By David Hargreaves
The Government's progressing its plans to 'ring-fence' investors' losses on residential properties as it continues its push against property speculation.
An Issues Paper has been released by the Inland Revenue Department on the proposal to change the rules in what the Government says is "an effort to level the playing field between speculators and investors - and home buyers".
IRD is proposing that the new rules will apply from the 2019-20 tax year and will mean that investors will no longer be able to offset losses on property investments against their other income. It's not definite yet that the new rules will be applied in entirety from April 1 next year as the IRD says it would be possible to phase the rules in over a two or three year period (by gradually reducing the amount of losses that can be applied against other income). However, the IRD appears to favour applying the rules in entirety from next year.
Revenue Minister Stuart Nash, in "encouraging feedback" on the proposed changes, says the "persistent tax losses" that many property investors declare on their investments indicate that they rely on capital gains to make a profit..
The changes will "make the tax system fairer" Nash says.
This move had been widely signalled by the Government and follows on from changes to the bright-line test, extending the period at which capital gains on sale of investment properties are taxable from two to five years.
"In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The time is right to test the detail of this proposal with investors and other stakeholders," Nash says.
What the IRD is suggesting:
As proposed, the rules would not apply to a "main home", or a property that is subject to the mixed-use assets rules (for example, a bach that is sometimes used privately and sometimes rented out), or land that is on revenue account because it is held in a land-related business.
IRD is suggesting that the ring-fencing should apply on a "portfolio basis", which means that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.
Also under the suggested changes, a person’s ring-fenced residential rental or other losses from one year could be offset against their residential rental income from future years (from any property) and their taxable income on the sale of any residential land.
The IRD's also suggesting "special rules" to ensure that trust, company, partnership, or 'look-through' companies can't be used to get around the ring-fencing rules.
It is proposed that such entities will be regarded as “residential property land-rich” if over 50% of the assets are residential properties within the scope of the ring-fencing rules, and/or shares or interests in other residential property land-rich entities.
Where that is the case, IRD suggests that any interest a person incurs on money they borrow to acquire an interest in the entity (for example, shares, securities, a partnership interest, or an interest in the trust estate) would be treated as rental property loan interest.
"The rules could then ensure that the interest deduction is only allocated to the income year in question to the extent it did not exceed the distributions from the entity (deemed rental property income), any other residential rental income, and residential land sale income. Any excess of interest over distributions, rental income, and land sale income would be carried forward and treated as “rental property loan interest” for the next income year," IRD says.
This is the statement from the Government:
Revenue Minister Stuart Nash is encouraging feedback on a proposal to change the rules around ring-fencing losses on residential properties.
An Issues Paper has been released by the Inland Revenue Department that proposes ring-fencing losses in an effort to level the playing field between speculators and investors, and home buyers.
“Changes would make the tax system fairer by ensuring that investors could not offset their losses on some property investments against their other income,” Mr Nash says.
“At the moment, tax is applied on a person’s net income, which means if a property investor makes rental losses those losses reduce their overall income, and therefore their tax liability.
“The persistent tax losses that many property investors declare on their investments indicate that they rely on capital gains to make a profit.
“In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The time is right to test the detail of this proposal with investors and other stakeholders.
Mr Nash says ring-fencing losses would be a useful tool to dampen property speculation. “This measure would not preclude any solutions the Tax Working Group may come up with in relation to housing”.
“I encourage the public to make submissions to Inland Revenue before the deadline of 11 May 2018,” Mr Nash said. For more information, including how to make a submission, see http://taxpolicy.ird.govt.nz.
189 Comments
This doesn't stop anyone investing in residential property to rent out. It just makes it less attractive in areas like Auckland where yields are lower than mortgage rates. As such, it might actually help to reduce prices where they are currently stretched and make yields more attractive.
@mfd Has it crossed your mind that there is no room for prices to fall meaningfully when the cost of building a very basic new compliant house is anything up to $3,000/m2
So a 2 bed unit of 100m2 costs $270,000 , plus the land serviced at $400,000 to $500,000 plus connection fees and DC levies of $100k .
The new matchbox costs $750k
A used unit sells for $650k and in Milford that unit is $1,20 million
How are prices ever going to magically "reduce "?
So how did house prices rise so strongly recently when the cost to build a house did not rise particularly fast? Land price increased to make up the difference. If prices fall, it will come out of the land price. This could happen if residential land supply and house supply increase sufficiently. The Government is working on this.
A new matchbox house only costs that much in Auckland because of the "apparent view" of a land shortage. Auckland isn't short of land, as you will discover over the next few years. Auckland just has land locked up by regulations and alot of it is owned by the government, which they are starting to release.
Yet the costs of building are inflated, just maybe the price to build is set at the price ppl will stand to pay and no where near what it actually costs.
PS last time I talked to a large developer of flats his NET profit margin was 100~120% per unit. Now Im sure there are a lot of small businesses out there and even landlords who would be happy with 20% NET let alone 100%+
Hi jcs
The press has demonized landlords. As all the tax breaks are removed and the costs of P damage and extra insurance cover, WOF, etc eat into profits, not many private citizens are going to bother becoming landlords any more.
So guess what? as a tax payer you won't have to subsidize any more, the tax payer will have to pick up the bill of providing the rental housing, managing the rental housing and repairing the rental housing.
The tax payer is going to take a king hit on this one.
And the Elephant in the room that no one talks about is population growth.
We still have a net gain of over 70,000 people flowing in.
10,000 kiwibuild homes a year will be gobbled up and more Kiwis on the street.
And infrastructure is a dirty word not mentioned, or at least who pays for it.
