Contents

  • A  Discussion on the New Housing Changes and The Effect on our Property Predictions. 

DISCUSSION

The pressing question on everyones mind is the impact of the new legislation on house prices, with the key changes being the lift in the Brightline period from 5 years to 10  years and the change to ones ability to claim interest paid as an expense.

The lift in the Brightline test was almost an inevitability and one signaled in the last newsletter. It was just too easy to do and then blame it on the previous Government. Grant Robinson must kick himself that he is recorded as saying he would not do exactly what he did do, just last year. He must be glad that he did not hold up a piece of paper with the word “No” on it like Winston.

The second aspect is the inability to claim interest expenses against the income received. This is creating quite a stir, principally because it will be the first time you cannot claim legitimate business expenses against income. It is fraught with difficulties and I would not be surprised to see a partial back- track before long. Most people know when a tax is fair and when it is not, and this one is unfair and will create a real headache for future tax assessment. 

 The legislation has not been drafted yet and the devil will be in the detail. The government is going to have to include “no interest’ on all residential property or people will simply move their property holdings to company ownership. If they do make it all residential property how are they going to assess:- 

* Property developers and building companies who buy a property for subdivision that has an existing house on it? 

* How will they assess a residential  house that is on  commercial land. 

* How will they assess the numerous businesses that operate out of residential houses? 

* How will they assess part usage, where part of a house is used for  residential purposes and part for business purposes?  

* If the legislation specifically excludes businesses, then what is to  stop property investors from setting up a company and buying through it.

* If you sell before 10 years and come under the Brightline test are you going to be able to claim your interest component off your profit. 

* If the answer is yes then people will accumulate their interest component for the number of years they own the property and claim it off the profit.

* If the answer is no, then investors will be effectively paying a double tax. Once by not being able to claim the expense and twice by not being able to deduct it from profit.  

Some years ago it was popular to set up a company to buy and own rental properties. This fell out of favour as there was little advantage in buying through a company. But the new rules will change this and the details of this change will demonstrate it as unworkable, as it changes a key aspect of business Tax law. Expenses are deductible. The Butterfly effect of this change will be huge and overly complicate a tax system that various governments have spent  20  years trying to simplify. 

One key advantage in buying through a company is GST. When purchasing you can claim the GST portion back from the purchase. 15% of your purchase price. You must pay GST on your sale, but you have the use of the GST money from day one.

One interesting and amusing question is how the Government is planning on handling the interest component of by far the largest borrower for residential property in the country.  Kainga Ora owned by themselves. Another 2 billion allocated in this legislation for further borrowings. You can bet that they will exclude themselves from this legislation, which will fan the fires of unfairness.

Just a quick note about this type of Government exemption. Over two years ago now, the Government found out that the guidelines for Meths in homes were wrong and they decided to change the standard to from 1.5 μg/100 cm2 to 15 μg/100 cm2. The government changed the criteria to their own state houses to 15 μg/100 cm2 immediately. However, the 1.5 μg/100 cm2 remains on the legislative books unchanged and all tenancy managers and landlords still have a 1.5 μg/100 cm2 level in their legislation. Some banks therefore still apply it for lending purposes. It is very frustrating when the actual written legislation does not catch up with the known safety standards. If you own a house with a meth reading of over 1.5 μg/100 cm2 you are legally obliged to clean it for your tenant, yet the Government can house that same tenant with a reading of 15 μg/100 cm2.

The removal of interest payments claim-backs is going to be an ongoing thorn in the Governments side.  Apart from the inherent unfairness of not being able to claim a legitimate expense, and apart from it being a retrospective tax in that it applies to existing properties with no lead in period, this will make a lot of properties unaffordable to the owners, who often have simply tried to set themselves up for the future. Some will have no choice but to sell and then they fall into the perfect trap set by the government. We ( The Government )  put you in a position where you must change your long-term plans and sell your property now. Then we have extended the tax net so we tax you as you fall.  It reminds me of the Crow and Blackfoot Indians of the USA, who had “Pishkins” where they drove the Buffalo herds over a cliff, thus harvesting a massive amount of meat, but having no idea of conserving animals for future generations. For the slow amongst you: – the Indians are the Government, the buffalo the landlords and the bottom of the cliff is the Tax department whose job it is to be fair!

The Sacred Cow that Just Won’t Lie Down!

The fundamental problem is that we do not have enough houses in the country. The old supply and demand issue raises its ugly head again  and again, and until it is truly addressed, it will come back time and time again to haunt any government. For proof of this we only need to look at Canterbury. The only province in New Zealand without rapidly rising house prices. (Until last month) Why? Because they had two massive earthquakes that damaged most of the city. They had to rush through special legislation to allow them to shortcut the RMA and  create vast tracts of new land for building, and then they had to build new homes on a massive scale. The consequence is that enough homes are being built for the demand, thus the prices are not going up to the same level as the rest of the country.

