owner in a better area, and then the dream of being a home-owner with a larger home in an even better area with special features like good school zones, lake or sea views, proximity to transport etc. Status becomes important for so many people too. We place our personal value judgement on property and certain areas, and treat it as the safest investment.
I asked a big five bank a decade ago how much they would lend me to buy their own shares, and they said the maximum they could give me was a 30% loan. Yet I was amazed when they said they would lend me 80% (without any lenders’ mortgage insurance premium) to buy an investment property, and 90% with a small lenders’ mortgage insurance premium to buy my own home, financed by them.
A year later their credit criteria changed and I could get 95% finance from them to buy my own home – but still just 30% for their shares. This shows you how much faith banks have in New Zealand property. For them it is a safe investment. Last time I checked we weren’t making any more land at the moment either. Even after the devastating Napier and Canterbury earthquakes the housing markets didn’t get decimated like the sharemarket in the Great Depression did and global sharemarkets when Lehman Brothers collapsed.
Leverage – use it wisely
Great mathematician Archimedes said – “give me a lever long enough and a fulcrum on which to place it, and I shall move the world”.
With our fiat money system we have a fine example of leverage in action, and now we have a system of property ownership involving leverage (lending secured against property). It would be churlish to say property goes up in value every year – it doesn’t. If you leverage too heavily towards the end of the boom stage of a property cycle and/or too heavily at the early stages of a downturn, unless your cashflow is very strong, you can get in all sorts of trouble, as many New Zealanders (particularly property developers) find out each and every property downturn we have.
Auckland Property Investors’ Association Debate – Is Property Investment Productive?
I have been the elected President of the Auckland Property Investors’ Association (Incorporated) since June 2010.
Whilst this is only my second blog on this site, I have been a regular reader of Interest.co.nz. I know that property investment doesn’t tickle every reader’s desire, but I want to dispel a few of the myths about property investment, cover off the right way to invest in property, and remind you that as part of a decent society we need to provide rooves over everyone’s heads. When our Government is borrowing in excess of $350 million per week, we simply can’t have Housing New Zealand buy more and more houses.
We need property investors to fill the void. There are many more reasons why property investors are vital for our economy to function smoothly.
Tomorrow, Tuesday 13 September 2011 at 7:30pm in the Rutherford Room of Alexandra Park Convention Centre we have the Auckland Property Investors’ Association (“APIA”) keynote meeting. The speakers are Bernard Hickey and me in a facilitated debate on the moot: Is Property Investment Productive.
Bernard has twisted my arm to arrange for APIA to provide 30 complimentary guest passes for this event for Interest.co.nz readers.
Together we decided that the best way is to simply have a first in first served policy. So please email admin@apia.org.nz for your guest pass (tickets are $50 for non-members) to listen live and perhaps even ask your questions from the floor to Bernard and myself.
* David Whitburn is a solicitor and rental property investor who is the President of the Auckland Property Investors' Association. See more detail on David Whitburn here.
70 Comments
Good article David. All the anti-property people on here seem to ignore the fact that for a good, safe 'long term' investment you can't beat property and at least you have something to show for your investment.
Keep up the good work and good luck in your new position.
This article is total BS. Tell that stupid theory to the people of Christchurch or Fukushima. There is no such thing as a “good” or “safe” investment. Property is and will always be a depreciating asset. You can only hope that property somehow meets or slightly beats inflation. And that is the best case scenario since property is not a proper store of value.
The only reason why property in NZ seems like a “good” and “safe” investment is there is a sustainable critical mass of people involved in the property market here. People see others invest in property and it seems to be increase so they get involved…and so on…and so on. If the same amount of people involved in the property market here and switched them to the NZX you would be saying that equities are a “good” and “safe” investment. It is NEVER a good idea to have all your eggs in one basket. You should have 2 passports, property in 2 or 3 countries, multiple currencies, investments all over the world. You need to diversify not just your portfolio but your life too!
BTW I’m not anti-property I’m just anti-group think!
Good article David. All the anti-property people on here seem to ignore the fact that for a good, safe 'long term' investment you can't beat property and at least you have something to show for your investment.