Guess what tax payers and rate payers, you are paying for the pleasure of sharing your country with this ongoing flow of people. Petrol tax in Auckland is a drop in the bucket.
You are paying with a denigrated lifestyle, High crime, overcrowded schooling, overwhelmed health system, new taxes, homelessness etc etc.
Wake up and shut the door.
Hello Northland Hippy.
Yes you are right, the press in NZ is too small to cover the full spectrum of opinions to provide a balanced perspective. I struggle with the Herald who seem to be more tabloid these days, than insightful journalism.
And yes landlords have additional escalating expenses that need to be considered. But the same is true for the many hard working small business owners that everyday make NZ great!
Owning a retail property doesn’t exempt you from the economic reality of profit and losses, even if beer fuelled BBQ boasting would have you believe otherwise.
The reality is, landlords are business owners, and need to be treated with the respect and dignity that all small business owners deserve. Not privileged and treated as special.
The market will adjust, as it has always done.
Hi jcs
insightful journalism? Don't get me started. Our journalism is just an extension of CIA propaganda.
If a NZ journalist wants to open our eyes to our involvement in the invasions of 2 Middle Easton countries he has to write a book about it because our media won't publish anything that doesn't fit the censored story line
.
As for landlords it should be a given that negatively geared properties are purchased for capital gains unless such landlord can show a history of buy and hold.
NZ taxpayer needs private landlords and will suffer financially as the govt once again has to take over this industry.
Government depts as a generalization never do as good a job as private enterprise.
Letting Immigrants purchase our rental stock as satisfaction of their investment criteria should never have been allowed to happen.
Some people think I am anti immigration LOL. I have lots of immigrant friends but my first care is for the NZ my grand children are inheriting.
I'm anti 70,000 a year. I'm anti unskilled labour, I'm anti education rorts where people can apply for residency after bogus courses. Once educated go home.
I'm anti work while getting educated, people should have enough to get by. Our courses should be so good we get elite students not dregs.
The very point is it isnt for rent its done to get a tax free capital gain.
I mean the very definition of negative gearing is the rent/income is in-sufficient to cover the costs but because the speculator can offset these losses against other tax but still aim to get a tax free capital gain.
So a sensible, long term landlord is in fact in it for the rent and some capital gain at the end of a career as a landlord. So what we'll see is the speculators exit which will drop house prices and improve margins so those wanting to own can, and those wanting to be a real landlord can make a decent living.
Yes, it shows we are opposed to the current Government’s profligate ways and its inevitable reliance on a higher tax take because we are the ones who are likely to be targeted to pay as opposed to those whose snouts are in the trough who want more for doing nothing.
I cant see how this law is anything but sensible. In what possible way could it be argued as reasonable to offset income losses against a completely separate entity even while you make capital gains? Its just fake losses passed through and locked in. What if everyone offset their income to 0 and lived of capital gains... Frankly the law doesnt go far enough.
Boatman, perhaps if you're going to comment on matters relating to income tax in New Zealand, you should gain some knowledge of the subject. You are flat wrong. Tax losses are not recovered on sale. Of course, depreciation will be recoverable if sale price exceeds book value, but that's a seperate matter, and not relevant to current investment properties.
Totally agree. The ability to reduce taxable income, mostly salary income, to zero by losses intentionally incurred on investment properties is a toxic feature of the market that simply allows investors to increase their leverage beyond what it would otherwise have been. Investors who reduce their taxable income by relying on negative gearing are a plague who merely transfer the burden of their forgone tax to other income taxpayers, many of whom are least able to pay. The only sensible discussion is on timing of ringfencing changes.
Why, he’s been here a lot longer than you and has valuable contributions in my opinion?
If you really want to test out your resilience go to the Trademe opinions forum. The Left are owned on a daily basis there. Thread after thread after thread critical of the COL and some juicy info that the media doesn’t seem to want us to know.
Yvil, look at the articles that get the most replies, it’s not business per se e.g. the article on mycoplasma bovis received one comment whereas the article on property speculation had 160 comments. If you read through the property comments the main sentiment is inequity, a classic lefty focus. Few comment on the mechanics of property development or have solutions that make anymore sense than Twyford has come up with. It’s daily whack a mole. There’s also an element of recruiting with comments seemingly designed for upticks and in one case where the poster specifically asked for upticks. All very schoolyard.
If you have better ideas, be sure to include them in your submission. Seems like a great idea to me, similar to what has already happened in the UK without the sky falling in. Over there, it's being phased in gradually over a few years.
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-wor…
It's a good proposal, running any business at a loss is stupid and dangerous, including real estate. It's just a bit dangerous to drive away too many landlords, tenants need a place to live in. The naive will say "the tenants will buy the houses off the landlords" a few Will, but Pete, John, Sandy & Julie etc won't
Nope, the houses will not sell but landlords will not supply more rental accommodation to house the increasing number of residents/tenants.
Fair point. Tax benefits should flow to "landlords" or "investors" who increase the rental housing stock. I'm with you on that....if it's actually what you mean.
Is this really an example of the Law of Unintended Consequences? To me it seems to be the logical result of reasonably strict and low LVR ratios and pretty lax servicing requirements for obtaining credit. I think this is intentional, as it benefits a large and powerful sector of voters (those with capital) at the expense of another smaller sector (those without). Although I could just be bitter...
...It will be intersting to see the voter reaction to this.... expect some great gains in popularity. When this happens expect even more efforts to restore the integrity of the tax system and remove landlord benefciairies from the game. Excellent stuff.
Go Ourcinda.