No amount of juggling the chairs on the Titanic’s’ deck is going to fix the supply problem. We will not see an end to the housing crisis until we have enough houses, and we are 10-15 years short of that. The recent timber supply issues being signaled by Carter Holt, show how complicated this issue is. Pull one string and a dozen objects move. Stopping the investor buyers will not address the shortage of houses. Other groups will quickly take up the slack. In Christchurch the massive, organized building program equaled the  lowest capital gains in the country. Lesson learnt!! . The average price in Christchurch (New Zealand’s third largest city) is $556,446 now similar to Whangarei’s with less than a quarter of the population.

The problem has been created by successive governments failing to address the supply issue adequately and urgently. Combine this with the incredibly open migration policies, and the current housing situation was inevitable and has been signaled and discussed for over  20 years now. We simply do not build enough new homes.

The latest rule changes are designed to partially exclude new builds, in the hope that this will drive people to new homes. It is a great idea but misses the point. There are not enough new homes being built. Look at any building company based in Whangarei and they are swamped with demand. They have more buyers than they could build homes for. Most building companies and independent builders are booked up 12-24 months ahead, What they do not have is the land to build on and the crews and subbies to build them, nor, it now appears, the basic raw materials to build with. You can throw feathers at a sacred cow, but you are not going to turn it  a homing pigeon.

Rents

I listened to the minister of Finance argue that rents would not go up through his new legislation, because tenants would leave those rental properties and move to cheaper ones where the rent had not gone up. This again shows a lack of appreciation of what is happening. There is a chronic shortage of rental properties and this will get worse as the Government continues to drive people away from being landlords. There are simply no houses for these tenants to move to.

Presumably, the government intends to build lots more rental properties, with all the money they are going to borrow, (and claim the interest expenses), however this will take 20-40 years. Surely it makes more sense to wait until you have at least made a significant dent in public rental supply and demand before shooting the golden landlord goose in the head.

I note Tony Alexanders’ comments in his latest newsletter. ” Data from MBIE tell us that since Labour were elected in September 2017 average rents throughout New Zealand have risen by 24%. In contrast, average incomes have risen by about 11%. The rise in rents we can largely put down to the government increasing the cost of rental accommodation.” 

I wrote the below article in 3/3/2019. Its 2 years old, and allowing for more properties to have been added to both the private and Government owned list, I am sure the ratios will be more of less the same;

What a sad day it would be if the Government and the Reserve Bank ever succeeded in driving the private landlords out of the rental market. Some simple facts.

  • 450,000 households rent (Census figures 2013)
  • Housing NZ own 62,000 rental homes (this figure is gathered by stealth as they seem to fudge their actual ownership by claiming properties, they lease off private landlords)
  • That means 388,000 rental properties are owned by private landlords.
  • That is 6 out of every 7 rentals provided by private landlords. 
  • If the private landlords all got out, you would presume it would be the governments job to provide the missing rental housing.
  • At an average cost of $500,000 each the Government ( i.e. you the taxpayer) would need to stump up with 194 billion dollars to replace them.
  • Or $53,000  in extra tax for every one of the 3.64 million people who pay tax in NZ.
  • To put that in perspective the Christchurch earthquake rebuild has cost around 40 billion so far.

The logical conclusion is …we need the private landlords,  so stop beating up on them. 

Summary 

The Brightline test was brought in under the John Key government to stop house flipping. ( where someone purchased a property, held it for a few weeks or months and then sold it at a profit). Two years was ample to achieve this purpose. It was then extended to 5 years under the current government, and at this point the purpose changed from a flip prevention to a capital gains tax. The new 10-year extension to 10 years is dishonest in that we were promised no capital gains tax by both the Prime Minister who said “Not on my watch “and the Finance Minister who simply said “No” to a question about if he would raise the Brightline Test. This is a capital gains tax and became one after the 5-year change when its purpose was no longer to stop people flipping properties.

The latest legislation will only affect a few investment buyers. Those that borrow heavily against the property they buy  or other property they own. The larger number of investment buyers we are seeing are the ones who are moving their capital out of bank deposits and putting them into housing. Basically, swapping their interest income to a rental income. These people are not going to worry about the lack of interest provision as they are cash and are not going to worry about the Brightline test as it taxes profit if they sell, when their purpose is to create an income stream now and in all likelihood will be the estates problem when they are gone. The profit is just a bonus they were not getting with their bank savings.

This legislation seems to have little purpose apart from collecting tax. There is no incentive for first home buyers, For example the cap rate. If a first home buyer buys a property under a set price (the cap rate) then the government will give them a grant of $5000 per person if it is an existing house and $10,000 if it is a new house. In Whangarei, the cap was at $500,000 before the new legislation and its at $500,000 after the new legislation. No difference. No wonder the first home buyers have been left underwhelmed!

It has been said by many people and I totally agree, this will push up rents. I deal with many landlords who deliberately charge a rent below market for several reasons. This legislation will force most of them to charge the highest they can get simply to survive as landlords. Any talk of it not pushing up interest rates, is just that… talk!

Landlords can only put the rent up on an annual basis now ( it was every 180 days) . This means landlords will charge the maximum they can get annually as they know that rental cant be changed for another 12 months.  

The government is not ready to take over from the private rental market. They desperately need the private landlords as they provide 6 out of every 7 rental properties. This move is way too soon and will backfire spectacularly, either pushing people to set up companies to go around it, or by selling, or by raising rental  rates.