Keep up the good work and good luck in your new position.
This ridiculous bias towards housing investment reduces the availability of capital for the productive economy and has our population focused on passive asset investment rather than investing in capability to compete with the world.
It's not about you or me or our respective investments it’s about what's good for the country.
This term "productive investment" is a cliche that no-one seems to question - a bit like the Emperors clothes. So, I start a factory building kitset sheds and employing 20 people. That would be termed "productive investment". My business grows rapidly and establishes a reputation for quality workmanship - so I expand the business into producing kitset houses, that are purchased by owner / occupiers and investors (I don't really care). Over 3 years the business grows to the point where I have employed another 40 staff, some at the expanded factory and 30 tradespeople assembling the houses 'on-site'. So, all of a sudden I am now told that, because its housing, I am no longer participating in "the productive" side of the economy...totally fallacious reasoning and is a handy term spread by the likes of Hickey, Holmes and Gaynor who have an equities bias.
So, as an investor, I did the right thing and spread my investment funds around i.e. "diversification". I put some in finance companies because not only did they pay good interest, but my social conscience said that they provided valuable funding for "productive investment". They are gone now...Oh well. I have also contributed equity into a couple of 'start-up' businesses but both have failed through a combination of bad timing (2008 crash and global turmoil) and poor management (N.Z. managers are notoriously bad). I also have significant funds invested in Australasian and global equities but because I am diversified, as they tell me to be, there is no way I can keep in touch with all of them; and I am continually losing sleep over the ongoing volatility, especially when I hear about the market 'crashing' on fears of Greece defaulting and French downgrade. Oh well, if I lose a lot of money here at least I have invested in the "productive sector" and my conscience is clear. I also struggle when friends tell me what a mug I am, and how the New Zealand equities market is tied up by a few 'old boys', and insider trading is still very much alive and well. So that's why, when common sense tells me that my shares in a certain company should be increasing in value, but for some reason they are dropping - and I hear weeks later about some bad news that was supposedly 'embargoed' from the market. Never mind, at least the directors came away unscathed.
I also invested some funds into selected property (residential and commercial) in Auckland. The properties haven't gone up in value much since 2008 but I'm certainly better off than the finance company, startups, and equity investments that I've had. And, they tell me that there is a looming housing shortage, which means that I might have to put my rents up. All the developers went bust a few years ago, so did the finance companies, and the government has no money left to provide State housing. By the way, the tenants in one of my rentals are young people who are still saving to buy their own home, but are grateful to be able to rent something so close to where they work - my kitset shed factory!!
Sometimes common sense goes a long way!!
TranceX1
"I start a factory building kitset sheds and employing 20 people"
Great.
But that's not what rental property investors do.
Let's say a rental property investor puts NZ$300,000 of their own capital into rental properties worth NZ$3 million with the help of NZ$2.7 million of bank loans. That investor might be able to buy 10 properties.
How many trades people are they likely to employ in full time equivalents?
Vastly lower than the numbers employed in some other more productive activity.
cheers
Bernard
David Whitburn hasn't learned the hardest lesson of investment ...yet.That 'what worked yesterday, isn't guaranteed to work tomorrow'. Have a look about, David; Do you see a financial or social world similar to the one that you started investing into? I don't. I don't see a 'new market', of property speculation, and investment even, to be tapped. I see an old, worn out, over-used and exploited market, set for decline. Have a look at any Life Cycle Graph, and pick where you think property investment is on that graph. It's not at the Early Adopted Stage, but the Laggard Stage. That stage where all the smart money has left, and only those who have hung on too long, have yet to take their loses or those late to the party are hoping for a magical return. Have a look at our demographic profile; of an aging cohort of citizens, clutching at their property as a means to survive the winter of old age. Property, as a medium of 'wealth, was last years, last decades' game. Ask any political party in New Zealand what they are going to do to add to the property market, and you'll soon see, they ALL are going to reign it in. The nations fate is embedded in the debt, historical debt, of the residential property market. That is about to change, and not for the property markets better.