The home ownership rates are the lowest in 66 years, therefore property investors are at the highest rate since 1951. I don't think lack of property investors is in danger of being a problem at the moment.
It appears that the investors have failed to deliver so far, so yes the governments plan is to step in and start building more houses. Do you not watch the news?
I seriously think investors should be made to buy new properties only, and we should have done it years ago. Investors just outbidding home owners for existing properties add absolutely nothing to the economy or to society. This has become a scourge on NZ society and has changed it more than any shower head or light bulb might have.
The only exception I would make for that rule would be an investor could buy a property where an existing dwelling could be demolished/moved and at least one other dwelling is built on the property.
Know nothing morans think that the only thing keeping property investors afloat is the <$2k per year they could be getting now by being allowed to offset losses against other income. It's just ridiculous garbage for the brainless masses. If they actually understood anything about how the tax works and the numbers involved, you wouldn't even hear a collective meh! However they seem to think property 'specualtors' are making billions of dollars per week through expense based tax offsets.
Looks like we live in interesting times. Grumpiness might happen:
There's little to cheer about in February's dwelling consent figures from Statistics NZ, with the recent growth trend coming to a halt.
According to Statistics NZ, 2412 new dwellings were consented throughout the country in February, virtually unchanged from February last year when 2418 new dwellings were consented. And it's little better than February 2016 when 2379 were consented.
In Auckland, where the housing shortage is most acute, the number of new homes consented dropped compared to a year ago, falling from 800 in February last year to 779 in February this year... It is estimated that Auckland needs an average of 1200 to 1400 new homes to be built every month just to keep pace with its migration-driven population growth.
I forecast more grumpiness, in fact, quite a lot of grumpiness.
Excellent News.... Guess who will be paying the difference?
This a disguised tax on all taxpayers in the country as water flows in all vessels and levels up regardless of size and shape.... watch the space. This CoL will get itself in a much bigger mess than they anticipated.
The cracks in the $11B deficit hole started showing early, Alas Bill and Steven are not here to witness it though, but will be remembered for warning us against it in 2017.
WP's prophecy of a downturn in the economy in 2019 might see the light after all !
Guess who will be paying the difference? ummmmm dah...those that have been offsetting personal tax with there losses. So that would be......drum roll....... the landlord beneficiary! Yipppeeeeee...less cash escaping from the tax system which cant be spent on golden oldie tours to foreign countries..
Because the Gov needs to fill the gap of housing and rental shortages to meet current and future demand and that will be paid by taxpayers.
If only 5000 out of 450,000 rental houses were sold to owners, then the Gov has to either buy or build 5000 units to accommodate the tenants of these properties, that is around $2,5B at best in Auckland ! - as I said earlier more than 1/2 of the 450,000 rental occupants cannot and will not buy their rentals. so go figure.
Chasing investors out of the market will NOT help them solve the mess, it will add problems to their plate. And it will erode the trust in any future partnership with this Gov. It will certainly lead to more complicated sets of regulations in an attempt to ring fence the mess they are creating - like changes to the Tenancy Agreement ...etc - they are digging deeper in the hole, when they are supposed to find a way to climb out of it.
Higher interest rates next year will make home buying more difficult .... I am certain that the Gov will buy or lease a lot of lower quartile rental properties itself to fill the shortage caused with these regulations - or pay more to house more homeless people in motels ( which no one is mentioning anymore as if they have all disappeared)! -- shot themselves in the foot again.
In time, Tenants eventually will have to flock up more to compensate for lost returns i.e. paying some ( and gradually most of it,through higher rents ).
Nurses, teachers and al rightfully want a pay rise, the very thing which National said labour did not account for in their promises (we shall see how fat their Operational Expenses item is)... Middlemore Hospital came out of nowhere to be a disaster and a black hole ...others holes will show up soon... Unions want more money and calling for a relief of budget rules to pay debt sooner ... Min wage starts tomorrow = more business expense= less profit= less tax ....even less next year and the year after. Investment capital is leaving the country to greener pastures as the honeymoon with this CoL is over.
Oh, and we don't have to believe the whole world talking about the next recession sometime in 2019 or 2020 because that is pure speculation.
If you can add these and few more unknowns you might reach the same conclusion ? -- $11.5B over 3 years is just small change.
Huh? If 5000 rental houses are sold to owners, there is no additional need for housing. 5000 families simply move from renting to owning. The Government doesn't have to do anything.
edit for clarity:
the pre-existing tenants of those 5000 houses move into the 5000 houses vacated by the new buyers (in aggregate)
Thanks Craig, that is an interesting point. Yikes, it means that rents will go up. How very inflationary. Oh, no, I'm renting, better buy one of these here "home" thingies. Now when did houses become "homes" exactly? Presumably it was when their prices needed some elevation, about the time that flats became Apartments methinks.
That doesn't prove what will happen in future if there are more home owners and less renters.
Correlation does not prove causation.
Generally poorer people are renters. They tend to have to bunch together to afford the housing costs. If they started buying houses, they would likely still group together to afford the mortgage, in whatever arrangement they prefer.
Info fro NZ Property Investors Fed, eg: https://thespinoff.co.nz/business/01-03-2018/pushing-landlords-out-will…
"An average 2.1 people live in owner-occupied housing in New Zealand, but there is an average 3.9 people per rental property. Every time a rental property is sold to an owner-occupier, on average 1.8 tenants still need a home to rent."
