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 however 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.
As usual, it's the poor who will get walloped first as they have no means of passing costs on -- so inevitably, a wage push will follow... then inflation, then higher interest rates, then the wage/price spiral starts all over again.
But that's good in a way, because the opposite of inflation is deflation and deflation would have us all end up walking in ever decreasing circles in Zombieland for ever.
Inflation is good for property, as we know. I have lived long enough to see the trends quite clearly.
The Inflation Factor
Never mind the statistics -- here are the facts as I personally experienced them.
My parents bought their first home in the late 1930s for $800.
I bought my first investment property in 1959 for $600 and sold it 6 months later for $1,200.
I bought my first house in Astley Ave New Lynn in early 1960 for $6,000 and sold it 12 months later for $8,000.
All through the 1960's I was buying and selling Auckland houses for around $8,000 - $10,000.
In the 1970s I was doing the same for around $18,000 - $20,000
In the 1980s these same houses had reached $150,000 and in the 1990s $250,000.
These days you have to pay $350,000 for something half decent in the main centres (unless you buy in the slums or the wop-wops) and if that figure wobbles 5% or 10% either way -- so what?
In a few years some will be looking back in wonder at the bargains that they missed out on.
The same story with commercial property. My first commercial property was 27 Rutland Street Auckland in 1969 and cost $25,000. Its CV today is $2.3 million. (What a shame I sold it!)
Another one to prove the point:
In the 1970s I owned 32 Lorne Street, Central Auckland, which I bought for $250,000 (and you can see pictured on the back on one of my first books The Property Boom 1981). The CV today is $3.75 million and it still bears my name: 'Newland House' and reminds me every time I see it how amazing compounding inflation can be.
And one more just for luck. In 1974 I bought an industrial building at 10 McColl St Newmarket for $150,000. CV Today: $1.135M
I could repeat these examples a 100 times more but you have got the point I am sure.
The lesson is clear: Who needs tax breaks with capital growth like that?
In my opinion, times have never been better to get that elusive bargain you have been waiting for.
While the much of the country sleeps waiting for the 'gummint' to give more handouts, the rest of us are out there shaking the trees.
To the victor the spoils.
The Do's and Don'ts now the market has changed
1. Buying houses and leasing them to the Government
This was always a marginal exercise but there is now no point to it at all. The returns were measly -- around 3%-4% at best, as owner you were still liable for general repairs and maintenance, rates insurance etc ... and the only advantages were rent 52 weeks the year guaranteed and a promise to pay for any major damage.
Now that depreciation is on the way out there is nothing to recommend this form of investment any more. If were thinking about buying such a property, don't. If you are stuck with one already, sell it if you can before the market wakes up to the fact that this sort of investment is useless. The Government will have to supply housing for the needy on its own. Another unintended consequence.
2. Room-by-room letting
This was another suspect method of cranking up rents favoured by spruikers, as well as legitimate property managers. Now that depreciation has gone there is an elephant in the room. More income, but massively more management and now without deprecation (which surely should apply to THIS sort of property!) they will become the investor's nightmare Mk II.
Carefully check this form of investment so far as possible. As time goes by, these room-by-room houses may fall out of favour, not only for the reasons given, but because such a property will only be worth what it is as an empty house. Too many of these room-by-room properties have had their values hydrauliked using the income to justify a higher price. If you want to have the benefits of room by room, then buy in central locations, supply good amenities to the tenants and be prepared to work very very hard.
These types of properties are very vulnerable to market forces and could suffer a decline in value. Only professional managers should attempt these. If managed properly they can be a gold mine. If not, a grave yard.
3. Little boxes in 'Nappy Valleys'
Another marginal investment are the little jerry-built boxes sited on pocket handkerchief sections by the thousands in the poorer areas of the main centres or in small towns and villages. For example large parts of South Auckland, and West Auckland as well as many small townships (e.g. Huntly, Wanganui, Rotorua, Wainuiomata) have large swathes of these little boxes.
As shelter for the working classes they are fine. As investments they are a disaster. I have lost count of the number of clients I have had who have been tucked into these by robber-baron spruikers masquerading as 'educators' who now face negative cash flow on a huge scale and repair bills to the sky. The values of these will nosedive along with income. Stay well away.
If you want to invest in residential property, then stick to small inner city apartments, (now under priced) so long as they are over 50 sq metres, have at least one separate bedroom and a car park, are freehold and on the Northern (warm) side of the building. The returns can be great, maintenance minimum, and long term prospects good.
Alternatively, buy regular houses, units or town houses in leafy suburbs, where there are no gangs, tinny houses, dogs roaming in the streets, beer bottles at every door, boy racers, graffiti, cars on blocks, or piles of rubbish on the streets.
They may pay little at first but like Edmonds Baking Powder -- sure to rise.
© 2010 Olly Newland. Used with permission.