It's not safe. Most investors are highly leveraged, undiversified, and own only a couple of assets. All it takes is a disaster or signicant market correction to enter the land of negative equity. Most of us have not lived long enough to experience these outlier risks; but they are real and they do exist.
a quick glance overseas shows housing is not a safe investment when many are over leveraged and the perception of never ending capital gains runs out. The best case scenario for most property investment in NZ is muted gains combined with large cash losses - once this cottons on (and it is happening now) its all downhill. Put simply, you cannot justify a doubling of house prices at a time when rents only go up 20-30% - the difference between rental and capital growth is basically the speculative premium built into the market. Some of the premium has worked its way out the market over the past 4 years, but not most of it. Dont buy now, but some time in the future it will be a sensible investment again.
David - you say, "When our Government is borrowing in excess of $350 million per week, we simply can’t have Housing New Zealand buy more and more houses." I guess to support an arguement for more private sector rental investment. However, in terms of the negative influence on the real economy (associated with foreign borrowing = overvalued NZD) there is little difference between the debt being public or privately held, unless you are advocating more private rental property is equity funded rather than debt funded? I'm guessing not, given what you say about our fiat money system and leverage. So, considering these concerns and you might be right, "... as part of a decent society we need to provide rooves over everyone’s heads." - could you support development of HNZ stock using the original funding mechanism for that project:
Housing on the state - opinion - the-press | Stuff.co.nzhttp://www.stuff.co.nz/the-press/opinion/5260027/Housing-on-the-state
"If we could build all those houses back then with Reserve Bank finance at 1
per cent interest, why can't we do the same now to rebuild our city?
We still have the Reserve Bank, which could issue credit at 1 per cent as it
did when it provided the money to build houses for Key's mother and more
than 33,000 other needy families.
Perhaps we need more common-sense sheilas and blokes managing New Zealand's
economy as they did with success in the 1930s and fewer over-educated
"experts".
That kind of funding mechanism is unlikely now, at least due to ideological objections, so what tax breaks and extra help from lenders would you suggest are required to incentivise, "... property investors to fill the void."? Cheers, Les. www.realeconomy.co.nz
So how will David Whitburn argue that pledging the surplus value of home ownership to financial institutions is productive?
Good on David for recognising that property investment can be risky. Maybe those people who consider property to be a good long term investment would comment on 350 years of data showing that inflation adjusted property provides no return (above rental).
http://baobab2050.org/2011/04/02/the-herengracht-canal-perspective/
This implies that unless something fundamental has changed property prices will revert to the mean, also falling in value over long periods of time. The reason this is not widely recognised is that the cycle tends to be longer for property values.
Any investment is safe, as long as you can afford to lose it.
Great piece of data Nic.
I have said before the current New Zealand Housing cycle started with the changed to the dollar and reserve bank in 1986. It is thus highly reliant on a fraudulent money supply. Even here if you go back a few more years a totally different pattern is evident, with houses in 1982 being the same price as in 1962.
Everyone interested in housing should also take a close look at that image, it has many of the qualities to make it an excellent example of a 'Street'. Great urban design, far better than the sprawl of modern cities.
It doesn't show 'no return' - the abstract to paper says "The average real price increase after World War Two is about 3.2 percent per annum. Nevertheless, the real value of the index in 1973 is only twice as high as it was in 1628."
So that's doubling your money in only 350 years!
I think what the data tells you is that the price change depends what time frame you choose. If you choose WW2 to the present it's 3.2 percent, but that doesn't mean that there is a trend. It could be double in 350 years and half in 400. Taking the first and last points and making a series is pretty mathematically naive, especially if there is an underlying cyclic process.
I believe there are updated series around taking the data past 2008. My point is who is to say that 2008 isn't another turning point in the series and property prices will trend down for the next 'life time' of the series. There is no obvious reason why not, and it's happened before.
Rental income (or not paying rent) is still a return, but property does not appear to have any inflationary price return in real terms.
Well without giving the matter great thought, I would say it is quite simple.
Trade is about producing something of value.
Capitalism is about the application of savings(or someone elses) to produce something tradeable, if it is done with debt then it isn't capitalism.