I strongly believe that they will have no option but to reverse their stance on the interest rate option. Its just dumb, and they will see this before too long, especially as they get into the detail.

What effect on Whangarei Prices?

We will see more investment owners selling. Some have been waiting for the right time to sell and that will be now. Those that were thinking of selling and had owned the property for 6 or more years will wait out the 10 years if required to beat the Brightline test . The properties that do go on the market will get snapped up by the huge number of first home buyers. We will hardly see a blip on the available supply.

Investor buyers will exit the market for now to see what happens with prices.

We may see a pause in the market while the new changes sink in, but the fundamentals of supply and demand will eventually drive the market onwards. Until there are enough houses built, the housing crisis will remain, and we will have upward pressure on prices and our prediction of a 12% gain by the end of December looks good. 

Email me if you have anyone that wants to be on my database and who will be interesting in receiving this newsletter on a monthly basis.

barry.joblin@harcourts.co.nz or go to  My blog

FURTHER TO MY FEBRUARY NEWSLETTER

What are the Rising Pressures

  • House prices are getting uncomfortably high. During my 35 years in real estate, I have seen many boom cycles, where the market has surged ahead and then slowed for some time. I have seen very small drops of a few percentages in the bust cycle, but mostly the market has just slowed down.  The house prices doubling every 10 years formula has proven true over those 35 years and historically over 135 years in New Zealand. If we take the current average house price in Whangarei of $580,000 (REINZ) then in using this old formula the average will be $1,160,000 in 2031. For that to happen house prices have to have an average growth of $58,000 per annum. That is $1,115 per week. Take another look at the current growth rate of $1,230 per week and we are only just ahead of where we should be for this historical doubling in price.
  • Do I think it will happen?  No I don’t, but then I didn’t think it would happen 10 years ago, nor the 10 years before that.  Based on the available evidence today its on track to happen again.
  • This really is a supply and demand situation. All real estate Agents today are crying out for more listings. In the existing housing market there is a chronic shortage of stock. The eventual answer to our housing “crisis” is new builds. If and when new builds catch up with the supply shortfall, we will have supply and demand pressure drop. For that to happen developers have to break up more land. For that to happen with any sort of speed the Resource management act has to be thrown out. And this is where our current Government is currently at. Kudos to them for finally understanding that the RMA is at the heart of our ability to address the housing shortage and having the courage to do something about it.
  • Interest rates may rise. This will have an immediate impact on housing as it will scare a lot of people. But it would have to go up a long way to be a serious deterrent and that would be very bad for the economy. I think we may see one or two token rises to give the reserve Bank something to drop if the economy downturns, but it will be a token only. The USA did it 3 years ago and had to backtrack quickly when it built recessionary pressures.
  • Building costs may rise to the extent that the inflationary prices are in the new builds. We have already seen this with building costs rising from around $1,900 a meter in 2016 to over $2,200 a meter in just a few years.  If new builds become dearer than existing homes, then existing homes will rise in price also.

2021 the year of Surprises

  • I try to keep these newsletters factual, but the reality is both Diana and myself have developed a sixth sense in the property market and it’s kicking in this year. It may be a flashback  back to my increasing and frequently wrong scepticism that prices cant possibly  double over the next 10 years, but I have a very uneasy sense about the current market.
  • I think we will see some sort of stall later this year. There is no evidence for this belief, in fact based on the current evidence we are heading for a 20%plus growth year. But instinctively I think we are going to see something happen that will stall the market. The most likely scenario is political interference. There are a number of ways this could happen this year.
  • The Reserve Bank has already instituted loan to value restrictions on investment properties. They could increase these. 
  • Capital Gains Tax could be introduced. This would be a very unpopular move as the Labour party has ruled it out for now, but it may feel the circumstances warrant the change in policy. This would be a very bad look for a Government who mantra is trust, so I believe the most likely scenario will be the next option, Fiddle with the Brightline test. 
  • The Brightline test could be adjusted to remove or extend the 5 year get out of jail free period. This would mean any property that was not your residential home, would be treated as taxable income when you sold it. You would have to pay Tax on the capital gain as if it was part of your income. Removing the Brightline 5-year period and replacing it with a 10,15,30-year period will have a major effect on property prices. It would only require one word change from the current legislation and politically is a perfect solution for Labour. The legislation was introduced by National under John Key. It is old legislation, so labour can argue that they stuck to their word and never introduced a capital gains tax. It is incredibly simple to change.  Basically, they tweak an already current bit of legislation. This option makes so much sense that I have convinced myself that it will happen this year.
  • I recently worked with a client who has American citizenship. The USA has far reaching housing tax system. When this client sells their second NZ property, they will have to pay the US government tax on the profit, even though the property is in New Zealand. I asked how the US Government would know? and was told that the NZ government provides this information to the USA.
  • Interest rate rises. If these went above 5% then a lot of people would be in trouble based on the high loan amounts to purchase today. This is not in the Banks nor the Governments interest, so is an unlikely strategy.
  • Cheaper forms of housing. We are already seeing some cheaper construction methods being imported into NZ and imported kitset homes are on the rise. I have an A1 home and took an internal wall out. The timber framing was a very superior, slow grown pine, with “Made in Austria” stamped on every timber.  This won’t fix the cost of the land, which is rising all the time, but could put a ceiling on building cost rises.