Craig
While the numbers might be accurate, they aren't a true reflection of the reality. Most people in their twenties are renters, and live in high occupancy situations (flatting with friends). Most of these people can't/wont buy a home. The typical home owner is older and in a relationship living without flatmates. But this is function of their stage in life, not of whether they rent or own. Couples in their late 20s /early 30s onwards with or without kids generally live as a family unit whether they rent or own, and this is where most of the FHBs are going to be coming from. So the real effect is going to be much lower, probably about 0.8 or so would be my guess. That article is just spin from the industry.
@mfd ....You are simply naive and do not have any experience with tenancy in NZ...
You keep assuming that all tenmant will BE ABLE TO BUY a rental and that is not the case in reality ... so read my comments again and ask someone older than you to explain. enough said !
They didn't imply all. But some would - that's kind of how it works you know. How many FHBers do you know who weren't first tenants?
Seriously your fundamental lack of understanding of reasonably simple concepts is confounding. Your posts would make an excellent book. You'd have the bigliest sales.
I know, this is where you say that it's not about maths blah blah and only geniuses like yourself get it.
IRD is suggesting that the ring-fencing should apply on a "portfolio basis", which means that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.
This is manna to the aggregators who will simply be in a perfect position to clip the ticket. The business model will be to assemble 'portfolios' of properties (into which an existing mom-and-pop outfit could sell their sole shack) and thus to keep that ring-fence around a substantial number of otherwise caught-by-the-fence properties. Of course there will be Modest Fees to pay to the Aggregator, and probably equally mdest Distributions if a portfolio tips into P rather than L.
It's perfectly analogous to the situation, especially in dairy, where compliance and operational demands are such that aggregators thrive: one overall Compliance Manager for the group instead of the spouse slaving over the old laptop in bed at 2 am.
But equally clear is the shift in power relations this would set up. Instead of dealing with hundreds of two-bit property owners, tenants, Gubmint and IRD would be dealing with several dozen well-staffed companies, with Legal Eagles on a short leash and Big Accountancy a single Interwebs hop away.
Of course, the above is simply a Thought Experiment (the safest kind).
Have at it, common tateriat!
..or simply, will result in dropping of ppty price to compensate for the absence of cash from tax refunds to pay the interest.
The tax rules just enabled higher debt loading as it was free cash enabling more debt. i/e joe tax payer subsidising the landlord beneficiary.
This will have a major affect on the LL beneficiaries........more than any other of the toying around.
This will certainly lower prices in Auckland especially, as I would guess that most property bough5 as an investment in say the last 5 years would be negatively geared.
What it will do is to enable seasoned professional investors with plenty of equity and cashflow to buy up the good investment stock at reduced prices.
Personally everyone of our properties is positively geared so won’t affect us at all but will enable us to continually buy if we so choose.
Do feel a bit for the mum and dad Investors that are trying to look after their retirement with one or two properties that are currently negatively geared.
What it is saying is that the Govt. doesn’t care about anyone but the ones who aren’t prepared to look after themselves!
Why do you feel for mum & pop "investors"? - if your investment plan is making a loss, why on earth would you do it?
Please explain how getting a mortgage on multiple houses that you can't afford is being prepared to look after yourself? It's a massive debt, that they can't afford and never could afford. It's a recipe for disaster, that somehow has been papered over by shonky tax benefits.
Please explain how getting a mortgage on multiple houses that you can't afford is being prepared to look after yourself? It's a massive debt, that they can't afford and never could afford. It's a recipe for disaster, that somehow has been papered over by shonky tax benefits.
Well expressed. And this is the crux of how "bubble economics" is ultimately destructive, regardless of the extent to which legislation influences behavior.
Ma and pa investors can still be involved, just not negatively. Which in essence esactly what this is all about, negative impact on tax, negative impact on fhbs, and negative impact on professional landlords who have to pay the same prices as FHB. Should be brought in as soon as it passes and without delay. Probably vote for retrospective impact for the last five years as well.
Pretty average comment!
How,on earth can the IRD retrospect negative gearing five years ago????
Tax returns already been done!
This COL are just that, a bunch of jealous people that really have never been successful in business so they want to kill other people’s ability to be financially independant rather than a drain on the taxpayer,in their retirement!
They should stop meddling in stuff they have no idea about!
"Don't want to be a drain on the taxpayer"...but for the love of god don't get rid of my annual tax break (FUNDED BY THE TAXPAYERS) that makes my highly geared speculative investment viable....
Been biting my tongue reading some of the garbage on here but SERIOUSLY - you couldn't make this sort of sh!@ up .
Also before you resort to type with your normal "must be a loser, jealous blah blah blah...our household income in top 5%, also own a couple of rentals (brought when yields made sense)...but stupid is just plain stupid.
CHCH is a village and it has a clear idiot..
He's probably just another bludger who expects a free pass off the back of actual workers. Financial parasites who have been exploiting these loopholes are bleeding the country dry about time the playing field as leveled. We will probably have to put up with a lot of toys being thrown out of the cot though.
Why is it that prior to the astronomical rise in property prices we never heard people speaking so negatively and ferociously towards landlords. Why is it that when the market was benign and capital gains were modest or non existent we didn't hear all the hate talk. Society seemed to be reasonably happy for private investors to invest in residential property, take the long term risk, and provide accommodation to people who couldn't afford it or didn't want the hassle of home ownership. People were grateful for private investors to cover the shortfall of what government could provide or afford. I for one was one who invested long term in these times at reasonable risk to myself and family but felt that in the long term it may work out ok.
Now through no fault of our own property prices have sky rocketed, everyone including owner occupied houses have increased. Prior to these startling increases there was very little to no negativity of any significance to landlords.
