Olly Newland’s Column, June 2010
2010 Budget Day has come and gone and the world has not come to an end.
Finance minister Bill English spelt out how he was going to deal to ‘property speculators’ and frankly I found it hard to suppress a yawn. I must confess that I was somewhat irritated to hear him snarling about ‘speculators’.
Didn’t we leave that all behind in the 1970s when the Kirk/Rowling Labour Government clamped down on ‘speculators’ with punitive taxes … and pushed up prices by over 50% as a consequence?
The removal of depreciation on both residential and commercial property while reducing personal and company tax means a re-shuffling of the deck chairs and very little else. Any professional who has passed Accountancy Stage One will find another means to reduce tax legally — of that I am sure.
So what’s all the gnashing of teeth all about? Be content if you have to pay tax and GST, I say. It means that you are making a profit!
For years I have taught that investors should be in the market to make profits, not losses. Too often I have had people come to me seeking advice who have bought rubbish properties just to create a loss. (It beggars belief that anyone can think in this manner but there you have it. They believe what they’re told by the get-rich quick spruikers.)
I used to cringe when I read or saw adverts that said ‘Let the tax man pay off your property.’ How dumb is that? Just asking for trouble.
Of course there will be consequences. Bill (call me ‘Slasher’) English says Treasury has admitted that rents may rise by ‘one or two percent’ as a result of the new rules. Well I’ve got news for Bill and all the Noddies in Treasury: Rents will rise all right — but more like 15%-20% over the next two to three years would be closer to the mark in my estimation.
Have they forgotten the effects of the GST increases on costs? And what about the Carbon ETS due to hit all our pockets in a month or two? Rates, fuel, electricity, insurance, timber, concrete, steel, you name it — ALL will be going UP in price … and adding fuel to inflation.
The government already admits that these extra costs will result in a 6% inflation factor. It goes without saying that if they admit that much you can be sure it will be higher.
Hi Olly
Just finished (and really enjoyed) The Day The Bubble Bursts. Makes a lot of sense…
However, I’m a bit confused now after reading your articles from the last couple of years. I would’ve thought that we’re now in a situation very like what you described in The Day The Bubble Bursts as signalling impending major problems, but you don’t seem to be predicting a significant drop in property values.
I’ve probably misinterpreted the book and/or the articles, but I’d really appreciate your clarification on this point!
Thanks for the book and any response to this question,
Joe
Dear Joe
The bubble burst around the world with the Global Crisis, and collapse of many finance houses and companies both here and overseas. The property price crash in NZ was with the developers ( e.g. shoe box apartments) and it was only the low interest rates environment and the shortage of housing that stopped it spreading further. As at this moment I think the market will remain flat for a year or two with good buying opportunities in the mean while.
Regards
Olly
Hi Olly,
In the US, they have apartment buildings where you can buy the entire building, and the cap rates are at commercial rates. They seem to be good for cash flow if you can manage them well. Safer than owning other types of commercial property I guess. The problem is, we don’t appear to have too many of this type of real estate here, if any. What would be the best alternative we have if we want cap rates (cash flow) at commercial levels?
Thanks for any help with my question
J
Dear Jason
If you have the money there is nothing stopping you buying up all or a great part of an apartment building. I know of several USA citizens who have do this.
But its not all peaches and cream. One gentleman and his wife I spoke to quite recently bought a 450 apartment block in New York. The returns were around 8% net which is huge for the USA. This was an existing block and only too late they discover that many of the units were under rent control. Over the years they have slowly renovated and sold down. The rent control turned out to be a bonus as by the time they could sell the apartments they had appreciated 400%. It was a 30 year exercise but well worth it. They now spend 3 months in NZ. 3 months in Switzerland and cruise the world in between.
Regards
Olly
Hi Olly
What does your crystal ball say about property values with particular reference to the Auckland Apartment market?
Leonie
Dear Leonie
The apartment market was grossly over valued a few years ago and now its grossly undervalued. If you can afford it, buy any good freehold apartment of at least bedroom or more, with views and a car park and over 50M2 in size. Avoid those that are a part of a hotel pool or the like because of possible GST issues. Guaranteed rents are to be avoided as well as they are usually over priced and yu end up paying for your own rent.
Regards
Olly