The Quota Concept and House Prices

A friend of mine was heavily involved in a particular quota system. It was designed to allow the product to be sold for what the market thought it was worth. All bids were confidential, so the only price disclosed was the top bid. What this friend discussed was how often the top bid was disproportionally higher than the next bid. It was not just a bid above the others but often 30-40% above and reflected what value that buyer saw the product as worth, on that day for their reasons.

We have a similar thing happening in the housing market. It does not happen in Auctions where the top buyer knows exactly where the second buyer saw the value but is happening in pricing situations where the price is either fixed or when it is advertised as “Buyers over xxx should inspect”. In multiple offer situations, we are seeing a range of prices usually within a ballpark figure, but then there is usually one offer a lot higher than the others. Its usually from someone who has missed out on several properties and has decided that they will get this one. The buyer has deliberately paid over the expected market price to secure the property for themselves. Not a bad strategy in a rising market as the property will be worth their figure in a matter of weeks or months.

But what it does do is speed up rises in house prices.  This property then becomes the comparison agents and buyers use in the street for their future appraisals based on recent sales evidence.

As an Agent I recommend sellers use this marketing strategy, as my job is to get them the absolute best price the market will pay, however I can see that an Auction based marketing system is fairer for the general population as the price paid by the top bidder is dependent on the underbidders last bid.

A concept in Chaos Theory is called the ‘Butterfly Effect “and first suggested by Edward Lorenz.  It suggests that even small events can have profound downstream consequences. For instance: –  ‘A butterfly flapping its wings in Mexico can cause a tornado in China” . A simple example would be a drip of water falling into a full bathtub, could cause a small ripple that overflows the bath onto the floor, where it soaks through the flooring into the wiring in the room below, causing the light to short out, which blows the circuit breaker, which blows the power pole breaker, which faults and blows the district circuit fuse blowing out power to the district, etc …………. “

On the 12th of February, the new Tenancy rules came into effect. Amongst many changes is the requirement to give tenants 90 days’ notice to vacate rather than the current 42.  A small change you would think, but No! it is having an excessively big Butterfly effect.

42 days was 6 weeks. 90 days is 12 weeks. With an average rental in Whangarei of around $480 pw, that means a bad tenant choice could cost you $5,760 in lost rent, compared to $2,880. Any opportunity the bad tenant must damage the property goes from 6 weeks to 12 weeks.

The result is, a landlord or Agency cannot afford to make a mistake. Those tenants who might have been worth a risk (i.e., missed a few payments, or had a few noise complaints made about them) are not going to get a second chance. The criteria for selection just got a whole lot tougher and ANY black mark is going to put the prospective tenant out of selection. For most landlords this is a good thing, but for many tenants it is a bad thing as their teenage history and dubious credit rating will follow them.

Consider the impact this will have on the 20/1/21 Stuff article by Henry Cook. “Public Housing waitlist grows by 1000 in two months to new record high …… The waitlist for public housing has continued its steady march upwards with 22,409 eligible households waiting for a state or social home at the end of November”.

 The unintended consequence of the new legislation will be many people, with minor rental issues, being rejected at the selection process and they will become totally reliant on Government Housing. The growth in the Public Housing waitlist will be dramatic this year and swamp the effect of building new state houses.

In 1991 I moved to Whangarei and worked for what is now Housing New Zealand but was called the Housing Corporation of New Zealand back then. We had a points system where we allocated houses to tenants based on their current living conditions. The rougher their current living conditions the more points they got.  I noted a family that we had just housed, who had been living in an abandoned 6 aside herring bone milking shed.  I was in the area where they had lived and was curious to see the shed for myself. I stopped outside the building and it was clearly occupied by a young family. I spoke to them and they told me that their cousin had just moved out and that they had moved in. They had been living with their family but had moved into the milking shed as it would raise their points and help get them a state house. It was clear that the shed had become a commodity to be used to raise priority. I am guessing with the current waiting lists for state houses we are going to see a lot more of this.

When the government moved to introduce the accommodation supplement in 1993, they took the pressure off state housing by providing a top up amount to all qualifying tenants so they could apply for privately owned rentals. This latest change to the RTA, will go a long way to reverse the benefits of that move.

We are already seeing the consequences of this change today. The good tenants get the rentals. The poor tenants get first pick of the State Houses. The people in the middle, who have a “risk factor” against them are going to miss out. Keep in mind risk factor includes not having a past tenant history. This will affect first time renters like your kids or grandchildren. They will not get the private landlord homes and they do not qualify for the Government housing, so will have difficulty finding a home and may become the new class of homeless. The new tenants will not get the chance to prove themselves through no fault of their own and will move back in with you! 