The monetary system and associated housing market is a scam, good luck to you if you participate because like all scams it will come undone. Only those at the very top ever make on the deal.
The reality is, people will have a need for shelter and will pay the rent...where as the money in the bank is being debased by the RBNZ on the direction of English. It seems logical that those who recognise gold investment as playing into the hands of the market manipulators...ie you will get screwed one way or another....and who realise staying in cash invites the debasement theft to take place.....these people see property and rental property for sure as a safer place to run to. Even better if idiot govt makes a transfer payment to the landlord by way of a rent subsidy.
Renting to tenants and collecting a govt subsidy is one way. Buying land that produces an income is another. Even better if you can avoid the gst theft going on. This is why the IRD has been instructed to bust the black cash market. They will bust only that which can be bust. The rest will escape them and the black market will adapt to avoid the busts.
The cost of clamping down will esculate.
Back to the start. Why save cash when the govt and RBNZ are actively working to debase it?
I can agree with you Wolly to the point where the banking system increases debt levels, and drives asset price inflation. There is plenty of evidence however that creation of credit is an exogenous process. This means that at the point when the central bank is expected to create more base money and deflate the currency, they have a choice,
Don't create more base money and cause a banking crisis (hardly an option).
Relax reserve requirements.
Create more base money (allowing reserve requirements to be achieved).
Central banks actually tried to enforce strict currency controls during the 70s and 80s and they were unable to meet inflationary targets. The process is to a large extent out of the control of the reserve bank. If anything their most effective effect is to work with the banks they support to influence lending policy.
and its not a conspiracy, its all very well documented and acknowledged. The banking and monetary system is however not widely understood by the general public. This goal of education needs to be achieved before there will be a change of the finance by any political system.
The bias of banks toward mortgage lending has hampered the economy's long-term growth by skimping on loans to small businesses. The money flowing into housing has created distortions by fuelling excessive investment in property.
The banks' tilt towards home loans meant fewer loans are available for business, effectively slowing the economy's growth engine.
This is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for New Zealand.
Is it smart to invest in perhaps the most cost prohibitive asset available to the general public?
Is it smart to invest in an asset that offers no diversification or flexibility?
Is it smart to invest in an asset that takes years and years to recover after a drop in the market?
The answer is NO to all of these questions .
Property caused the current global financial meltdown. Clueless people throwing money at wildly overpriced properties believing they're on a winner simply because it's a property and you won’t lose. So when property values tanked all over the world people realised what a stinker of an investment decision they made and were left with not much else other than massive debt which they couldn't afford even in the best of times.
The mistake you make A is to judge property on a collapse and not look at the value derived by those who bought property at the bottom of the madness cycles.
Have another look at the whole picture...buy at the bottom...avoid the planned debasement of the currency..avoid the thieving taxes on the pisspoor interest paid out....do your thing on the land and then flog it at the top of the next wave of planned bubble boom....
Why invest in a nz company that pays its bosses and directors massive fortunes while holding dividends low...year after bloody year....only to spew their guts on some stupid venture into outer gogggleland. And you get taxed to buggery on the divs....and the share value always turns to shite.
Property did not cause the meltdown, a high availability of cheap financiing to purchase all and any assets caused investent bubbles and not only in property.
The problem is cheap finance combined with high leverage and with those ingredients ANY investment can be wiped out not just property investments.
Yes, of course. I was going for the root cause. I think if it had not gone into property it would have found some other investment class the same way water pressure finds the hole of least resistance. But all ponzi style investments must have large and cheap finance as their foundation.
"Property caused the current global financial meltdown."
So let me get this straight:
1. Property repealed the Glass-Stegal Act ?
2. Property decided to change US Govt policy to ensure that more aspiring home owners had to be helped into home ownership even if they could barely afford it.?
3. Property decided to relax lending standards ?
4. Property decided to rate junk as AAA ??
5. Property lied through its teeth to get into the Euro zone ?
etc etc etc
Having a house is not an investment, its a necessity. This means that buying property does not need to stack up on economic or investment terms to make sense.
