Nicholas, you have it.
Many owners have shifted out, rented their home as reluctant landlords and are also renting themselves.
The chart shows rent prices went up over the 2002 to 2008 boom times.
Now likely to be flat for a number of years.

Surely this further undermines the credibility of the argument that a big housing shortage has developed over the last year or two
If it had, then massively increased competition for housing would have pushed rents much higher
The housing shortage is another big myth generated by bank economists to pump the housing bubble further
BTW does anyone else notice that many of their aquaintances are either leaving for Australia, or more seriously considering it? It has been quite noticeable to me in the last 3 months, but it might not be reflective of a wider phenomenon

I think it's like a car, when I rent a car I want the cheapest possible, the corolla when I buy a car I want the best I can get for the money i have available, the BMW. I've lived in many rental properties I would never buy.

I recently came back to New Zealand for a holiday. It was refreshingly friendly and cheap. On the way we stopped over at the Gold Coast, friendly but very expensive, and Melbourne, unfriendly, arrogant and expensive.

I tell you as an expat Kiwi looking at both Australia and New Zealand as a possible choice for returning and future settling down, Australia is not all that great. Certainly New Zealand has many good aspects over Australia. it's not just about how much money you can earn. Quality of life is equally as important, probably more so in the long run.
Of course they do have more sunshine than we do in NZ. That might be a reason some prefer Australia I suspose.

My verdict is still open but i did enjoy coming home for abit.

Calling all David Smthyes, Olly Newlands and Andrew Kings - where are your charts? You talk well, but .....

Roger - I think at the end of the day Aus and NZ are fairly similar in terms of costs
some things are pricier there, some things cheaper
In general I think NZ is a quite pricey place and lots of immigrants here agree, and are surprised by the fact
As you say power is pricey here, housing, clothing etc.

This can not be right!....its rents to the moon,rents to the moon!....Olly say's so!

Alen - rents don't move downwards with any ease whatsoever, they are very sticky in that respect. The fact that rents didn't move down does not necessarily mean that rents were especially robust in the face of other negative factors, they are just sticky

For example, in a 4 bedroom flat scenario the rent is often spread across 4-5 tenants. Even with a recession, there is little pressure to reduce the rent on such a flat from say $600pw to $570 pw, because that only represents a $5 - $6 saving per tenant That is very unlikely to be of any significance in trying to attract tenants

President - I agree rents are likely to go up from here.But that is probably where our agreement ends. I see only a slight edging upwards over the next 2-3 years (nowhere enough increase to justify residential property as an investment again), you probably see quite significant increases

No?

Matt and Nicholas

Just because the kettle isn't starting to whistle, doesn't mean that the water isn't getting hot!

Rents didn't really get moving until 2003/4 despite 2001 being the turning point in the market. Plenty of people sold out in 2002 and 2003 thinking the market was oversupplied and peaking when in fact they sold their properties at less than half their 2007 price.

Demand is strong for quality property, but remains subdued for lower quality locations - for now.

Despite what you think there is room for rents to increase. Since the mid 90s, rents have risen slightly less than household incomes. Median rent is now just 28% of the median household income for renters. There's room for rents to be up 20% by 2012/13 if net migration remains positive even without anything more than subdued wage growth. (That's not a prediction).

Tenants seem to be more prepared to pay a premium for quality over the last few years. The days of renting out a nice property for not much more than a scruffy one seem to be drifting away. That shows tenants aren't exactly under rental stress if they are prepared to pay more for quality.

It is FAR too early to make this sort of call. I don't think we'll start to see any significant rise in rents until 2011 after the effect of tax changes has played out. You need to remember that there was an over-supply of rentals, which is being gradually soaked up, so there was no need for rents to rise.

Rents have been around the $300 mark since mid 2007 thats 3 years of nil rent increases and flat house prices and theres no light at the end of the tunnel with tax changes yet to come, migration falling, stagnant wages and interest rates/petrol heading up. The only thing investors are clinging to is a supply shortage myth that was promoted by TA. Rents usually follow house price trends and they are about to head downwards again very soon.

guys,

rents are only flat becuase landlords are being generous. Everyone knows the median rent would be 1000 per week if landlords wanted it to be - but they are performing an important social role by keeping rents low. 1000 per week would bring yields into teh historical average range (either that or a crash).

If your rent is $370 p.w peterd, @ 6% p.a. interest only, plus ongoing $5k for insurance ,rates, maintenance etc,( let's forget the one-off legal + purchase fees) that will allow you to buy a property for $237k. to be cashflow neutral.(NB: Because this is interest only calculation, there's not paydown of the principal; so the same ownership charcteristics as renting) If your rent is lower than others around you at the moment, then I'd suggest that at your probably better off where you are, unless the houses are selling for less than $237k. The average NZ house, @$352k, should cost $500 p.w. to rent, but Bernard's article seems to indicate it's about $300, so I'd guess that you are in an above average standard of suburb. So the purchase price is highly unlikely to be less than $352k?

I wouldn't forget that from about 1998-2007, rents increased by around 70%. The investors that bought smart before or in the early years of the boom are not hurting at all.

Well, I've been beaten in bidding for 3 apartments in the past month by investors who seem prepared to accept 5% yields
So I am back into "stuff buying property" mode

Many property investors fail to realize that as with any 'business'(funny that) you are in competition with every other supplier. REAL business people know this! 300,000 rentals nation wide all providing the same overpriced product which they don't want to do any maintenence too or improvements.

i owned 2 rentals but sold them in 06 & 07 while i could still get the stupid money for them. bloody glad i did!!!! my sister owns a rental house and apt and she is loosing money on both. cant get tennants for the house and cant risk raising the rent coz her apt tennants will bugga off coz theres LOTS of other vacant apts around going cheep.

my gf and i are moving to sydney as soon as we can sell the house were in right now.

How Bizarre... someone is making posts in other's names... one pretending to be me (Drelly - my username on propertytalk) and another (mis)using Dean Letfus' name. Not only childish but undermining the quality of the discussion.

This report really says nothing. Rents have been flat for a while and they haven't responded to increased demand. Forget that the increased demand was only getting us back to a more normal market. It will take much more pressure to increase rents in a recession.

Dave Smyth : You raise a good point , regarding bloggers' names . Mis-use by a minority does stuff up a debate . I'd prefer that everyone " man-up " , and use their real names . Certainly it gives more weight to the comments . And adds the need to be prudent with one's utterances .

Bernard : Any plans to tighten up the rules on blogger names ?

It was not to long ago that there where MT rentals all around the place...
And one was able to negotiate the rent down a little
I think it would be safe to assume that many/most renters would be low income on WINs rental subsisties...if WINs have tightened up, they will not be increasing these subsities....and being on low/unemployed incomes not willing or able to pay more.

Just maybe all those rental signs up a yr ago in front yards was because landlords where pushing what they where asking for?

In a down turn of wages not increasing , higher unemployment etc, it is commonsense that landlords would have a choice....lower or stable rents or MT houses.

The main rental market is houses in the 200K to 290K....these same houses where selling in the 320 to 360K range pre end of 2007.....and we have seen a huge turn over in the last 3 yrs in this bracket.....Also with bank tightening up with 20% equity, such a drop of around 20% in purchase, there is no need for the 'new' landlords to have to up the rentals.

I think many have to pull their heads out of the stats and look around in the real world influences.

Many of us here have mentioned the above and alluded to it repeatedly over the last couple yrs...now the stats are just confirming it.

Goodonya Onya!
Couldn't agree more, poorly built shacks in the middle of nowhere for sale at $400,000 plus on life sentence blocks. Whats going to happen when employment dries up and dole and Sickness benefit criteria are tightnened. Will the Chinese be buying in these outlying districts as well?

Beach houses for rent at too-high prices from March to November then renters get kicked out while landlord expects even higher holiday rent. People are changing.... I live in a beautiful coastal area...this year our hidden beach has been full of freedom campers.

Not your usual kiwis and Europeans in old cars traveling on a shoestring budget, but big luxury camper vans. In picnic areas, boat ramps, anywhere they can squeeze in.
The times are a changing folks!

Murray yeah Sydders is expensive but so is Auckland. We have money in the bank from 2 houses sold and will have the money from 3 houses sold if we are ever able to sell this house -- not much interest at the mo unfortuantly every one wants to pay 1998 prices. But hey no money worries here even for Oz coz of cash in our bank account. And we didnt loose a cent in the finance companys crash coz we didn't have any cash in finance companys!
Hamilton rents going higher and lots of tennants? Hard to believe mate Hamilton is a dump! Must be all the people who cant afford to live in Aucks any more!! :D

Roger Thompson: What comes around goes around fellas!...some of you guys need to examine your own comments on other sites blogs regarding Bernard!