As a result of huge immigration and extremely low interest rates property prices have skyrocketed, I know there are other causes as well, but sorry this is NOT the fault of investors, investing in a system that was presented to them is no different than any other business. There are many people on this site who really have no understanding of the tax system and how it applies to rental property business. Landlords pay tax and it is fair. Capital gains tax? I don't really care about paying it but my gut feeling tells me it wont reduce house prices.
I really do sympathise with people trying to buy a home in this market, but some commentators have got the wrong end of the stick and it really can only be interpreted as jealousy and envy. By all means discuss how we can fix the issue long term but enough with the hate talk, you were conspicuous by your silence in years gone by, changes in the market after landlords invested is hardly the investors fault.
So, you're saying that investors rushing for the capital gains gravy train didnt drive up prices.
It's disingenuous it was 'no fault of your own'. If you didnt pay so much, it wouldnt cost so much and the property wouldn't be negatively geared.
There's a reason why RBNZ introduced limitations on investor and low deposit lending. Because that is a contributing factor.
You understand bubbles, right? Maybe read up some.
I guess it's ok for mum and dad's to use a loop hole to avoid tax by running a flawed business plan that relies solely on over-inflated prices producing capital gains which has been a large contributor to the massive bubble in nz real estate. But screw those "investors" without kids.
Just to be clear: positively geared investors i have no issue with. Speculators regardless of parental status can take this on the chin as far as i'm concerned.
Some investors are now raising their rents so that they can be positively-geared or at least keeping up with their increasing expenses- they're called greedy. But if they keep their rents low - which benefits the tenant - they're living off taxpayers. Investors can't win either way.
The thing about a good capitalist system is that there is competition. In this case positively geared landlord can afford to offer lower prices than a negatively geared landlord. If negatively geared landlords raise their prices too high in comparison with positively geared landlords, they will have longer periods without tenants. Every week without tenants eats profits that raised prices provide. Our rental market is not even close to a cartel or monopoly.
If Jacinda, Phil and team are committed to closing so-called loop-holes, they should clean up their backyard and stop MPs getting guaranteed inflation plus salary increases every year without any form of performance review; their post-MP perks such as free flights should be stopped; their generous superannuation scheme where the taxpayer gives them 2.5 dollars for every dollar (I understand) should also be stopped. But they won't stop their benefits. Property investors are a nice political football for them.
Inflation is good when we have huge private debt levels such as mortgages because inflation raises annual income, but unfortunately annual income increases won't come anywhere close to off-setting the last 5 years of the property bubble! Expect job losses and forced sales, even a bank or two going down, before the markets start to settle. We live in interesting times.
Buying investment property so someone has to pay you money in your retirement instead of buying their own house, is not looking after yourself.
Your tenants are looking after you, and forfeiting any capital gains in their house and they will have a lot less themselves for their retirement as they have been paying for yours instead.
@avergeman .......... you really dont get it do you ?
The price of used houses is simply tracking the upward increase in the cost of new builds .
This is a perfectly normal function in a market with limited supply .
Think about it .
There is no way in hell prices of used houses will fall as long as the cost of new houses is increasing.
And there is no way the cost of new builds is coming down with Fletcher group controlling the supply chain and Auckland council charging $20,000 for a water meter
I agree both of those imputs need sorting as well as both are taking the piss. Fletcher is proping up its construction losses and Council is covering leaky building claims. Will the govt have the stones to tackle two sacred cows, fletchers share price and the Mayor.
Rubbish.
1) rent is set to the maximum people can stand. Do you really think with landlords making a few % right now that if they could they wouldnt be increasing their margins to a more reasonable 7+%?
2) The same number of houses exist and the prices will drop or rise to get cleared. What we see here is the removal of tax "advantages" from booking income "losses" in the hope of tax free capital gain. What will happen then is the people in it for capital gain will exit selling their property, see 1) for that outcome.
The current prices reflect that situation. Demand is affected by prices, if they go higher than someone can afford when demand is elastic they won't buy it. While rental demand is inelastic, people will either drop their standards or end up homeless if they can't afford rent. If landlords could raise rent higher, then why isn't rent more expensive than it is- don't tell me they're providing a public service.
Oh here we go again..Rent will rise. As if landlords aren't renting out for as much as they can get already!?. Some might set their rents a bit lower as a strategy but please don't pretend any landlord is doing it for the good of their fellow man.
The fact is houses are too expensive and the raft of changes they are bringing in might actually contribute to lowering prices despite jacinda's stated aim of making houses more affordable... without lowering prices.
Someone mentioned conflict of interest, yes! by parliament. Is it 85% of mps are landlords? and they voted to increase accomodation supplement/working for families? pretty sure that helps explain recent upsurge in rent acheived
Chairman Mao Tse Dung would award Jacinda the Order of Heroic Exemplar , the only thing left to do is she must publicly execute a Landlord in Aotea square
She has systematically reversed and killed off all the incentives that Helen Clarke put in place to encourage the private sector to provide housing for New Zealanders .
She will get what she wants ., but I hope she has deep pockets to house everyone !
@JC .......... Bollocks , absolute bollocks.
I have lived and worked in Singapore for Standard Chartered PLC , and when I was there home ownership rates were around 85% in the late 1980's ............ among the highest in the world
The rest was mostly provided by a mix of private landlords and property-owning companies .
Perhaps you misinterpreted what I said. 80% of Singaporeans live in "govt built apartments." It's a fact. Definitely not bollocks.
http://blogs.worldbank.org/sustainablecities/what-about-singapore-lesso…
Is this a troll?