Owning your own home is primarily a way to avoid paying rent, and to beat rental inflation. Since the motivation for owning a home is entirely rational, (at least as far as buyers are able to predict the future and therefore act rationally) its wrong to blame them for a property bubble, poor economic performance by the economy, mal investment, debt, etc... This also applies to the argument that New Zealand is living beyond it's means. People do not generally live on debt (which is the implication above), mostly people have a large mortgage debt and live within the means of their wages while servicing the debt. In most sciences you can't simply extrapolate from a macro to a micro, or from a micro to a macro scale. This also applies to economics.
Unless the incentives of the economic system change the eventual results will always be the same.
I do not agree, on everythign you say. A house purchase is a fairly new thing....decades ago many ppl rented and had a perfectly acceptable home...
Rental inflation, you can usually move quite easily, so your accomodation need is fairly liquid, owning a house is il-liquid...especially in times of financial stress. Owning a home means you also face risk of loss....since 2007 most property has been losing money because it is greatly over-valued...
Rational, no to buy when over-valued is a mistake, that's greed with the hope that they will make un-earned capital tax free....that isnt very rational.
When your debt is 25 years long ans there is a risk of loss as there is now, thats mal-investment...however PIs are indeed Mal-investing, they are doing so to reduce tax in their main income with the hope of a tax free gain when they sell....thats risky, its a gamble.
Most sciences, this isnt a science, this is people.....and actually you can to an extent look at macro behaviour, a forcasted by the name of Dent is doing just that and forcasting a property collapse...
NZ Govn is chnag8ng the incentives, slowly.
regards
Property Investment = Effective Tax Evasion
Property Investment = Less people able to own their own home
Property Investment = Worse standard of living for NZ (no investment in productivity)
Property Investment = Disgruntled youth who leave for better opportunities overseas
Should we consider property investors in the same light as Wall Street bankers?
So used to spellcheckers, where is the one on this site? Disabled intenntionnally soo thatt we cann identifyy the spelling challenngged?
"Do-gooders = loosers" - I'm still a bit shocked by that comment, but I guess there are many people out there with that attitude. We just know them as property investors.
What a load of BS:
1 Tax avoidance has been made harder with removal of depreciation and LAQc to LTC
2 Where do people live while they save for their first home
3 Property investment also incudes industrial and commercial properties which the productive sector require.
4 And the same youth are going to have GBP500,000 to buy some apartment in London
Ya right!!!!!!!
The underlying problem is with the banks not with property investors. Trying to go to your local bank to borrow money for share market or a start up business, I can almost guarantee the response will be" you want what ?" - I know, cos I have tried. The banks are making too easy to borrow money for property investment and human being , we will choose whatever the easiest form to make money. If you have chose the harder route to make money then you are being stupid !
All forms of Investment including property will have some risks - property has been judged as low risk for a very long time. I am not a PI but I wish those anti PI stop using terms such as rorting, scumbag landlords, tax avoidance, ponzi etc.. It's not their fault, blame the banks and the policies instead!
Here, Here to that! And Let's add out dear leaders to that too.
All the ranting against PI's on this site is getting boring. Most PI's are just people who saw the logical thing to do with thier money/income based on the set of circumstances they found themselves in. To justify the pious judgments around here most of the commenters must be wonderful model citzens without so much as a parking ticket to thier name.
I have invested in property and my own business and I can tell you the bank would not lend a dime to our business endeavors withour securing it against a property. This is because lending to business is effectively lending to an individual and has to involve trust and a proven track record - much easier to be able to trust the consistancy of property values that have historally only ever dipped by single percentage points YOY. They also know that....
The Gubment is motivated to keep this status quo as so much of the electorate has money in the market. Big drops in Property value are bad for most of thier voters and this is partly why we haven't seen the apocalyptic predictions of property collapse that were common here over the past couple of years - those in power have insulated it from sudden decline.
Property investment is like any other in that it has it's own pro's and cons. These articles that interest.co.nz puts up about property are like bait for the haters.
Here in nz we are so obsessed with everything being "Fair" that this in itself becomes our focus instead of trying to foster new ideas or create something for ourselves or boost those who put the energy in to succeeding.