R.John.Mason - in a postpeakoil world NZ is going to be very, very appealing.

Just how appealing will become evident once the sh*t starts hitting the fan in the US.

Thats as long as we can stop the pollies expanding the NZ population too much further.

I watched a programme the other day on the health care situation in the US. It was a real eye opener. Unbelievable how the corporates in America have got the citizenry "by the balls". One lady (with health insurance) was paying off the co-pay part of a simple appendicitis operation - using a credit card. I mean, how is that paying something off? It's like digging a hole in the sand.

I reckon there are just so many Westerners who don't even think twice about 'paying' one debt via a means that creates another debt.

Then there was a young woman with lupus - a chronic but treatable disease. However, on graduating from university she was no longer covered under her parents insurance policy. She got sick, needing drugs neither she nor her parents could afford. She was eventually admitted under emergency to hospital - where she underwent operations costing $900,000 before she eventually died. Her GP said she did not die due to lupus - rather she died due to not having health insurance.

We Kiwis just don't know how good we've got it. Heaven help us if we ever sign a free trade agreement with the US.

@onya 8.02am. I had to have a good belly laugh at part of your post. During a converstion with my Ex last week she proudly announced that she had bought another ex-Ministry of Works 'cottage' in Cromwell, that was going to make her a tidy sum!

Ross said, Health insurance is nature’s way of weeding out the worthless people.

What on earth does "nature" have to do with health insurance?

If you mean we should just let "nature" take it's course such that no one receives any medical intervention - well then you might have a half-way intelligent argument.

But to suggest only the "non-poor" should be treated is something that doesn't even happen in the States. Lots of folks featured in the programme were indeed people with health insurance when they got sick - but their policies didn't cover all costs - and a number of them declared bankrupcy (apparently 700,000 people each year in the US declare bankrupcy due to medical bills).

In the US, no one can be refused treatment in an Emergency Room - hence the reason why the lupus sufferer racked up $900,000 at a cost to the US taxpayer in the weeks before her death. How bloody stupid is that? The meds she needed to maintain health wouldn't have cost that amount over a 20 year period. As I said earlier: the US corporates have the citizenry by the balls.

Waiting lists in NZ are sensationalised by those who support the argument for privatisation of our healthcare system.... yourself being one, I assume, Ross.

I’ve travelled the planet, and NZ has a lot of nice spots to live (I’m talking quality of living, not just remuneration)….

I think you let a stray "just" into the comment there Murray!

i read a statistic somewhere that Hamilton has more bogans per capita than West Auckland AND the Hutt Valley. Its a scary thought what could happen if alkd sprawls and becomes one with Hamilton. Jack Daniells and motorhead all the way.

Its time for repentance guys,todays sermon really spoke to me.Ive decided that its time seek the Lord and no longer be just a part of the church furniture.
First id like to ask Bernard if he would accept my forgiveness for the many bad things I have said about him and doing my best to make one look bad....I'm sorry!
Second to all my students and the ones who have had to listen to all my dribble and half-truths at different seminars around the country....I'm sorry please do forgive me!
Third thing and last id just like to say, all who bought property with the view of capital gains...it was all about making money and we are going to loose on our speculation of such views we once had.

Blessings Dean

Well eri that's really got me thinking,I think I need to start going to church also as I now feel sick and can see the person I really am,always telling other posters to put up there rent and telling lies and gossip about other people and different tenants,I really are the speculating scumlord type arn't I.....O please forgive me!

R. Mason - I suppose you've got it pretty much right on NZ wages and living costs. However you forgot what a great, friendly bunch NZers are. of course you don't see this in the stats or on pretty pictures. It really does make a difference (for example compared with grumpy French people who spend a heck of a lot of time complaining and going on strike - yes, I am a French immigrant and not going back). NZ isn't perfect but it sure is a nice place to live. And btw, if the country was invaded by millions of Nth Americans it wouldn't be the same anymore so just as well NZ isn't everybody's cup of tea (not that I don't like Americans of course : )).

Ross said, "Health insurance is nature’s way of weeding out the worthless people." What a lovely comment. I take it you are very rich and have a very high opinion of yourself (no I'm not poor but it doesn't mean I feel the need to call poor people worthless).

Wow, a few more posts using PropertyTalk usernames. Sounds like someone who got slapped down on PT who left because they couldn't take the heat! Ha!

Times are on posts
Doesnt take long for a Server Admin to go thru access logs and match up ips to posts

This then will ID their isp and email.
From there its not a problem to send an email off to their ISP with a copy of that part of the log, mentioning that spam and knowingly impersonating someone else is against their contract agreement and NZ law.
From my own experience with isps in NZ Aussie and the UK, they deal with these things rather seriously now.
This is one of the areas I rather enjoy following up as a Server admin and web master...

I have contacted Bernard about the impersonations. He will have the IP addresses of the impersonators and with that we can find the IPS's who own the IP Addresses - contact them and contact the real people who were accessing the Internet at that time. They normally report them to the police.

You must be real stupid to think you can hide these days on the Internet!

Marc
www.PropertyTalk.com

OK...ok....that's it.....all you property speculating scum-lords back to property-talk now.

That includes you also essance you dirty minded gossip!

I have also instructed the posts be removed and the posters be reported to the Police

What a joke you are Dean Leftarse. As if the Police would give a toss about your childish complaint.

Go back to your other website!

I agree Pastor.

Ross, you need to educate yourself about the subject of Healthcare in USA,you have obviously no clue about the subject,it is not about being able to afford the insurance or not. Read about the cost of healthcare and actual delivery of services and subjective experiences of people in US. You have no idea how the insurance companies control the medical profession against their better judgement.

I now feel terrible guys,people are going to look at me like they do David Lereah in america...oh no, I really should be trying to keep low and disguise myself!...i'm thinking along the lines of growing hair,does anyone know about the hair implants they do now,think they take hairs out of your bum and implant them on your head!...

@DeanLeftus@massivecrap 8:14

Its a rather simple operation (bum hair implant) but can be a time consuming operation indeed,depending how hard the hairs are to pluck etc.I'm sure this operation would be of great benefit as disguise and i'm sure your looks would benefit also.Actually this month we have a special offer 2 for the price of 1 so maybe both you and Marc from PT should come by for a consultation and take advantage of this great offer.

Dr Sam

We really need
to examine things
now guys,I knew I
should have deleted
Deans post,any idea's
what the mods should
take here?...

yes Kakapo....I agree as it was me that bought the block of units!

another 1 of my backroom students of 2007-08 maybe!....is that the student that liked to gossip all the time?....

Seminars etc aren't for me, thanks. There's plenty of good books you can buy for $30 that have all the info you need. I started in property at a young age in the early 90s and have now been through 2 booms and 3 busts.

If you can't add anything constructive, please don't post. (@ impersonator (since been deleted), not you kakapo!)

Hello Jacko and thank you for the invitation to comment.

Reading through this thread I think Bernard must be disappointed with the quality of many posts. It is a very poor discussion with more vitriol than well reasoned argument. The addition of false postings in order to generate incorrect assumptions speaks volumes.

We all need to understand that it takes many different factors to make an economy run. If we all invested in rental property and no-one invested in the share market, then we would have extremely cheap rental prices but few companies to employ our tenants.

Conversely if we all invested in the share market then workers would not have access to decent or affordable housing.

If you choose to invest solely in the share market or managed funds, bonds etc, then fair enough, your decision, good on you. If I choose to invest in rental property then you don't need to get upset with me. We are both contributing to the economy and there is no need for animosity between the two groups.

If rental property owners wanted to criticise other investors decisions it would be pretty easy. The fact that they don't is partly because they don't feel that it is the investor at fault but those who are running the system and partly because they don't care how others are investing.

In reply to Bernard's housing report, I do have a few comments. I have been involved with these statistics for 14 years since using them with a property investment magazine I used to publish. Just because the number of bonds increases, this cannot be extrapolated into increased demand for rental property. Firstly, an increase in bonds being listed is an indication of turnover rather than demand. Secondly, I have spoken to the Bond Center officials regarding Marches results and was told that a shortage of data input in February is the reason for a larger number of bonds entered in March.

Regarding the median rental price, to state that this has not changed in two years is not quite true. The median rental price increased to $305 in November last year, then again in December to $310. It stayed at $310 for three months and It was somewhat surprising that it fell in March.

However the reason could be explained by the high number of one bedroom properties let. The number of one bedroom properties increased by 225% from 1114 in February to 3616 in March, while two bedroom properties only increased by 132%, three bedrooms by 121% and four bedrooms by 157%.

Currently it is around $6,000 cheaper to rent the average NZ home than it is to own it. This would indicate that there is room for rental prices to rise. If an across the board increase in the cost of supplying rental property was to occur, then it is likely rents will rise.