As Andrew Little said, phasing in the ring-fencing will allow investors to adjust. They can adjust by raising the rents and this will be good to level the playing field between investors and renters who have been paying rents that don't cover the outgoings. The other way to adjust is to sell the property perhaps to an owner-occupier. Stats show owner-occupier occupancy numbers is less than renter occupancy - which means that some renters will be displaced if sold to owner occupiers. Owning and maintaining a house is very expensive - many will be surprised. Shamubeel Equab has pointed this out on a number of occasions.
Well the obvious adjustment will be property value decreases. The current investors will be screwed, but after selling to someone else for a massive loss, the new investors will have much less outgoings due to their lower mortgage and will be able to make a nice honest profit.
@jimbojones ............. if hypothetically house prices were to fall to levels where they were cash positive in terms of rental , then I would buy 3 properties , one for each on my adult children
AND IMPORTANTLY , I would qualify for 3 mortgages totalling $3,000,000 .
Just like if Jacinda starts offerring new houses for $500k houses at less than cost , then we will ensure our 3 adult children get onto the waiting list .
And my wife and I will stump up with the deposits required by our kids .
Like I have said for the past year ............... this is never gong to happen becasue it cannot be done .
You won't qualify for 3 mortgages totalling $3,000,000 in two years time because houses won't be worth that much! Talked to your bank lately? They have changed their lending criteria and are in the process of migrating their investor customers from "interest only" loans onto "principle AND interest". These customers are now starting to be hit hard with repayments that are doubling in some circumstances. What happens to our banks when the defaults hit 5%? Banks start to fail!
Ok lets say you're right and landlords form a cartel and raise rent sky high. Inflation skyrockets because to afford rent people need higher wages. Subsequently interest rates rise.
And if incomes don't rise, consumer spending will plummet and the whole economy will go into a massive tailspin.
If anyone's spoken to anyone at IRD policy, they'd know that the IRD hate this idea because it won't work. Whenever you try and distort the tax system to create special rules for a special class of income, it leads to widespread manipulation. They've written the paper simply because Labour have asked for it. The large scale investors who are the biggest problem in the market will just set up a company (Company 1) which will borrow the money. Company 1 will on lend this money to Company 2 at a low rate of interest. Company 2 will purchase the property. As rent on the property will cover the low interest loan, Company 2 will break even. Meanwhile Company 1 will make a loss which will be passed on to the investor. This is just one of a dozen scenarios investors will use to get around these proposed rules.
And, as I speculated (oooh - bad word - thought-experimented) above, the huge beneficiaries of this proposal will be the aggregation/property manager companies. They will step in, offer a solid if not exceptional buy price to the mom-and-pop investor with the loss-making fibro shack in Ranui, and make Mom and Pop shareholders. Then, along with other such shacks, arranged into a neat Portfolio (which will, as it's owned by the one entity, be neatly ring-fenced), the company will operate with the following outcomes:
- Charge all owners a Management Fee to cover Overheads
- Disburse to all owners a Modest Return on the agreed value of their shareholding/property.
- As this is a company distribution, it follows normal withholding tax rules so IRD will be happy, and the owners have insulation against personal liability
- Customers (tenants) will stump up (as rent) whatever is needed to cover the opex, the return, and the aggregators Modest Fee (or whatever the market will bear, whichever be the larger)
So the net effect is likely to be an increase in non-tradeables (as an extra layer or three has been added to the property stackj), and in rents to pay for that layer.
As this is all a Thought Experiment, who knows what exact behaviours and consequences will flow??
But I'd bet the farm (if'n I owed one) on plenty of work for company creation - er - companies, lawyers, tax accountants, Legal Eagles and other birds of prey. And for the Land Registrars of this fair land.
And there surely will be Consequences, because human nature.
*Customers (tenants) will stump up (as rent) whatever is needed to cover the opex, the return, and the aggregators Modest Fee (or whatever the market will bear, whichever be the larger)*
I think you might want to adjust to say "lesser" rather than larger.. Tenants won't cough up more than the market can bear. Which results in their being insufficient funds to cover both the aggregators Modest Fee and the owners Modest return.. so something is going to have to give.. And i'm guessing it will be shareholders distributions before directors fees/management fees.
If the I.R.D. treated capital gains even handedly like any other form of income, regardless of the duration of ownership then there would be no need to separate it from any other form of income. The fact that they are having to do this is a clear indication that property related income/wealth increase streams are not treated equally to conventional income. It is a patch up and it would be more effective to address the disparity properly.
So, Labour have effectively declared War on Landlords but so far the populace think it is a Good Thing. Should be interesting. Presumably rents will go up.
What about all the flats, er, I mean, Apartments, that sit empty, owned by overseas owners as cash boxes and who don't need anything as crass as those dirty tenants messing the place up. Will they be next, and what proportion of flats, sorry, Apartments, are in fact empty at the moment, 15%?
All landlords will be executed by this communist -leaning Government ............ just like Mao Tse Dung turned the peasants against landlords and about 190,000 landlords were executed in Guangxi province in China alone .
Of course I am kidding but there no doubt that war has been declared on the property-owning class by Jacinda and her Government
Well if that's the case. National declared war on all NZers that are under 30 including future NZers who are not born and who don't have a home.
Labour want homes to be more affordable for everyone, not sure why that's war unless people can only see one side of the argument, and don't care about anyone else.
If you have house investments, why not sell up and buy at lower prices, when house prices drop. Seems an easy strategy, yields will be better with lower mortgages, stop offsetting losses.
An interesting angle is the connection / trade off between the ring-fencing proposal on the table and the CGT being floated . It seems that they are just about mutually exclusive ; from the IRD paper :
"
There is therefore an argument that, to the extent
deductible expenses in the long-term exceed income from rents, those
expenses in fact relate to the capital gain, so should not be deductible unless
the capital gain is taxed.