A thing for concideration, emergence. The points you raise, I'd wager, were also raised in Ireland, Spain, The States, The UK, Japan, Portugal etc. etc. ie : ".. so much of the electorate has money in the market. Big drops in property value are bad for most of thier voters.." and regardless, their property markets fell. For whatever different set of reasons, those markets ...fell in the face of conventional wisdom. There is no reason that our Government should be so blessed that it could avoid a similar fate, even if it was, likewise, economically and politically destructive. Do you think those Governments just 'stood back' and allowed it to happen, unchallenged? We in New Zealand ( & Australia ) are not different; we are the same. Because we have so many things in common with those that have gone before us; most strikingly...the residential property debt.
Sounds like blaming to car manufacturer for being caught speeding. How dare they build a car that goes over 100 km per hour!!!!!
The banks don't force people to borrow: I haven't seen my bank manager grabbing people off the street, giving them a $100 grand in cash and saying you must have it.
Maybe the fact you didn't get a loan is simply the deal didn't stack up and Bank wasn't prepared to put their savers money at risk lending to you?????
It's a profitable business model that attracts the top echelon of wheeler and dealers to a rock solid investment class.........
"The opportunity has attracted some unlikely buyers, among them Haught, who spent 4½ years in prison for Medicare fraud and whose own home is in foreclosure.
Haught and his associates have landed some amazing deals:
A $1.2 million bayfront home in Apollo Beach for $10,010."
The favourable tax treatment of rental housing has driven a significant increase in investor demand and crowding out first home buyers from the market. This distortion has contributed to a significant number of people to make property investments because they are tax-efficient rather than because they are wise investments.
Housing is definitely a non-productive asset. It does nothing to generate generate exports, or improve the competitiveness of our country.
While New Zealand stays focused on becoming a nation of property investors, China was investing in becoming the world’s manufacturer.
Our focus should be on making investments in the export sector and creating jobs that bring in a sustainable revenue stream for New Zealand.
"Our focus should be on making investments in the export sector and creating jobs that bring in a sustainable revenue stream for New Zealand".
Our focus is on whether property is a good investment, not on political slogans - the latter belong to politicians and their blogs and forums.
Property investment can bring great returns if done in a considered manner. Like any investment, it is not risk free. Like investments in stocks, bonds, commodities, currencies, etc. it worked well for many people. Also, similarly to the other investments, it can fail due to lack of due diligence or due to unexpected circumstances. It’s just another form of investment… All this talk about “tax evasion”, “unproductive investment”, “criminal investment”, not an “honest dollar”, etc. is nonsensical fluff coming from those who never invested in anything and have nothing else to do except “blogging”.
Exactly how is housing taxed favorably compared to other investments?
Don't get me wrong, it has been damaging for our economy that the goverment let the housing party go on for so long but it was not because they were treated any differently to other asset classes, It was because they weren't treated any differently.
It's favourably taxed by ommission, emergence. The one market has two sets of participants, that are not treated similaly, taxation wise. One set are owner/occupiers ( no tax offsets, in theory!) and the other set are 'investors' ( tax offsets). It should be one or the other, not a chimera. How does an owner/occupoier compete on price against an investor, otherwis,. except by paying a higher net price and thereby chasing the market price up ( to the delight of the established investor segment)?
Well that's kind of my point. For social reasons, property investment could be treated differently to ensure a critical resouce doesn't become a speculation bubble.
But this is different to crying out that Property Investors are a bunch of scumbags taking a free ride on the taxpayer. At least any more than any investor looking for growth is. The dogma here it that property has some special tax loophole that is unfair. It doesnt.
Say I take some savings and use it to start a business, I can set it all up, grow the good will and turnover using my money and claiming all of this as deductable expenses, then sell it at significant profit to a new owner and pay no tax on the capital gain I have made. Am I the same as a PI scumbag for doing this?
I also take exception to the other favorite fall back on these forums about how business is productive and property is not. Property produces a critical benifit to our society - somewhere to live, work, play. Only the speculation is unproductive, not the investment.