It is unlikely that rents will rise sufficiently to compensate for all cost increases however. When faced with rent increases, tenants have the option of choosing a cheaper property, a cheaper area or increasing the number of people living in the rental property. It is likely that a majority of cost increases will be reflected in higher rental prices though.

There are two interesting articles in today's Herald regarding house prices. They point to a dramatic drop in demand for property over the past few months. Do not underestimate the affect that uncertainty over tax changes in having on the market. In addition, be careful what you wish for as there will be negative affects for many if unwarranted tax changes are applied to property for the wrong reasons.

A different point of view has been printed in the Herald's Dialogue page today. You can view it at http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1063...

For the sake of Bernard's website, lift the standard of posting otherwise no one will want to come here.

Andrew King
Vice President
NZ Property Investors' Federation

rather than continue with property can i just not ask people for heaps of unsecured cash and pay it back to them at 5 cents to the dollar while i continue to build a Parasite Drive mansion? No I can not, as that is not what i do - i do property, I like honesty, and truth be told i need to up my rents, but cling/hold onto my existing tenants on their existing terms. so rents can go up, mine need to, can do and will do, it's just timing to get the first increase in place without destroying my cash flow (exit tenancies). there are people who will pay more but i kinda like my tenants, so i will introduce reviews in a way that is not counter productive...

Hi Andrew - good to see you commenting on Int.co. We met at the TWG conference last year and had a brief chat over coffee. I think you make some useful points about tax treatment of various asset classes. IMO, the simple way to fix the problem is a repeal the intent rule, in other words a capital gains tax, as that would deliver a much broader tax base/system enabling corp tax and PAYE to be much lower, and therefore more investment in our productive sectors to help rebalance the economy. (I'd support exemption of the main family home, however.) A land tax would also be useful in this regard. However, while you are on the site you might care to comment on some of the points made here:

http://www.interest.co.nz/news/urgency-among-home-buyers-all-gone-despit...

Particularly those by Nicholas and IanC?

Cheers, Les.

@Andrew King 10.09 am.
I would urge you NOT to concider the vast majority of posting to this site that are made at the weekend as being typical. I assume that the administrator is enjoying a well earned break at that time, and a lunatic fringe encroaches on what is an admirable site.
Most of us have differing, but I like to think, open ended opinions that find an outlet and a forum for discussion here.
Your 'weekday' post here today, amongst all others, is most appreciated.

Property investors in NZ appear to be incomplete confusion. The reality is that the banks lowered lending criteria and we got a big property bubble which is now in multiples of income nor seen before. In the long term it is in everyones interest to get the figure back to 3 or at least some long term sustainable figure. While wages may have stagnated or risen slightly they have in no way moved enough to maintain peoples life styles. We borrowed from the future. We got overexcited about buying now and paying it back later ,without fully understanding the consequences of compounding Interest .
At 9/11 the western world was shocked by an event that changed the way the west views its security and we are not going back. In 2007 we had a financial shock the ramifications of which will takes years to unravel but will impact much more than present on banks ability to borrow cheaply and the structure of the banking industry. The next shock will almost certainly be energy which our short term thinking has not planned for.
Mr King should stop using the word investment and start using the correct analogy which is speculation. Saying that it is $6000 cheaper to rent than own, so rents can rise is simplistic rubbish and lowers the quality of debate on this site. The reality is that wage earners are being squeezed that rents are far to high as a % of take home pay and rents need to fall. The property market is due for a major correction and inescapable date with destiny. Part of that date will involve much higher interest rates.
Some simple advise for those who think they can dictate to market, 'you lose every time'.

Regarding AndrewJ's post above, I also believe that simple supply/demand explanations of the house price/rent debate are hopeless without accounting for income and price. Mr. King seems incapable of grasping that debt plays a fundamental role in creating a property pyramid. I do believe that debt deleveraging is happening among the private sector and private individuals (little hope that the public sector will follow in any meaningful form), so one would think that the pressure on prices and rents is downward.

The supply-and-demand cultists ignore the inconvenient fact that when demand for a commodity diminishes due to the overvaluation of that commodity, supply immediately far exceeds demand and the only way to restore demand is by reducing the valuation of the commodity.

Investment property owners - which is to say almost everybody who bought property since around 2001/2002 - are engaging in wholesale enabling amongst themselves, telling each other and themselves over and over that things are good in the property market and that they weren't foolish to leverage themselves to the hilt to buy (more) property at the peak of the market.

The only way to rekindle serious interest from potential buyers is by reducing prices. A lot. Even when banks were still handing out mortgages like candy houses property was still ridiculously overvalued. Even the dunces can see that now. Yet still investors forlornly cling to the hope that everybody will suddenly be able to come up with the cash to pay the 2007 prices property investors expect to be paid.

Hello Les and thank you for your comments.

I was also pleased to hear that the standard of debate is usually higher.

Much of the arguments against rental property are based on tax advantages. As far as I am aware, the same rules apply to all investments.

A simple question. Where in NZ Tax Law does it state what these tax advantages are? I have never seen them and the IRD and Institute of Chartered Accountants say that they don't exist.

With respect, I think some people mistake property investment with speculation or trading. They are not the same. If I trade property (which I don't) I pay tax on the difference between what I bought the property for and what I sold it for. This is right and proper.

If I hold a property long term primarily for the rental income, then I am a rental property owner. It is difficult (though not impossible) to buy a rental property that is immediately cash-flow positive. Many investors take a long term view of their investment and accept short term losses for long term gains.

The same is true for companies. Many people start a company and make losses for the first few years. 42 Below is an example of this. They can use these losses to offset the tax they pay on other income they may make.

Many shares provide low dividends. If I buy these shares should I pay tax if they go up in value? What if I borrow the funds to buy these shares? Should I be able to claim the interest I pay as a tax deduction?

Some other questions to consider.

What is the productive society? Is it just companies that produce things? What does a hairdresser produce? What does a lawyer or accountant produce.

If a factory worker lives in cramped, unhygienic, cold and damp accommodation, how productive are they when they turn up for work? How many days do they take off from work because they are ill?

It takes many different aspects to make up an economy. You play your part and I play mine.

If providing rental property is so lucrative, easy and assured of success, why are you all not doing it?

Andrew King said "If you choose to invest solely in the share market or managed funds, bonds etc, then fair enough, your decision, good on you. If I choose to invest in rental property then you don’t need to get upset with me. We are both contributing to the economy and there is no need for animosity between the two groups." Hmmm, maybe some people need to read this again (although it has made for fun reading at times on this site).

For what it's worth I agree with the view that rents are unlikely to go up if people's disposable income remains the same or even decreases (eg if unemployment goes up).

Lets say we see oil stabilising around $100+ when the economy finally picks up, I expect properties closer to city centres will be in demand (and have corresponding rent increases), those further out may see a drop in demand (and have corresponding rent decreases).

Average rent may stay the same, but there could be significant changes based on location…

Mr. King,

Most people are not concerned about where you invest. There are those invest in Asian equities (including Japan), commodities, precious metals, and energy who are often ignored or looked at with confusion. They are occasionally written off as loons or "speculators." Who cares? You know better than most to do your own research and to make your own decisions.

As for the difference between property investing and speculating, it has been often stated since the market slowed. My feeling is that speculation was so pervasive that the basic fundamentals of property investing were thrown out with the bath water by a substantial number of players. The long-term consequences of that are unclear at this point. That cannot be contested, despite the optimism echoing through some parts of the sector.

Andrew King landlords don't build rental accomodation builders/developers do (usually for owner occupiers) landlords simply buy and sell existing houses just like share traders buy and sell shares on the secondary market. Production only increases and new jobs/growth created when investment money goes into primary investments like IPO's, capital raising and loans that go directly towards buying machinery, plant and new land development etc.. something new is created. Buying and selling an existing asset is simply speculation not investment. Landlords don't provide any social service either it would be far better if more people owned their own homes rather than increasing numbers of landlords. Its the tax advantages between landlords versus first home buyers where the equity and fairness issue is. Not between property investers versus share investors.

As a business, there is no GST paid on residential rental (I believe Commercial rents attract GST?). Is this not a significant tax difference to the rental property sector relative to other business sectors?

@ Worm & Nicholas

"As a business, there is no GST paid on residential rental (I believe Commercial rents attract GST?). Is this not a significant tax difference to the rental property sector relative to other business sectors?"

No, because businesses don't actually pay GST, the public do. It's not income, it's a tax that is just "passing through" - a transfer tax. If residential investors could charge and claim GST, you'd have even more rental investment as you could buy a $300k property and get a nice fat $33k GST refund that would finance further borrowing!