"
and
"
5.3 Under the suggested changes, where a taxpayer sells a property that is subject
to the ring-fencing rules (that is, a residential property) and the sale is taxed,
any ring-fenced losses the taxpayer has could be used to reduce the taxable
gain on sale to nil.
"
So if the intended consequence is for house prices to drop to an affordable level so speculators don't see property as a big gravy train, then why would rent go up.
The drop in house prices would mean that mortgages are less, then this would make higher yields more attainable for investors and mean rents would drop, when investors buy at new levels.
Sure if house prices stay the same and investors cant manipulate the system to get the money they need to cover their costs, then rent increases, may be necessary. But then some people would sell and get out of the market, they may sell at lower prices, others will buy at lower prices and rent at lower rents. This competition will drive other landlords to match rents, if they cant match rents and are making a loss, then they will have to sell house at lower prices
Affordable houses is good for investors as they get better yields at lower rents, and its easier for FHB. Lower rents mean more money for the economy on other goods and services.
Sure if you bought a property in the last few years and you see your capital gains wiped out you may not be happy, but as long as you hold for another 20 years or so you should be fine.
I just did a mammoth "analysis" of last week's sales on the auction results page found on this site.
73 houses sold. 43 sold over 2017 RV while 29 sold under and one was the same.
82.707M in sales
79.685M 2017 RV (3.8% over)
55.715M 2014 RV (48.4% over)
Nothing exceptional in the findings, business as usual, possibly an uptick in activity. Prices are still very good at over 48% above 2014 RV. It is the biggest single "analysis" I have done for one week.
Do-ups definitely being picked up well below RV.
Check this one out in Otahuhu:
https://www.barfoot.co.nz/753050
(RV 620k, sold for 540k Still 36.7% above 2014 RV though).
Also this one for 200K below RV:
https://www.barfoot.co.nz/753339
If it is a do-up knock off 200k.
And this amazing bargain:
https://www.barfoot.co.nz/752988
2017 RV 1.0M 2014 RV 670k sold for 580k!! Upkeep and maintenance folks, it's important, as well as paying the mortgage.
Large sections still doing exceptionally well.
Well done Zachary and thanks for the analysis. It's just been released that NZ is the world's 8th happiest country in 2018. People will continue to flock to NZ as we are seen to be a happy place and a happy bunch globally! #danzdanzdance
http://live105.ca/finland-happiest-country-world-canada-seventh/
Has anyone done any proper research into while they still keep coming? The cost of living is quite high especially when you factor in housing costs. Yet they still come.
I think weather has a big influence. Finland, Norway and Iceland are practically unlivable most of the year. We would be first if weather was given a bigger weighting. Language as well, learning Finnish must be a bit daunting.
Just Auckland and just houses and units being careful to check and consider extraordinary outcomes that could indicate subdividing or a new build since the RV and excluding those. I did include the Cornwallis property though even though I could have justified excluding it I think. Pretty much focusing on ordinary houses with an ordinary history as far as I am able to.
In spite of the halfwits in government, I say bring it on. The wealthy will continue to buy rentals in future at lower prices if this move works. They will put down larger deposits, outbid the first time buyers, ride out the five year bright line or find a way around it, and reap the rewards. Its gonna be like Xmas in the park. Bring...it...on.
Bob, you are correct in most of the things you have said.
Yes seasoned investors with the equity will buy more but first home buyers will be able to buy but it will only be the crappier homes that seasoned investors don’t want.
Investors with good returns don’t tend to sell so the 5 year Brightline will affect the mum and dad investors more due to change of circumstances.
The COL is going far too far and if they turn too many investors away from providing housing then the country is going to be in Pooh street as the governments have always been useless when it comes to state housing!
This needs to be implemented slowly
There is a risk that in the short term with an ongoing shortage of housing in Auckland, all it will do is drive up rental prices with reduced rental supply. House prices will fall with increased supply but probably not quickly enough - i.e. increased stock for sale at a higher prices sitting on the market for extended periods.
It would be far better to address the high immigration rate first so that demand and supply are more balanced and then make the taxation changes.
One unintended consequence may be to drive up rent. But not because a Landlord is just being greedy, but because if they can no longer offset a small loss against other income, they need to make the property at least pay for itself, hence pressure to increase the rent (balanced against market price/demand). If the loss is too much and not able to sustain covering it going forward (nor increase rent to cover it), then selling might become an option. That might put some downward pressure on prices, but if the people buying the former rentals are not investors, the rental supply will decrease putting upward pressure on rental prices. These things all have flow on effects, some of which are unforeseen.
Reasons not to own a rental property:
Reasons why government will have to step up and provide much more rental property in the future as private investors exit the market and new investors don’t buy in. Result = fewer new builds.
1. We now have to provide insulation at up to $3500 a flat. That is $10 a week for nearly 7 years. I have no objection to that.
2. We will have to provide heating and ventilation (that is called open a window as men have done since windows were invented). Yet to be decided but the cost is likely to be in the vicinity of $20 a week plus for 7 years if we are forced to put in air conditioners. I can see the time coming when I have to do the tenants dishes. Will the heating be the same in Northland as it is in Central Otago or will it be rated district to district. Will we be required to install an HRV so tenants don’t have to open a window?
3. Asbestos inspection likely to be several hundred dollars by April this year. $10 a week for a year and a half. Just where do I get a qualified asbestos inspector from?
4. Agents letting fee $5.00 a week for 1 and 2/3 years. I hope the tenant doesn’t move out as the landlord is not likely to be compensated for having paid a letting fee on behalf of the tenant. Or will you include compensation for the landlord in your bill.