The real issue that people should have with property is that we had unbalanced tax rates and massive leverage enabling some people to convert real earnings into capital gain through gearing and thus avoid some tax. This fed the hot market fires and should have been sorted out long ago but was not the root cause of the issue.
Well that's kind of my point. For social reasons, property investment could be treated differently to ensure a critical resouce doesn't become a speculation bubble.
But this is different to crying out that Property Investors are a bunch of scumbags taking a free ride on the taxpayer. At least any more than any investor looking for growth is. The dogma here it that property has some special tax loophole that is unfair. It doesnt.
Say I take some savings and use it to start a business, I can set it all up, grow the good will and turnover using my money and claiming all of this as deductable expenses, then sell it at significant profit to a new owner and pay no tax on the capital gain I have made. Am I the same as a PI scumbag for doing this?
I also take exception to the other favorite fall back on these forums about how business is productive and property is not. Property produces a critical benifit to our society - somewhere to live, work, play. Only the speculation is unproductive, not the investment.
The real issue that people should have with property is that we had unbalanced tax rates and massive leverage enabling some people to convert real earnings into capital gain through gearing and thus avoid some tax. This fed the hot market fires and should have been sorted out long ago but was not the root cause of the issue.
It is 'unfair', emergence, only because it discriminates within the same asset class. It give one set of participants an advantage that other do not get. If you establish a business, likewise a similar establishee gets exactly the same breaks that you get. It should be either all property owners get the same tax treatment or none do. Comparing property investment, as a business, to establishing another class of enterprise does not alter the fact that there is an anomaly in property that creates an advantage for some, and not for others.At the very least, it tempts those on the wrong side of the legislation to alter their circumstances to attract benefits to which they are not entitled ie: house swapping, or more precisely address swapping, to rent houses out into a pool of owner occuppiers so each 'rent' their own homes.
Property investment is treated favourably in one specfic aspect. Under the current tax law expenditure is tax deductible if incurred with the intention to produce a profit. In many property investment cases this has not been enforced by the IRD as it is clear many negatively gear property portfolios are specfically structure never to make a profit. Based on the law the deductible expenditure should not be allowed, they have never contested this systematically with these tax payers but happy to pursue small/medium sized businesses on aspects of tax deductibility. Here is a couple of other industries that have long loss profiles that have been audited aggressively , small land holdings/blocks and B & Bs. Why not property investment in this respect?
speckles - surely the intent is to make a profit by capital gain when the property is sold, what's wrong with that?
If we are to maintain the intent rule then maybe we need a bright line test to disincentivise the behaviour you outline. Suggestion - such a test could be based on taxing gains proportionally with percentage of years less than a certain level of profit, say, risk free rate of return (rfrr). For example, a property is held for 10 years and for 7 years it makes less than rfrr, therefore 70% of the gain at sale is taxable. If it was 7 years above the rfff, then 30% of the gain is taxable. Therefore those intending to invest for income, with more equity, less debt and over the long-term, are not disincentivised with the prospect of gains taxation. While those intent on structured avoidance via negatively gearing property portfolios specfically never to make a profit, might be incentivised otherwise, or just pay tax on the gains and be glad they could and move on to the next speculative venture. What's wrong with that? However with reduced debt momentum in the market such speculation might not be such a sure bet.
Am not suggesting this with any great rigour behind it and have not considered wider application than the topic here. In regard to rental property, as always objections based on not releasing properties for sale seem absurd when one considers the purpose of the intent rule. Nevertheless, just considering the aim of the idea, what +/- effects might tighter definition and enforcement of 'the intent rule' have on private debt growth, property investment, the property market and also say farming, which in some areas has become more of a property investment activity, as Labour MP Stuart Nash illustrated just recently?
As for your question, "Why not property investment in this respect?" - were you serious?
Cheers, Les.
From what I see in market now there are not a lot of property investors and that sector of property market has been replaced with first home buyers.
With changes to depreciation and LAQC structures those so called tax efficencies have been removed.
Whole property game has changed.
Attracting investment capital into rental property has a significant cost to the economy.