Well, the world is struggling, fast moving and spinning- time for fundamental changes the way we think and deal in our economy/daily lives.

How much will the NZ property market and our economy in general be influenced by overseas events such as oil price or say Climate Changes ?

Introduction – in a few words.
Well - %, 34 US$ index, house price, Bill’s GDP charts, NZ$, Carter’s Crafar effluence farm, (OBEGAL) was a deficit of NZ$4.5 billion ETS induced. Hide destroys Ecan, 4c/litre rise in fuel prices, Brownlee drills and build a UHT milk packing, NZ-US 3-year swap spreads widen out to 290bps, from closer to 280bps, Key considers, NZX50 Gross Index. GPG has had a negative return of 28.6
Well said our economists/ politicians sitting in a office in the 2nd floors+ upstairs. Yes, yes, yes all good great words- very, very tie and polished shoes !!, but only figures and nothing to do not real life. “Boxed Office People”, it is time to wake up and see what’s happening around the globe !
Then have a number of visionary people from this country and develop a clear and detailed economic strategy for the 21st century. Everything else is just the same - waste of time folks !

Greed & Megalomania
The people of New Zealand are not only suffering under too much consumption but Greed and Megalomania of a few – including a bloated government without a clear economic direction for years.
How much longer is the younger generation waiting for a revolt in “Beautiful New Zealand” ? The “Powerfools” in this and other countries are not only destroying theirs, the public’s natural environment the land, the waterways and the air, but also their future, our souls and pride. The BB generation is currently causing enormous damage in our society not investing, but for them selves– costing this, but especially the next generation Billions to clean up the mess in may sectors/ levels. Not to mention our bubbly Property Industry – making our NZkids renting flats on Rook Creek Rd or worse, while foreigners living in flash houses on Orchid Park Drive – HA this is all crazy!

Ethics, Economy Ecology
More and more country are losing the battle against a clean and green environment, healthy food supply, fresh water and air. We should 100% use the advantages of being a remote and rather underpopulated country- but no !
Here in New Zealand the massive national account deficit is fast increasing and it seems forces the government into a situation of desperation. Obviously falling into a trap considering revenues for more natural resources, opening more land for agriculture but with negative consequences for our environment and tourism is a clear indication of that – long term this isn’t sustainable.
--
In stead we must develop a clear, consistent, long term strategy in our economy to be the

“NZ Green Sustainable Economic Model Of The World”

Such a model would inspire and lift ethics, spirit, pride among the population and feed into many other sectors in our economy. It would make Billions in revenue, the country would prosper.
--

Economy and Philosophy
Our economy is so unbalanced, unstructured and unorganised- badly managed, when serious philosophical questions have to be asked. What is New Zealand way of life in the 21st century ?
As a remote, relatively small and rather unpopulated country many good options are on the table. Developing a sustainable economy, where the wider population have decent jobs in “Green Industries”.
With a massive account deficit, why not start manufacturing widgets in sectors like power, transport and telecommunication, in fields where we relay on foreign dependency most, to a degree that our national security is not at risk anymore. Why not be clever and build on sustainable niche markets, producing quality goods for us and some for export demand.

Energy, Public Transportation, Telecommunication supply steps for better solutions:
Energy & Transport:
Two examples of how we should proceed with infrastructure questions in Energy and other such as Public Transport. Financially and economically it doesn’t make sense to import heavy and expensive machinery/ equipment like turbines/ generators, nuclear power plants or heavy trains.
Such imports are mostly under overseas contracts, managed and installed by overseas technicians and workers, without hardy any local workforce especially skilled ones.
In stead we should develop our own Green economy –SMALLER UNITS- manufactured by Kiwis in our own country in order to make us less depended from foreign expensive imports knowledge and skill. The same applies for Public transport - developing an industry to cover public mobility within a 100- 150km radius. Innovative businesses starting from producing SMALL QUALITY UNITS starting from bikes, scoters, light rail systems and the interaction within, hardly seen in other countries. We need an economic strategy to help young Kiwis having decent jobs and cutting back our account deficit.
Self- sufficiency, national security and a good life- style as a nation are becoming more desirable again in the future. Is it achievable ?

Please, read and understand this in context to my many other articles.

Cheers Walter

Andrew - In a wee rush, will get back to you, although others seem to be doing a great job of addressing your points. However just wanted to say I forgot to add this in to my previous comment:

http://www.interest.co.nz/news/bernard-hickey-talks-alison-mau-tvnzs-bre...

My 'dramatisation' (ahem) of Nichlas A's point. Any comment?

Will the NZ Property Investors’ Federation be sponsoring something like this:

http://www.interest.co.nz/news/alternative-budget-2010-competition-launc...

To aid discussion about how we need to rebalance NZ's economy and maintain and build opportunity for the generations coming after us BB's?

Cheers, Les.

A few answers

IanC Says:
April 12th, 2010 at 1:25 pm

Andrew – there are no specific tax advantages to residential property, as you say, however as an asset class it lends itself particularly well to taking advantage of the existing rules.

Thanks Ian. So what you are saying is that the rules are the same for everyone, but because of the way you believe different businesses and investments are structured, some structures should be taxed differently to make it fairer. This is completely against conventional tax wisdom, which is that tax policy should not be used to influence investment decisions, either for or against. Check out the NZ Institute of Chartered Accountants opinion.

IanC Says: I agree with the AndrewJ that referring to a $6k difference from rents to typical mortgage costs is evidence of room to move on rents as seriously lowering the tone of the discussion. Can you explain why you’d expect a material deviation now from the historical pattern of rent increases over time (basically wage inflation) which has been pretty constant despite numerous housing booms and busts? Why not a fall in house prices to address the difference?

Thanks again Ian. Sorry I lowered the tone of the discussion in your opinion. Yes a fall in the value of the average NZ house by around $100,000 could cause a reduction in the cost of renting versus owning the average NZ home. Is this likely and what would be the consequences if it were to happen?

House prices would need to fall by around 30% for this to occur which is extremely unlikely. Most property owners would not need to sell if demand for property fell to such an extent that prices fell by 30% and will hold onto their property.

If prices did fall by 30%, small business owners would be the most affected as many use the equity in their homes as security for their business loans.

IanC Says: Actually that reminds me. There are different tax treatments for international vs domestic shares so its not like its unprecedented —> why shouldn’t property be treated differently than other asset classes, specific to its economics?

Good point Ian. Why are international shares taxed differently? It is a little different to our discussion however. The tax treatment is different within an investment class based on different geographical location. We are discussing the tax treatment between different investments classes within the same geographic location.

Kieran Says:
April 12th, 2010 at 1:49 pm

Andrew King landlords don’t build rental accomodation builders/developers do. usually for owner occupiers) landlords simply buy and sell existing houses just like share traders buy and sell shares on the secondary market. Production only increases and new jobs/growth created when investment money goes into primary investments like IPO’s, capital raising and loans that go directly towards buying machinery, plant and new land development etc.. something new is created. Buying and selling an existing asset is simply speculation not investment. Landlords don’t provide any social service either it would be far better if more people owned their own homes rather than increasing numbers of landlords. Its the tax advantages between landlords versus first home buyers where the equity and fairness issue is. Not between property investers versus share investors.

Thanks Kieran: You raise a few good issues. On your first point, does something new have to be created in order for an investment or business to increase production? A commissioned sales consultant who sells a NZ product into an overseas market has not physically created anything, so by your definition he is not part of the productive sector. The lawyer who has expertise in international law did not produce anything when he gave advice on how to structure the deal. Again, not part of the productive sector.

You say that buying and selling an existing asset is simply speculation not investment. I agree. If the asset is a property then they are required to pay tax on the income they produced through their buying and selling. However if it is shares in a company, unless they are deemed a share trader, then they do not have to pay tax on this income. Is that fair?

I agree, landlords should not be providing a social service. I never said they were.

You believe that its the tax advantages between landlords versus first home buyers where the equity and fairness issue is, not between property investors and share investors. Great that you seem to accept that there is no tax advantage between property and share investors. The argument that investors have a tax advantage over first home buyers is usually made because investors can use expenses and depreciation as a tax deduction while first home buyers can't. However this doesn't account that investors are required to pay tax on the income they receive as well, which first home buyers do not.

Once again, exactly how does rental property have a tax advantage, real or implied? Why is rental property not part of the productive society? If providing rental property is so lucrative, easy and assured of success, why are you not doing it?

On another matter, has anyone suggested to Bernard that a system for showing quotes from other posters would be a good idea?

A commissioned sales consultant who sells a NZ product into an overseas market has not physically created anything, so by your definition he is not part of the productive sector. The lawyer who has expertise in international law did not produce anything when he gave advice on how to structure the deal. Again, not part of the productive sector.