In a few cases this will be their own fault. I can think of one example where a friend of mine privately let his property to as family who carried a few warning signs. The landlord was taken by the family’s story, the apparent good character of the bread winner and believed in them and wanted to give them a chance. Immediately upon occupation strange repairs were required, where toilets and showers started leaking, a dog was moved in, and the neighbours started complaining about noise and cars and the rent stopped being paid. After some difficulty, this tenant was moved on. Today that tenant won’t get another chance (yes I know they don’t deserve it),

Contents 
1. Small Business Funded By House Prices
2. House Prices In The Next Six Months 
3. House Prices Doubling Every 10 years ..
4. A Critique ! A Warning About The Auckland Market
5. Rental Market Headwinds ? 
6. Hunterwasser Tribute 
7. Wild Inflation Theory 
8. Electric Cars Parity with I.C.E.
9. Fusion Energy and the Future       

Welcome to the next edition of my mostly real-estate thoughts, facts and predictions for the future. The last letter was in July and as is becoming increasingly common it takes a few months for the dust to settle enough for me to get an idea where things are going in the property market. In the last issue I said that while logic told me that we had to be heading into a recession, we were seeing no sign of that in the markets, and that I though we would see the market stay flat of even rise for the rest of the year. Well half that prediction was wrong. It did not stay flat, but I was way ahead of every noted economist. 

Small Business Funded By House Prices. 

I managed to spend about 2 minutes walking alongside John Key, when he was Prime Minister, as he was heading from our conference for a rendezvous with a government BMW. I was desperate to get my message across that small businesses depended on house price inflation. He probably thought I was raving loony, as I garbled on about the link, that seemed so obvious to me, a business owner. He finished my monologue by saying “Small business needs rising house prices! I get it”. My teaching the then Prime Minister, who had a lengthy and distinguished career in the financial world to suck eggs, was done! 

So, let me walk with you for two minutes …. Rising house prices are essential for business growth, survival, and capital expenditure. Approximately 97 % of all businesses in NZ are small businesses and they employ around 30 % of the working population. (MBIE). Any small business owner will tell you that when they need money to:- start up, buy more stuff, get an overdraft, buy more stock , buy more machinery, expand , or just survive, that when they go to their bank for funding, they are going to get asked one overriding question. . “What’s your house worth?”. While the banks are interested in other aspects of your business, what they fall back on is the security you have in your house or houses. That is what they primarily lend you money on. They know that this is the only readily realisable security they can get. They also know it motivates the hell out of you to make sure your business succeeds. The more your house is worth, the more you can borrow. The more you can borrow the more you can grow your business. The link between house prices and funding for small businesses is cast in chains. The last thing the government, the banks, and small business owners want to see, is property prices declining. That would be the beginning of a really, really, big financial disaster. 

Which Segway’s into the Reserve Bank’s Chief Economist, Yuong Ha, saying the bank was not responsible for soaring house prices and cannot control them. “House prices are not something we can control, even though people put that on us”. And neither should they. Houses are a commodity and should be market driven by supply and demand. We do,  and will see government intervention in house prices, but imagine if the government made legislation that controlled other asset classes, like the share market prices or Gold prices. Imagine the uproar!

Where Are Prices Going In The Next Six Months 

The short answer is up and accelerating. 

There is way too much pressure from the multitude of buyers to see any other result. We are seeing multiple offers on properties similar to the peak three years ago. Open homes are full, and we have people making offers on property without seeing them. What we are seeing in the streets

  1.  First home buyers. As more and more young people build up a deposit in KiwiSaver, more and more of them have a deposit for a house and are they ever in the market. Any property that comes in their price range will get 20-40 people through the first open home and it is probably going to have a deal on it, within a week. KiwiSaver started 17 years ago and after three years people qualify to remove some money for a deposit. That means we have 14 years of qualified first home buyers entered or entering the market. These people are pushing the investors out of this section of the market as they pay more than the value the investor sees. A negative side effect is that the first home buyers are moving out of rentals and widening the gap between desirable tenants and less desirable, meaning the overall quality of tenants is declining.
  2.  Money fleeing the banks. We are seeing more and more purchases where the buyer is pulling their cash out of a bank and putting it into a property. These people are often buying the one- and two-bedroom smaller properties that do not suit the first home buyer. Most of these people are older and have the cash, so we are not seeing many sales subject to finance
  3.  People relocating from the main centers. There seems to be a huge amount of movement from the bigger cities to places like Whangarei. These people are often cashed up, as they are selling more expensive homes. I mention the cash element, current Bank strategy of limiting Loan to Value Ratio’s is only going to hurt the first home buyers and not the second two groups.
  4. With the current pressure on the available stock and with interest rates predicted to remain low or go even lower, there is no reason to believe we are going to see a slowdown in the market for the next 6 months, at least, and I suspect it for 12 months . Again, logic says that we must have an impact from the Covid recession, but every prediction of when that was going to happen has so far been proven wrong. We are through the end of July crash, when the subsidies would stop and kill the market, and through September crash when the impact of the subsidies stopping would be felt. The only predictions still standing are the ones saying next year when the impact of the subsidies stopping is going to be really felt. I’d hate to be the emperor standing naked in my new clothes but remember this Covid induced recession is not like any other recession and all the usual rules do not seem to apply. The recently released unemployment figure of 5.3% demonstrates that the predicted mass unemployment simply is not happening. We have had way worse unemployment rates even in good years. When you take out the 4% totally unemployable the real rate of active job seekers is exceptionally low, with some industries crying out for workers. The Government tax take is nowhere near as bad as predicted so again, bad news predictions proving wrong.  The reality is we are being told things are way worse than they are proving to be.