5. Warrant of fitness coming up? How much a week will that cost and what costs will be added to the price of providing rental housing?
6. Legislation to make it near impossible to get rid of a bad tenant on the books? The present 42 and 60 day notice should be kept in place.
7. Rent increases limited to once a year. Is that on the books?. I currently have three flats which are way behind the average market rent. I have been increasing them by $10 each six months. If I have to increase them every 12 months I will have to increase them by $20 at the beginning of the year.
8. The tenant is no longer responsible for damage done and only has to pay the excess if the landlord is covered.
9. If the building is not fully compliant the tenant may be able to claim his rent back even though he has lived happily and comfortable in his landlords building.
10. Rates and insurances increasing exponentially by hundreds of dollars every year on both rates and insurance. I can’t just keep increasing rents.
11. Ring fenced tax losses. Not many will be able to afford to take the losses for perhaps ten years or more while rents catch up to the cost of owning. (Rates, insurance, interest, maintenance, rental agents fees, accounting etc.
Will ring fenced tax losses remain on the books after 7 to 10 years or will they drop off?
12. Tax on capital gains if sold within 5 years.
13. Responsibility for all actions of trades men, rental agents etc when they are on the premises under health and safety regs. How the hell do I control what an electrician or plumber may do. I am not a tradesman and can’t be expected to be on site while they are there.
14. LVR values are stopping rental properties being purchased resulting in fewer new builds. Stopping negative gearing is going to further exasperate the problem.
All except the Rates increases have been added to the cost of owning rental property within the last 3 years. I am seriously considering exiting the rental market. Through the NZ Property investors Federation, I already know a number of investors who have exited.
I can put my capital into shares and have no capital gain tax, enjoy regular fully franked dividend income and a capital return which is potentially far better than property. I will have no maintenance or managment to do or arrange. Just a sweet uncomplicated investment.
Most of the legislation is unnecessary: Any property which is substandard can be rectified by the tenant issuing 14 days notice to rectify. If the land lord fails to comply the Tenancy tribunal will step in giving exemplary damages, a legal requirement to rectify and possibly rent refunded and rent suspended till the repairs are done. Once a tenant commences this action any action the landlord takes other than rectifying the problem will be seen as retaliatory action by the tribunal. It will be disallowed and possible exemplary damages awarded to the tenant. The tenant will be guaranteed ongoing residence and even rent increases will be prevented. In short the landlord has no option but to rectify.
There is an outright and ongoing attack on landlords.
That as well as putting up with difficult, dirty and damaging tenants who don't pay rent makes me wonder what I am doing.
With my money in rental residential property after 40 years of investing and going without I now have a potential return of approx $400,000 return a year including $290,000 capital gains at 6% which I can’t access unless I sell. My actual return is much less after substantial annual maintenance but I am positively geared. If I exit rental property and invest the same money in shares my potential return at 5% dividend is $570,000 a year.
None of this is going to stop property speculaters (as opposed to investors who buy for the rental market). Speculaters will simply pay or avoid the tax and get on with it. Nor can I see property prices going down much if at all. But it appears those with a crystal ball on this site know more than me. Could you please tell me where to get one from.
As far as I am concerned the government is turning the property market into an undesirable investment and in future they may have to provide most rental housing.
Himself, you are pretty much on the mark with all,of your comments!
However, our rental returns average around 9 to 10per cent on purchase price from around 6 % to 15%.
Yes there are hassles at times but I would far prefer to be invested in property than the sharemarket.
The sharemarket is blatant gambling without any control over what occurs.
We personally have a lot of money invested with a financial advisor but not from our own investing!
Yes there will be a lot,of investors leave after the ringfencing comes in, and yes the country is in deep Pooh with Twyford at the helm of housing.
He hasn’t got a damned clue and is totally out of his league, and his appearance on TV in regards to the petroleum tax tonight confirmed his nillness!
1.Letting fee ban- Good move.Some Property Managers are not unknown for turfing out good tenants as a fresh tenant means another round of clipping the ticket for letting fees.If letting fees were to be hoisted upon Landlords, then they may monitor more closely terminations of tenancies by their property mangers.Can expect more stable tenancies with longer-staying tenants with the proposed move to ban letting fees.
2. Ring-fencing losses.The IRD's 2014 figure of $740 million being claimed on negative-gearing losses is a strong indicator of what so-called "property INVESTORS" are after. Its plain that capital gain rather then rental income in the main driver of their investments. Something the country could do without for the greater good.
3. Foreign buyer ban- can't understand the brouhaha generated & the opposition to it !! After all, didn't National dismiss foreign buyers as a negligible 3% ??? Should hardly cause a ripple then!!! Or is the 3% being a creatively-fudged figure??
1.Letting fee ban- Good move.Some Property Managers are not unknown for turfing out good tenants as a fresh tenant means another round of clipping the ticket for letting fees.If letting fees were to be hoisted upon Landlords, then they may monitor more closely terminations of tenancies by their property mangers.Can expect more stable tenancies with longer-staying tenants with the proposed move to ban letting fees.
2. Ring-fencing losses.The IRD's 2014 figure of $740 million being claimed on negative-gearing losses is a strong indicator of what so-called "property INVESTORS" are after. Its plain that capital gain rather then rental income in the main driver of their investments. Something the country could do without for the greater good.
3. Foreign buyer ban- can't understand the brouhaha generated & the opposition to it !! After all, didn't National dismiss foreign buyers as a negligible 3% ??? Should hardly cause a ripple then!!! Or is the 3% being a creatively-fudged figure??
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