No (material level of) capital is invested in either of these. That's your answer - there is no "investment".

More of a distortion than allowing deduction of interest on 100% of the financing of a residential property when the banks wouldn't lend more than about 50% on a standalone basis?

(hey, where'd your comment go? I look like a crazy multi-posting stalker now)

Sorry about the post disappearing Ian. I answered your first point before you put the others up. I thought I would answer them all in one go so requested it be deleted.

Yes I think it is more fundamentally discretionary. If a bank decides that they see more risk in shares than property and are willing to lend more of their money for property as a result, then that is their decision. It is not up to tax authorities to try and usurp this by altering the tax treatment of property.

Shares are more liquid than property. This is a fundamental advantage of shares. Shares should not be taxed more because of this fundamental advantage.

Andrew - I do this:

http://www.htmldog.com/reference/htmltags/blockquote/

putting blockquote within html tags around text I want to quote. If there's an easier way I'd love to know!

I have a fundamentally different viewpoint to you in general on the points noted above and I'm not sure that arguing most of them is going to get either of us far. I simply disagree with your view on landlord costs being a major driver of rents ---> I don't recall any reduction in rents as interest rates came off and, absent significant wage inflation, wouldn't expect to see them rise as interest rates rise.

On the other hand, I also don't buy into the productive sector argument per se - for each house buyer paying at today's price, someone is receiving the inflated price. Perhaps they're investing in the productive sector? Perhaps they're reducing debt? They have to do something with the money and at least we aren't seeing continued rapid expansion of mortgage lending at the moment ---> that's what had me worried.

How is it a good business decision on the part of owners to price their houses out of the market? This needs a really convincing explanation.

The purchase market and rental market are only tangentally connected, for the simple reason that rents can't inflate irrationally on credit - they're irredeemably shackled to the reality of what people earn. And frankly, an owner's bad investment decisions aren't the responsibility of the tenants.

I'd love to get away from the word 'landlord'. It's archaic, and seems to give some of them delusions of feudalism.

Andrew King

"For the sake of Bernard’s website, lift the standard of posting otherwise no one will want to come here."

Andrew totally agree with you. I would look at this website on a weekly basis,its now monthly soon it will be yearly.

You can only take so much of the same negative postings over and over again.

As for the American's post. I'm rather happy that I live in a backward poor 1st world country.

Let me assure you money certainly helps however there are more important things in life than money.

http://www.htmldog.com/reference/htmltags/blockquote/Investors only pay tax on their profit not income and this can be negative for many years. It is in this period which the advantages of the “investors” over owner/occupiers is most apparent. The investor takes account of the tax deductions and subsequent losses which the owner/occupier does not have access to when deciding to purchase.http://www.htmldog.com/reference/htmltags/blockquote/

Hi AndyM; Yes, of course I realise investors pay tax on their profit, which is why I mentioned the deductions. The point I was making is that owners do not have rental income and therefore do not need the tax deductions because without income they pay no tax. The tax deductions available to a rental property owner are irrelevant.

http://www.htmldog.com/reference/htmltags/blockquote/I prefer to make my investments in the productive areas of our society that earn export dollars rather than engage in an activity that send billions of dollars overseas in interest payments, blowing out our current account and subsequent issues that this creates.

So what you are saying is that you base your investment decision on your social conscience and what you believe is best for your country. That's fine, that's your decision.

http://www.htmldog.com/reference/htmltags/blockquote/“Why is rental property not part of the productive society?” Because those that engage in it create nothing that a person owning the same property would not. They add nothing, they just drive up the price of existing property.

A person owning their own property provides themselves with accommodation. A rental property owner provides someone else with accommodation. Collectively, rental property owners house a third of our population. Without this accommodation our workers would not be as productive as they are.

Using your argument, a restaurant is not productive as they create nothing that a person cooking their own meal would not.

http://www.htmldog.com/reference/htmltags/blockquote/I ask you this. Will NZ climb up the OECD productivity tables if we increase investment in property or productive services & industry?

As I've said previously, we need many different commercial activities to increase our productivity. Of course we need companies to do well and sell goods overseas. I think that is a great aim for NZ Inc. But we should concentrate on achieving that. How are we going to improve our NZ companies by making it harder to provide rental property? Where is the coloration between these two actions?

http://www.htmldog.com/reference/htmltags/blockquote/They are part of the sales chain from which the product is produced and sold. Without their input the value of the product is diminished.
Without the sales consultant less might be sold and so produced. Without the lawyer copyright may not be upheld reducing sales because of competition from cheaper competitors.
http://www.htmldog.com/reference/htmltags/blockquote/Where exactly does renting properties add value (that owner/occupiers might not)?

I agree with you, these people are part of the production. So are the workers who operate the machines that produce the goods. So are the supermarkets that collate the food that provides the sustenance for the workers. So are the textile firms who produce the clothes that workers work in. And so are the rental property owners who provide the shelter that workers live in.

It takes many different processes to achieve the production of goods and services. People can grow their own food and make their own clothes, just as they can provide their own shelter. Most people do not grow their own food or make their own clothes and a third of the population do not provide their own shelter.

Hi Kakapo

I don't believe many rental property owners do price their property out of the market. If they do, they won't be in business very long.

Your right that house price inflation is not directly linked to rental price inflation. However there is a link in that if house prices rise, the cost of providing rental property stock also rises. This will not necessarily lead to rental price increases as the tenant may not be able to pay the increased rent. So a bad investment decision certainly isn't the responsibility of the tenant as you say.

Good providers of rental property pay as little as they can for their property stock. They are price followers, not price setters.

If property prices escalate beyond the point that investors can provide them for what tenants are willing to pay, then rental property slowly becomes uneconomic and people stop providing it. This in turn leads to shortages and further rental price inflation. It is a very slow cycle though.

I agree with you about the term landlord being archaic, but for different reasons. I believe non-landlords hold on to the term because they view rental property as part of feudalistic system. I know a great deal of rental property owners and they are very decent people who view their tenants as clients.

I far prefer the term rental property owner to landlord, but it is a bit cumbersome.

If property prices escalate beyond the point that investors can provide them for what tenants are willing to pay, then rental property slowly becomes uneconomic and people stop providing it. This in turn leads to shortages and further rental price inflation. It is a very slow cycle though.

This is, quite frankly, backwards. It doesn't work that way in commercial property and you should wonder why.

@ Nicholas Arrand

Making ones own clothes/food costs the individual less than the local business product. Owning ones own home costs more than renting the commercial equivalent.

I totally agree and suggest we raise rents by 50% to encourage home ownership. :)

You've got it, Dave Smyth! You will recall from my earlier posts, I believe that rent should always be more than the cost of ownership, not less; for all the additional costs/risks involved in being one of Andrew King's 'property owners'. The way this will happen won't be by rent rises until there is a general salaries/wages rise. It will come from asset price depreciation to balance the equation. That way your suggested 50% rent rise will be comparative not nominal.

@ Jacko

All that talk of rent increases almost seems like you are trying to scare and threaten government with some kind of cartel like action. The argument, related to tax changes just doesn’t seem to stack up?

I really don't get why so many of you don't see the basic premise behind rental rises? If you went into a restaurant and ordered the lamb and were told that it's gone up in price because the farmers are paying a new fart tax, you'd understand.

Nicholas Arrand Says:

@Andrew King: You note :”People can grow their own food and make their own clothes, just as they can provide their own shelter.”
Here’s the difference; If one grows their own food or makes their own clothes there is no taxation discrimination against doing that. If one buys ones own home, there is.

What is the tax discrimination Nicholas?

@Dave, to be slighly trite, I think Paul Newman once said, "Why go out to eat a burger, when I can stay home and have fillet?". Apologies, that is trite and only the same in terms of having choices. Perhaps one choice might be prime rib going down in price - or homes going down in price and ex-tenants being able to afford them because they can also stand in market more fairly against PIs, once the latters' advantages are removed. It is the the point Nicholas Arrand and Les Rudd are making, why can't you see the basic premise behind that? In terms of rental pressure, it's about supply and demand balancing, and leading to a zero sum result, as we've discussed before.

Exactly Andrew K, but it has taken far too long to get to that point. Just as it took far too long to prosecute the first person for living in their own LAQC.

My argument all along has been that if the current rules were enforced then some of the heat would have been taken out of the market some time ago and there may not be the need to contemplate legislative change now.