We may not see the calamitous and dire future predictions that we have been foretold occurring. We do not seem to have died from lack of tourists. 10 billion of the money that was spent on overseas holidays is now being spent on NZ holidays. I thoroughly enjoyed my latest camper holiday, where the first thing you noticed was the different attitude of the camper staff to their own people, and the second you noticed was that everyone pulls over to let cars get past. You don’t see the big lines of cars following slow campers. The pickup and drop off terminals were very busy. There were plenty of campers on the roads and the holiday parks were full.In Reefton, Diana and I dropped into “Dawson’s Bar and Dining” looking to talk to a local about the town. I asked the extremely helpful bar lady to point out a local to me. Her finger waivered in the air as she used it as pointer to scan left and right over the 30-40 diners and drinkers, before finally with a sense of triumph, identifying one couple and a single manic looking gentleman. 3 locals out of 30-40 people. The point being NZers are out and about seeing their own country and spending much of the 20 billion they would have spent overseas this year in good old NZ.But for me the biggest bonus of all was the lack of social media posts of annoying family and friends basking in some exotic overseas location, while I was hard at work suffering the rain and cold. 

The fundamentals of low interest rates, a shortage of houses and a growing population are still in play and have been for the last 15 years. Basically, until the supply catches up, the demand will drive prices up. (See Something to watch in Auckland)

“Do House Prices Really Double Every 10 years” by Mark Lister. Craigs’ Investment Partners 

An interesting headline that always captures my eye, as these articles are invariable written by someone with a barrow to push. Mark starts off his article saying he is no property hater and recommends young people getting on the property ladder. Craigs are predominantly a share broking and investment firm and property investment takes money away from firms like this.

 In this article he quotes Reserve bank data from 1962. He writes “that at first glance, the numbers are good. New Zealand House prices have increased 8.2% per annum over that 58-year period, so they’ve in fact doubled every nine years”. He ends his article saying that “It’s also based on some periods in our history when inflation was exceptionally high, this makes the rule of thumb much less useful, and potentially a little less accurate” 

And this is the argument all these writers follow, like a well-worn Wildebeest game trail into the Great Green Greasy Crocodile infested Limpopo river. They try to claim that this increase is not truly representative of true growth, because we have inflation and gross domestic product and these events  must be taken off housing growth. Mark  also talks about how mortgage rates have fallen and made housing more affordable, thus distorting the increases.

He mentions that the biggest rises have occurred in times of high inflation and therefore are biased  increases And the answer is “Of course!! That’s the exact point and that’s why people invest in property and that why the rule of thumb of doubling every 10 years is accurate”. Do not complicate it Mark. Your article clearly shows that despite fluctuations in interest rates, despite how well the gross domestic product is doing or not doing , despite economic slowdowns and rises, despite high interest rates and low interest rates, despite plagues of locusts and corona viruses, property does on average double in value every 10 years , (or nine years in the last 58 as your research shows.) This does not just go back to 1962, but back to when property records began. 130 years in NZ and Australia and 900 years in England (the Domesday Book)

Something To Watch In The Auckland Property Market. 

Auckland looks like it is making inroads into its severe housing shortage. Previously this figure has been estimated at around 40,000 by noted economists like Tony Alexander, however a new report from the Auckland Council Chief Economist David Norman has the current shortfall at around 15,000 homes. This in part will reflect the intensive building programme in Auckland, but also by the slowdown and shift in immigration trends. While net immigration  figures are up on last year (79,400 this year as opposed to 52,300 last.) The people coming into NZ now are predominantly returning New Zealanders, and with our borders closed we are not seeing the number of non-NZ migrants to the country. The New Zealanders differ from the more typical overseas migrants as they head back to their areas of origin, rather than piling into Auckland as the non- Kiwis have done in the past. Along with the baby boomer retirement drift out of Auckland for financial and lifestyle reasons, we could see the pressure on Auckland house prices slow down or even stop. The result will be a stagnation of prices in this area. It is 3- 5 years away, but we may be seeing the beginning of the trend now. It looks like we will have a Covid vaccine before then ,and it will be interesting to see how open our borders are to overseas persons after this scare. You can be sure there will be more pandemics coming and some of them will be deadlier. You can also be sure New Zealand will be an even more attractive destination to people overseas, with our ability and willingness to close the borders in times of crisis. Just how open our borders are will decide the future growth in the Auckland market.

Rental Market Signs. 