Firstly, investment capital is put to non productive use and it contributes to house price inflation, which results in higher interest rates. The higher interest rates combined with a strict anti inflation monetary policy attracts speculative capital to New Zealand. This drives the currency higher. The current policy hits the exporters in three ways; diverting capital away from them, higher interest rates and a higher currency.
Secondly, as property prices increases, more household disposable income is directed into mortgage servicing rather than being spent on goods and services. This in turn restricts the productive sector and ultimately slows economic growth.
Last night I went with Mrs Pythagoras to the debate between David Whitburn and Bernard Hickey on ``Is Property Investment Productive?'' Many thanks to the Auckland Property Investors' Association (and their sponsors :) and to interest.co.nz for making available the free tickets. David went first and scored points for:
- Showing some nice before-and-after photos of some renovations he has done. All good work, except we preferred the statement-making bath from the 1980's to the white and grey tiled modern one that replaced it.
- Explaining that rental properties and renovations provide jobs for painters, water blasters, roofers, interior decorators, electricians, builders and so on, and that all these activities generate tax revenue for the government.
- Being slippery smooth with the delivery. You could feel the love in the room and I would have bought two of anything he was selling last night.
- Showing some nice photos of his family and explaining that he'd like them all to stay in NZ.
- Pointing out that the jobs David's houses create for painters, water blasters, etc., are not the high value jobs that will attract young NZers to stay in the country.
- Telling a joke.
- Backing up everything he said with facts and figures and graphs, and explaining in vivid detail the cost to the country (in terms of cash flowing out of the country to foreign banks, etc.) when someone borrows piles of cash.
- Giving a reasoned yet impassioned delivery. You could have heard a pin drop while he was speaking.
- The most interesting question was what should one invest in, other than property. Bernard said he wasn't a fan of the NZ share market, that returns on bank deposits were too low, and forget finance companies. So what does that leave? The only other option, it seemed, was to start one's own business, such as interest.co.nz.
- At this, the audience got rowdy and hecklers yelled out various comments, mainly along the lines of ``my rental properties are a business, too''. The most enjoyable cringe-moment was when one man screamed out that cliche ``all my tenants have flasher televisions than me''.
- Bernard kept his cool and responded to each outburst with a calm and reasoned answer.
Thanks for the run down on the debate, the problem is in New Zealand investment options are limited. Building any business is taking the hard road with the system biased against you at every turn. Politically, financially and market wise it is quite a challenge. That is even before you consider moving from a simple business to one that is innovative and the requirement to go mutinational to meet markets. It usually takes extreme dedication and a freakish ability in some area.
People also are not interested, this forum is dominated by property and macro economic issues.It does show the hand of readers that they are not interested in or typically involved with complicated businesses.
Certainly for the majority of business people they made their money in NZ in the past ten years via property not their business...unless property related.
In the same time line I have been associated with five NZ companies that had the choice to become IPOs in NZX, Australian or the UK AIM markets, every time the best option was a private placement of funds to grow or aid a partial exit. No investment opportunties for mum and dad investors here. The cream does not get listed.
Well Said.
Having 2 businesses and 1 property investment I can tell you which is easier to get started and maintain.
Most Kiwis seem to want to have a decent job that can provide them with a nice house, car, holidays and time to muck about on the weekends while leaving a bit to put aside for retirement. Where that retirement bit goes is the issue here because we have traditionally put it into the house. Starting businesses, IPO's, R&D, angel investors, managing staff, etc... don't really fit into the above life goals.
Much easier (conceptualy) to simply take your bit extra, put it into a property and watch it grow with a bit of leverage from the bank.
Of course starting your own business also has some of the same pitfalls that many level at property investment. The investment is difficult to sell, you are at the whims of the market, all eggs in one basket...
and is a lawn mowing business is really more productive than a property investment.
The issue is with the leveraged specualtion market that has existed for property, it was a no brainer to put your money in property right through the oughties. If banks suddenly decided that SMB's were worthy of 10% equity loans at current mortgage interest rates, you'd see a massive SMB speculation boom that would be even more dangerous than the Property Boom.
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