Andrew, the problem, as we all see it, lies in your last post, and the comment "I believe this has resulted in around $100m of extra taxes from speculators and traders over the past two years.". These were in all likelyhood were honest, hardworking citizens who have been misled or tempted into illegality with the view of 'well if I don't get caught, it's ok"; Everyone else is doping it, I'd be mad to miss out etc). Now not all, but for those who have to pay back that $100m ( and I'd just about lay odds that this will not be the final amount!) it's going to mean unexpected hardship and long term consequences ( once you're card had been karked at the IRD, it stays marked!). The property investment market has been distorted from its beneficial intentions, and needs to be corrected.

@Dave Smyth: A home ownership may not be a business, but it competes for the same apple at the same market; but only one buyer has an advantage over the other. Markets must be homogeneous to function efficiently.

Nicholas Arrand Says:

Err…. If I buy my own home Andrew, I can’t legally offset the costs associated with it. If I buy a home to rent to someone else, I can. Ergo; If two people have the same amount to pay for a home, one to occupy – one to rent, the owner/occupier will always have to factor in the inability to clawback the costs associated with the ongoing occupancy of the house when calculating the all up cost of the purchase.

Err....if you buy your own home, Nicholas, you are paying for accommodation. Why should you have the opportunity to offset this cost?

In providing rental property to a tenant, the costs associated with providing the rental property are taken away from the rental income and tax paid on the difference.

You will probably come back with "ahhaaaa, thicky, that's the point, rental property owners don't pay tax because they make losses."

Yes some do. It is the nature of the industry that people are not prepared to pay much to rent a property, much in the same way they usually choose the cheapest rental car. This is something that rental property providers have to overcome. It isn't easy, which is a key reason why more people do not invest in rental property.

However the majority of rental property owners do in fact pay tax. While it has become widely accepted that rental property owners continually make losses, it in fact isn't true.

Have a look at the Tax Working Groups report. On page 26 there is a graph showing the tax paid for rental property over the past 28 years. Industry losses where made
in only two of those years, yet the figure often quoted is the loss of $500m made in 2008. This was the year that mortgage interest rates were at there highest.

Just imagine how you would feel if your taxes were going to be increased based on the result of one year in the past 28.

@Andrew "..you ( by owning my own house) are paying for accommodation." Exactly! If I am paying for the accommodation costs of my own home, I am in effect renting from myself. So why should I not be able to claim the same taxation benefits as any other landlord, just because I am my own landlord! You'll know from my previous posts that in some countries, Switzerland that I knew of, owners get taxed on the notional rent that they would otherwise pay to themselves.
I don't mind which way it goes. But I do think all property owners should be treated equally as it is EXACTLY the same physical asset that is invloved.

Dave and Andrew - forgive my clumsy attempt at dramatisation, but should we continue to 'value' this kind of thing:

http://www.interest.co.nz/news/bernard-hickey-talks-alison-mau-tvnzs-bre...

Or should we do something to level the playing field (taxation wierdalities - new word!) between home buyers/owners and property owners/investors/speculators/traders?

Cheers, Les.

@ Nicholas Arrand

Exactly! If I am paying for the accommodation costs of my own home, I am in effect renting from myself. So why should I not be able to claim the same taxation benefits as any other landlord, just because I am my own landlord!

This idea is great! It's a win-win for me. Not only will the extra disposable income the home owners have push house prices up further but rents will rise too!! Please implement this excellent idea as soon as possible. :)

Also... for everyone...
Here's the tax working group report: http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf
On pahe 26 (25 if you type it in the box), the green line shows taxes paid by property investors.

as pressure grows on rentals, yields will have to be higher to encourage landlords to provide housing…

But Andrew K keeps telling us that Property investors are NOT speculators (ie developers). This is the point, outside of the inner city apartment market, landlords do not buy homes off the plans. Instead they buy existing properties that were built, often >50 years ago, for owner occupiers. After all, there is a vast group of tenants who no landlord in their right mind would ever put into a new property...!

To increase the housing stock of family homes we need to encourage owner occupiers to build. This has nothing whatsoever to do with landlords.

@ Andew T - houses are not sheep - when the farmer (landlord) goes bust the house is not sent to the abbatoir (demolished)

@ Nicholas Arrand
It is the same in Austria, if you live in your own home, you have to pay tax on the amount of rent you actually saved by this. It is called "rental value" of your own home by the tax man.

@ Chris B

To increase the housing stock of family homes we need to encourage owner occupiers to build. This has nothing whatsoever to do with landlords.

Who do you think the landlords buy their rentals off? How do you think the people building new homes can justify the investment without being able to sell their old homes?

Is it your personal car or your business car, Andrew? Tax wise it makes a difference. If it's your business car, used for personal purposes, then you will have to pay Fringe Benefits Tax.

See Gertraud T 10.31 am, Andrew.

You have said that a person owning their own home is effectively renting it from themselves and should have the same tax deductions as a rental property owner.

Gertrude has said that in Austria they PAY TAX on the assumed rental income.

I have provided a scenario of rental cars that fits the model you have put forward.

Again, would you agree with this?

@Dave S - "Who do you think the landlords buy their rentals off?"
Off owner-occupiers - one of whom somewhere down the track built the thing. Your point being?

How do you think the people building new homes can justify the investment without being able to sell their old homes?

Your argument was these new houses afe needed to house population growth. In which case these extra FHBs don't have an old home to sell. If they can't access the market with a deposit saved from PAYE income they can't build.
As an example we - as FHBs - are have been looking around to build in Wellington at the moment. Problem is you can't find a section advertised for less than 250k which works out at ~$550k for a ~130m2 house. Not broadly accessible for the average FHB! Land prices have been pumped up along with house prices and it is that which has put a huge brake on consents for new builds - not worries about landlord tax breaks. People aren't building small family homes and haven't been for several years.

@ Chris B

The point is that the investors are ultimately buying property because an owner occupier somewhere in the chain bought a new home. Landlords didn't start the boom, new home buyers did by creating a building boom that perpetuated a general property boom.

There will always be a gap that landlords have to fill. There is a sector of society that needs accommodation to be provided. FHB's need somewhere to live while they save for a first home. If the cost of providing this accommodation rises, rents will have to rise and saving for that first home will be harder.

Nicholas Arrand - you are confusing being in business with NOT being in business.

With the car example, if I buy cars to lease out as a business, I can claim all the expenses involved against the income I earn. If I buy a car for my own private use, there is no income, no business, and obviously no expenses can be claimed. Should we blame all the car rental companies for the price of cars?

If I buy a lifestyle block, and plant an orchard on it for personal use, I'm not in business, have no income, and can't claim expenses. A commercial orchard, on the other hand, generates income and can claim expenses, including depreciation on their buildings and equipment.
Damn those orchardists for pushing up lifestyle block prices!

But firstly, here's the point, Andrew. One can currently deduct the expenses on rental properties agianst personal income. As you note, this can not be done with vehicles. The answer typically is " But any other mutlifacceted business can redeploy its expenses to be offset agaisnt the group income. So why not property?" My view is that it is for the very reason that two classes of people compete for the same item in the same marketplace, and further, that it is an item of necessity not choice.
As far as vehicle charges, depreciation, expenses etc. and the ability to write off expenses against income as though one owned it? I'd argue just as in the first paragraph. As long as it's the same for all, then I have no problem with it.
I would further add that the question to which you refer in my original post was meant to be taken rhetorically, but it holds up literally as well.

@Murray. Again, it's all about "business" clarity. I'll bet you know a number of people who 'are in business' to claim the expenses back on their lifestyle blocks. Years ago this was addressed with the Economic Usage clauses. But that has lapsed, and I guess the country only needed so many Eycalupts, herb gardens and alpaccas!

@ Nicholas Arrand

As you note, this can not be done with vehicles.

Actually you can. Andrew was referring to vehicles used by non-business owners.

@ Chris B

True – but is that gap really 33% of all NZ households?

60-70% home ownership seems to be the normal range for most western countries.

Eh? What buidling boom?

The one that kicked off the property boom from about 2001-2007.

Issue now is can we as a nation afford to keep subsidising rents via tax deductions to rental property owners?

Interestingly, the question many landlords are asking is, can they continue to subsidise low rents for tenants?

My answer is no we can’t – and that claims that rents will rise are disingenuous scaremongering emanating from lobby groups with extemely tax-sensitive vested interests.

You're kidding yourself. It's not scare-mongering, it's just common sense. As a restaurant customer, did you not notice increasing prices as the cost of food has risen? I did!

Do you seriously believe that you can reduce housing supply without rents rising in response?

Still, Nicholas, it depends whether you are in business or not. You can run a home based business and claim a portion of your home expenses based on what percentage of your home your business uses.
Using your argument, I should be able to claim expenses on my private car just because car rental companies can. And I should be able to claim on my boat, because other people charter theirs out as a business....

The other day I was watering my pot plants in front of my post- office window in the first floor - and bumbs – one of the pots just dropped on someone’s head below. Is that particular pot tax deductible, even when not insured ?
I’m sure someone of you experts have an answer ?