We are seeing an unusual set of statistics in the rental market. We have previously talked about price glass ceilings for rents. $400 per week was one of these I talked about in 2018, but that ceiling is well and truly shattered. Rents are going up fast at present with an average increase of $7 in the last month and average rents are closing in on the next ceiling which will be $500 per week. There are some potential signals that all is not as good as it seems. The days a property is vacant has increased to 26.5 days. Correspondingly we are seeing both enquiries and applications down on previous months. There are a lot of potential reasons for this, including the approach of Christmas, but one suggestion is that people are not prepared to pay the rents being asked. We will watch this closely as we know there is a chronic shortage of rental properties and we went through something remarkably similar when average rents approached $400. For the first time in my memory , it is usually cheaper to own a home than to rent it. 

Hunterwasser Nears Completion. 

Never has a building in Whangarei been so mired in conflict and so polarizing in opinion. You would this it was  another Trump Tower. The process to fund it followed a very convoluted and twisted path, and looking back on it there were obvious signs of “clever manipulation “ of the public, including creating a referendum that split the “No” vote in half and despite assurance to the contrary,  it will undoubtedly be an ongoing cost to the cities ratepayers for many years to come. 

However, that said, as this magnificent structure slowly and sensuously strips from its bridal white robes, revealing tantalizing glimpses of gleaming multi coloured tiles and soft  seductive  and sweeping curves, even the staunchest critic must be impressed. We are seeing a masterpiece being created. 

For 100’s of years after the controversial process has been forgotten, this unique building will become a symbol of Whangarei and its future. It will make national headlines as it becomes the Ohakune Carrot or the Paeroa L&P bottle of Whangarei. It will spread across the world in people’s selfie photographs and will put Whangarei firmly on the map. 

Congratulations to the many who fought so hard for this building for over 12 years.  Who had the vision to see what many (including me) could not see. You will be remembered in future generations as some of the current day founders of our city . 

Respect!

Inflation Theory A’la Barry 

Here is a strange theory I have been working on. In July I mentioned that when you print money you make that money worth less, because there is more of it, and the things it buys worth more. Classic inflation theory.  Historically when money gets created through “Quantitative easing “inflation gets going. But this is not happening yet. Japan has been deliberately printing money for about 5 years to try to get inflation moving, and so far, it has fallen as flat as a  rice cracker! 

So, what if we were in fact getting the inflation that quantitative easing creates, but it was only showing up in certain areas. Imagine that brick pavement you walk on in most city centers. The ones with brick sized pavers and lots of cracks between. As those bricks push down into the sand underlay you get sand rising through the cracks and settling in the grooves. If we look at the sand as the things that are going up in price like houses, shares, and gold. The bricks represent the things that are not going up in price, like cars, TV’s, and toasters. These things cannot go up because there are so many of them and if the manufacturer put the prices up, you would buy a different one, or hold off buying one for a while. Technology and mass production are constantly driving the prices of these items down so holding off can save you money. So, let us say there is inflation occurring,  but its only in selected areas like property and shares. They are the cracks in the pavement.  When we look at property it is deliberately excluded from the inflation index, as is the share market. So what we are seeing as a rising market could in fact be inflation happening, but not across the board as has previously been recorded, but specifically in property.  

As I write this it seems a bit far-fetched, but I am leaving it in the newsletter for those with greater knowledge to comment. I would also point out that this  ties in with the K shaped recovery we are told about, where the recovery is very uneven and favours certain sectors over others, such as medicine over travel.

Electric Car Prices Due to Hit Parity Next Year. 

Just putting this prediction out there again. New electric vehicle costs are predicted to reach parity with internal combustion engine vehicles next year. If you are in the market for a new car then you should watch this closely, as once this happens, internal combustion cars are going to be hard to sell on the second-hand market. Initially the cheaper vehicles will come out of China and India, but once started the rest of the car companies will follow suit.

New Renewable and Radioactive- Free Power Source Possibility 

We are all aware of the nuclear fission energy source. That is the classic atomic reactor that splits up very heavy atoms like Plutonium or Uranium and captures the energy released to create electricity. The problem being that pesky by-product radiation. 

A British company based in Oxfordshire has switched on a new type of power source ( Tokamak Fusion Reactor) where they fuse two lighter elements together and harness the energy, so instead of splitting a heavy atom they fuse two light atoms together in a process called nuclear fusion, as opposed to nuclear fission . The process attempts to create the same type of energy the Sun creates with its hydrogen and helium mass. So, providing they do not turn us into a mini sun ourselves,  (it is switched on so that minor setback has passed), the new type of energy source could create unlimited power with zero radioactive by- products. 

This will revolutionise power as we know it, with cheap , efficient and green energy for Cities, Houses and vehicles. 

While researching this article I looked up the “ NZ Nuclear Free Zone Act 1987 “ to see if we would be allowed to use Nuclear Fusion, and guess what, this much quoted act only stops nuclear powered warships, weapons and craft. The act allows the building and using of Nuclear Power. You could knock me over with a radioactive feather!!(Thanks Rupert Morrish for putting me right on Fission and Fusion )

Optimize Realty ltd Licensed Agent reaa 2008
Barry Joblin areinz licensed agent reaa 2008

July 2019 Newsletter

Welcome to an unseasonably warm winter. 