Interestingly, the question many landlords are asking is, can they continue to subsidise low rents for tenants?

What I find most interesting is that the attitude of the landlords is that the rent is low.

Its low only when you refer to house prices (or section prices, on a new build). Its not low by any other measure... and it wasn't low 5 years ago. And some landlords above acknowledge that sub 5% yields aren't a good idea.

Hmmmmm.....

..... why would one reach any conclusion other than prices are too high?

@Dave S

Eh? What building boom?

The one that kicked off the property boom from about 2001-2007.

Which consisted almost entirely of Mcmansions and inner city apartments - no affordable FHB housing there....

Interestingly, the question many landlords are asking is, can they continue to subsidise low rents for tenants?

Just as well Bill English is preparing a budget for the whole country then and not just the <10% who are landlords. Oh wait, hang on..... (i'm hoping he does the right thing but fearing the worst here).

Do you seriously believe that you can reduce housing supply without rents rising in response?
No of course not. But I do not believe that increased landlord costs will result in houses being demolished. Furthermore, it will also not have any impact on new build numbers for the type of property (small family homes) that FHBs and PI's compete over in the market place. If you have evidence that landlords (not speculators who of course always pay tax on capital gains!) are buying such properties off the plans in statistically significant numbers please present it - I cannot find any suitable data online.

Quite frankly if landlords actually believe that they can pass any increased costs directly onto the tenants why are they making such a fuss? This is purely and simply a vocal lobby group for a small minority of the population that is attempting to pretend that they can hold the entire national budget hostage. Bill must call their bluff....

NA "These were in all likelyhood were honest, hardworking citizens who have been misled or tempted into illegality with the view of ‘well if I don’t get caught, it’s ok”; Everyone else is doping it, I’d be mad to miss out etc). Now not all, but for those who have to pay back that $100m ( and I’d just about lay odds that this will not be the final amount!) it’s going to mean unexpected hardship and long term consequences "

So its ok to not pay tax if you work hard and can claim to be misled or tempted into breaking the law ???

@ Chris B

Quite frankly if landlords actually believe that they can pass any increased costs directly onto the tenants why are they making such a fuss? This is purely and simply a vocal lobby group for a small minority of the population that is attempting to pretend that they can hold the entire national budget hostage. Bill must call their bluff….

I think that's a bit paranoid. The NZPIF represents about 4000 landlords out of about 200,000. That's not because they are a scary, rabid, right wing property fundamentalist oppresors but because about 95% of all landlords have 2 properties or less, are not heavily in debt and most of them are not what you'd call "active investors". There is no cohesive, secret plan to push up rents. As I've already tried to explain, market forces will do the job for us. To what degree is a guess but I think rents over the next 3 years are certain to increase by more than the cost of the tax changes.

@Dave S-
I think rents over the next 3 years are certain to increase by more than the cost of the tax changes.

Which is where we disagree - which is fine this is after all a free democratic society(!).

My beef is that Andrew K, Olly Newland and others present this guess on the future direction of the market as a fait accomplit - and are attempting to blackmail less sophisticated voters into accepting the neccessity for the status quo. Which is definitely disingenuous at best, if not actually a conspiracy (a charge I didn't actually lay but if things turn out as you suggest there could be an interesting legal test case on the point at which media lobbying by a business group becomes incitement to price-fixing).

We should be having a debate about whether the best use for that $500million pa of taxpayers money is as a tax-free loan to landlords - or to help pay for the hospitals, schools and police force we can't currently afford - let alone the investment that is desperately needed in transport and energy infrastructure. But no, the media noise is one deafening blanket of self interested landlord lobbyists.

@Chris B, your point about blackmailing less sophisticated voters into accepting the neccessity for the status quo, who knows, but I do think there is more emotion than reason in the premises involved, see my comment this morning where I said, "All that talk of rent increases almost seems like you are trying to scare and threaten government with some kind of cartel like action. The argument, related to tax changes just doesn’t seem to stack up?" Hopefully government are just a little more sophisticated than the section of voters you are referring to.

@Elley, me too, and others if you ask around. It's the way the PI business(?) model has evolved here. Sad, dumb, but true.

@Andrew, IRD's statement, from a taxation regs pov perhaps in terms of other businesses, but not in comparison to equally interested home buyers. NZPIF, ICA, KPMG, discount. Who pays them, who do they work for landlords, or tenants and equally interested home buyers? Discount. TWG, sure but didn't they make the point that hordes of folk have jumped into PI since Cullen instituted his dumb rich-prick tax and that this has lost revenue from the general tax take?

http://www.interest.co.nz/ratesblog/index.php/2010/01/06/summer-chart-se...

It is time, now, that our country used ‘its’ borrowed money for productive purposes, not as the mechanism for buying and selling propety to each other. Unless we stop this madness, we shall suffer the fate of all debtors; the redeption of debt though an asset swap.

You're such a fool. When has any pyramid scheme ever gone bad? We can't lose, I tell ya!

Andrew - it is one of my major concerns that our demand for borrowings to fuel 'tax unfettered' property investment means our interest rates have to be higher, which pressures our currency north, see:

http://www.stuff.co.nz/business/market-data/3544439/Kiwi-currency-overva...

As a small open economy with an export imperative this has obvious negative effects in terms of losses, current account deficit and needs to be fixed. Fettering property investment with appropriate taxation will help address this, our exporters, the real economy, and those poor "mugs" (as Gareth Morgan calls them) who some only seem to value as their rental mortgage slaves who cannot win in bidding competions with the tax advantaged PIs - which is something I had not recognised until I looked more closely into this subject. Do you recognise the problem, that Nicholas has addressed to you several times, and that I have repeated to you with my wee skit, still without comment from you?

Can you comment on that situation please?

Cheers, Les.

IanC said:

"It occurs to me that while the assumption of many here is that demand by renters for rental properties is inelastic, the evidence of the past half decade is that the inelasticity is residential property investors —-> prices rose, yields fell, but still they bought.

Do yields matter?"

Yields clearly matter for some investors, but not for many. For the latter, property investment has all been about the capital gains. After all, property always rises, right?

That is why we need a CGT, although of course that doesn't seem to be a serious consideration as it is politically unpalatable

Hello Les

the tax advantaged PIs – which is something I had not recognised until I looked more closely into this subject. Do you recognise the problem, that Nicholas has addressed to you several times, and that I have repeated to you with my wee skit, still without comment from you?

Nicolas has done an extremely bad job of explaining what the problem is, asumming the problem is that rental property owners have a tax advantage over home owners. I pointed out a major hole in his argument and he will not address it directly. Hence the post above.

I missed your wee skit sorry. Could you repeat it please and I'll comment.

@ Chris B

@Dave S-
I think rents over the next 3 years are certain to increase by more than the cost of the tax changes.

Which is where we disagree – which is fine this is after all a free democratic society(!).

Chris, do you know how much the removal of building depreciation would cost the average investor per rental? It's only about $30 a week. I don't think it's unrealistic to expect the average weekly rent to rise by $10 a year.

Hi Les

What exactly is the tax advantage that the boomers have?

heres westpacs summary of different tax's on housing
http://www.goodbusiness.co.nz/system/files/market-outlook/Tax_and_house_...

Quote:
"Landlords normally pay more in expenses and mortgage interest than they receive in rent. These losses are tax deductible against other income, while capital gains are tax free. High-income landlords can swap their taxable labour income for tax-free capital gain income. Unsurprisingly, many do. We estimate that changing the top rate of income tax to 30% would reduce house prices by 14%. The tax system currently discourages home ownership because landlords are treated more favourably than indebted owner occupiers"

Andrew - wot Kieran said.

Roger - sorry.

Andrew - how should we 'value' that situation, as a society, bearing in mind the points I made in my 5.03pm comment?

Anyway, before we go on, over Xmas Int.co was running a poll to rank the popularity of a selection of us discussants. I was in that list for my comment on moneytree policy (sorry Roger,) with my attitude described as 'Never say die'! M8 (sorry Roger,) you take the biscuit for determination! Hats off to you, your federation is certainly getting value for money from you! Your attitude seems to be, never, never, ever say die. However, no amount of ignoring the facts alters the truth - wot Kieran said. (I don't care now Roger, sorry, Andrew has worn me out.)

Cheers, Les.

PS - I didn't score bottom in poll and as I recall it was a close run thing between Wally, Mark Hubbard and Andrewj.

Don't give up on me now Les, you're one of the view here that I believe is open minded.

In your skit you made a general comment that because the boomer had a tax advantage they could outbid the generation Y'er. I would merely like to know how you work this out before I comment.

If I am wrong I will admit it. However I won't admit I'm wrong until someone puts up a decent argument. Ian is the only one who has attempted this so far.

@Ian. Well done for actually coming up with a reasoned argument rather than a generalised statement. There are a couple of small but significant points I would like to make about your calculations.

If he owns and rents out the property next door then he either has to use his own labour to manage the property or pay a property manager.

Although some on this forum believe it is possible not to pay back depreciation clawback, believe me it is not that easy. I have paid back depreciation clawback when just transferring ownership of a rental property. Because of this, I don't believe depreciation should not be taken into consideration in your example as it has to be paid back when the property is sold or transfered, which reduces the actual end value of the property compared to an owner occupied property.

With these two items considered, owning the average property in NZ and renting it out while renting the identical property next door will not make you any better off financially. I conduct a regular study into the cost difference between owning and renting property and can email you the workings if you want to check this out. My email is Andrew@AndrewKing.co.nz.

One time where it does make sense to own a rental property and rent the property you live in is where your rental is in a higher yielding area and you live in a lower yielding area. Typically this means that you own a rental in an outer suburb and you rent in a central suburb.

While not financially any different from a wealth accumulation point of view, it is cheaper on a cashflow basis.

It's late, so I hope I explained that properly.

Cheers

You did, and that's what I was thinking of (sort of) with my final point.

I only have 2 further points:

1) tax on the depreciation is effectively a (interest free) loan from the IRD, and from a cashflow perspective is a benefit. I note that what the Govt has been hinting at is effectively taking away this loan, and possibly allowing the depreciation deduction on sale if it can be proved --> kind of reversing the way it works now and arguably not that onerous... so if you think depreciation shouldn't be taken into account in my example, perhaps you don't mind the govt's intentions on changing the depreciation rules...

2) I realise this cashflow benefit is temporary and not a material factor once the clawback is taken into account. I also realise that (theoretically) a property manager could be considered. However, what I observe is property investment decisions being made without considering either of these (or other factors, like vacancy risk), often because of a combination of wanting to ensure tax is reduced and an irrational belief in perpetual high (and tax free) capital gains. I personally think time will sort both these out (irrational conditions persist only until they don't), and would normally want to leave well enough alone, but its taking far too long and I think something needs to be done about it from a policy perspective* - probably by adjusting the way the perceived tax benefit flows (I quite like ring-fencing --> hard to argue this is any different than a limited liability company).

* policy perspective is, in my mind, a combination of bringing forward the tax payable by the sector (you are arguing it will get paid one day, so lets bring it forward) and perhaps helping to moderate house price speculation.

Andrew - "While B can expense his costs, he must also declare his rental income. The net result is that there is little in it. It does depend on a lot of assumptions of course, so B may have a disadvantage sometimes and an advantage at other times." From the Westpac piece Kieran is quoting:

"These losses are tax deductible against other income, while capital gains are tax free. High-income landlords can swap their taxable labour income for tax-free capital gain income. Unsurprisingly, many do."

And, "Sure they cannot just take the tax deductions without also declaring the income." But:

These losses are tax deductible against other income, while capital gains are tax free. High-income landlords can swap their taxable labour income for tax-free capital gain income. Unsurprisingly, many do.

Who said A was not a high-income individual/couple?

You say to Ian, "I don’t think it is fair to allow other businesses to have depreciation but not rental property." Excuse my language, but I say to you, bollocks Andrew, no offence meant, but in the main property appreciates, which is why it's known as a reliable inflation hedge. Plant and equipment used in the productive enterprises of the real economy do not in general appreciate - quite the opposite and fast sometimes. I think I said in this thread or a related one - let's stop trying to be academically pure to avoid 'unintended consequences' when we live with them already, because our version of 'pure' is actually clunky and dirty in terms of outcomes. Let's recognise judgement calls need to be made that level the playing field and alter the outcomes, and forget the academically pure bs. So I strongly disagree that all businesses should be treated the same when it comes to depreciation. If it ain't depreciating, it should not be expensable, simple.

"Unsurprisingly, many do."

(Ian - excuse me cutting in there.)

Cheers, Les.

Andrew T - my rateable values looks like both have been going up? Plant and equipment used in the productive enterprises of the real economy do not in general appreciate. Land, and houses on them, generally do. You'd not go buy a widget spitter, website spitter, wood splitter as an inflation hedge, would you?

The point is however, because of the ability to expense costs, B can improve cashflow position and hence purchasing power, whereas A does not have this advantage.

Cheers, Les.

The replacement cost of buildings increases by roughly inflation per annum so even if the building does depreciate in real terms, in nominal terms (which is how the depreciation clawback is calculated) they rarely do unless very poorly maintained.

Given much of the maintenance is put through as a tax deductible expense (certainly the incentive for a landlord is to try and do it this way), and assuming there is evidence that a depreciation clawback is payable in almost all cases (from a practical perspective), it actually seems kind of reasonable to assume that residential property's building depreciation rate is nil.

Perhaps a question for you Andrew (K) ---> how often have you sold a property and **not** been required to pay the depreciation clawback.

At the end of the day I can’t see anyone doing it, except if you want to live in an expensive area but can’t afford to.

This is a pretty serious red flag to me (that property prices are too high). The gap between renting and buying shouldn't be that wide.

Les is there much of a secondary market for widget spitters ? Might be a nice capital gain to be had if demand for widgets goes through the roof :-).

Hi Ian and Les

Repairs and maintenance are expendable, however capital items are not. If I modernise a kitchen for instance, I have to depreciate the cost at the building rate. Not sure what will happen if I'm not allowed to depreciate any more.

I think we have agreed that a building can depreciate, especially over shorter timeframes, however they usually go up in value over the long term.

Currently we can claim depreciation and if it turns out it didn't depreciate when we transfer or sell it, then it is clawed back. If the building has depreciated, then it isn't claimed back.

Despite what you may think, it is actually very difficult to provide rental property, and the depreciation allowance is extremely useful, especially in the early years before rental prices increase. My view is that as we don't know if a property will or will not actually depreciate then the allowance should remain. Your view is that because properties usually appreciate then it should be withdrawn. We may need to agree to disagree.

Govt are looking at allowing depreciation for a rental property only if it does actually depreciate at the time of disposal. This would have a very real negative affect on cashflow and lower the ability to provide rental property. As rental property does not have a tax advantage over other investments (I think you have to agree to this given it is the view of the IRD and Institute of Chartered Accountants) this would be poor tax policy. If, however, it applied to ALL businesses and investments then we couldn't really complain.

@ les: I haven't sold many rental properties but to the best of my knowledge I have always paid back depreciation. The last time was about five years ago when I transferred a rental property into another structure. This triggers clawback and it cost me quite a few thousand without any sale dollars to ease the burden. Them's the rules.

The case of people owning and renting out a home in the outer suburbs while renting in the inner suburbs is more about the difference in yields between different areas, not ht ecost of renting vs owning. It is usually younger people who want to live and socialise in the city but can't afford to own a home in the area.

Andrew - your'e sure earning your money, good on you. We'll have to agree to disagree on a good few things, as for what IRD and Institute of Chartered Accountants say about the advantage, I'm more inclined to agree with Jacko:

http://www.interest.co.nz/ratesblog/index.php/2010/04/09/rents-unchanged...

It's been a good discussion with you, as usual in these kinds of thing one can learn as much from the unanswered questions as those answered. Anyway, I hope you've enjoyed it too and understand that most of the Int.co blog folk aren't malevolent PI haters. Some might be, but a good few, as you can see, just want to get some balance back in the economy. You are at least consistent, I recall at the TWG Conference you hand seemed to be up every other session telling the poor blighters you'd whack up rents - maybe it's you that's got JK and BE quivering in their boots about what they must know should be done - I could well believe it if that's the case, your'e not a quitter that's for sure.

As I said before you guys have your place and who'd want the state to provide all rental accommodation? Sadly some would, but maybe they never been to Moscow!

Cheers, Les.

Hello Andrew

With respect, the property market is quite complicated and from what I can tell, people on this site do not really understand it

They talk about what they would like it to do, but do not really understand the drivers.

So true.....if you was to ask Greg Laurie or Chuck Smith they will tell you that GOD is the driver and its all part of end times confusion predicted in the bible.

@Andrew, I wasn't implying you would pay for information that suited you and your lobbying, but the potential for bias because of vested and conflicted interests abounds in this area. Plus, as that Summer Chart Series article explains, the tax take has suffered since Cullen's 39'er and the search for income sheltering increased, which is very convenient with property investment, given our tax system and regs. I too hope the government will consider the facts, and where we are now and how we got here.

A friend of mine told me to check out your blog. This is just the kind of substance I was for. I wish I'd have found your site earlier.