  • Reality check – A salute to parents 
  • Electric houses coming closer
  • Market prediction for the next six months
  • Confusing legislation – about to erode your rights
  • Difference between Jonquil and Daffodil  

No frosts in my part of the world and the days are getting longer by a surprising 1 minute and 2 seconds per day. That extra minutes daylight is a lovely warming thought in the midst of winter. We are seeing the signs of an early spring with the Jonquils and Dahlias already starting to flower and the Wild flowering Cherries looking like they will flower about the time you get this newsletter.

Our lovely Daughter in Law recently went through a medical crisis with her spending several days in Intensive care and fighting for her life. The scary thing is they know what the issue was but not what caused it, and they suspect they never will. I drove to Tauranga to pick up their three-year-old and looked after her for 11-12 days. She is an absolute angel and such a well balance kid …. but …. I have not been so exhausted for I don’t know how long. On a good day it felt like my life was on hold, on a bad it felt like it was in chaos.

So, my greatest respect to all the parents out there. The ones who sacrifice their lives daily to create a warm and loving environment for their families. And Uber respect for those amazing and rare older parents who permanently take on one of their children’s children. What courage and what selfless dedication to another.

And to all the mum’s and dads who raise kids and work. I admire your time management skills and ability to focus on your tasks and fit it all in the same 24-hour day I have. You are the best!

My Daughter in Law is slowly recovering at home now, but it will be a while.

Futurist Predictions and Self Powered houses

The futurist Dr Richard Hames(NZ herald 14/7/19 ) . Has predicted that Hydrogen Fuel cells are the way forward for electric vehicles rather than electric. This could put a spanner in my very confident prediction that self-powered houses will be an option within 5 years. However he also predicts Trump will get in for another term so we will soon see if his predictions carry any weight.

I don’t know about Hydrogen Fuel Cells but do see a clear cross over between electric vehicles and self-powered electric houses. The new technology will be developed for cars and then crossed over to batteries for houses, as is already happening ( I.e. the Tesla Power wall) . If the way forward is Hydrogen Fuel Cells, then I don’t know how they will power houses.

A report from Bloomberg NEF, has electric car costs becoming cheaper than combustion engine cars by 2022. Previous reports had the crossover in 2026 which was reduced to 2024 and now to 2022. It stands to reason that as more manufacturers develop the new technology, costs will come down faster and the crossover point could be 2021 or earlier. Basically, this will be the end of the combustion motor car.

Market prediction

I haven’t put out a newsletter for a couple of months now, basically because I have been confused by what was happening in the market. I could see a slow down coming by it just seemed to never arrive.

We at Harcourt’s had some great selling months leading up to winter and it’s still going strong. This is contrary to many of the signs I had been seeing and to my earlier forecasts. So, did I get it wrong? I don’t think so.

The biggest driver of the market over the last four to five months has been the first home buyers. They have been out in numbers and snapping up any homes in the $350,000- $500,000 bracket. Once you move out of that price range the market has been a lot slower. We are seeing areas, Like Bream Bay, where most houses are over $550,000, hit a wall with minimal activity unless it’s under this price range.
We also need to consider that even though we are building more homes we still haven’t caught up with the under-supply. Recent reports say we are still falling behind.

Rents have been moving upwards, so those with Kiwi saver schemes, are being influenced to buy rather than pay $400 pw. plus rents into a landlord’s pocket. It’s a big incentive to beg steal or borrow to get into your own home.

Interest rates keep falling, although very slowly now. We get the combined effect of money being cheaper to borrow and the interest on money in the bank not being worth having, so many people continue to take money out of the bank and put it into an investment house.

If we look at Core logics” latest average price for Whangarei, its sitting at $548,223. This has remained reasonably stable for 8 months now, so it suggests the boom is over for now. However, a closer look shows that this figure is strongly influenced by the number of lower cost houses selling.

The fundamentals such as supply, interest rates, and immigration are still strong.
The days to sell is pushing out to around 50-60 now. Another indication of a slow down.

My prediction remains that we are heading into a stall. The market won’t drop because of the underlying positive forces, but there will be a period of adjustment for a year or two while people get used to the average property in the city being over half a million dollars.

Investor buyers will find increasing pressure from the Government to get out of rentals, but this will be offset by the low interest rates, rising rents and the wave of first home buyers wanting their properties. I still think that if you want to get out of rentals this is the time to do it. But similarly if you are wanting to get into long term rentals, get in while there is a slower period.

 

Warning !!! You and the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill

Firstly, what a mouthful and secondly what a deceptive title for legislation that takes away landlord’s rights to offset their loses in owning a rental property against their main income. I have read the legislation and unlike most law changes, this one is about as murky as it can get. I think I have found the actual wording in the legislation but am still not 100% sure.

Here is what appears to be the relevant section
Sub-part EL— Allocation of Deductions for excess residential land expenditure

General outline
The provisions in this sub-part, in general, –

  1. Limit a person’s deductions for expenditure incurred in relation to residential land to income derived from the land; and
  2. Suspends deductions for the excess expenditure for the income year in which the expenditure is incurred;and;

These words mean you can no longer claim your rental loses against your main income.

Ashley Church, a writer for NZE, has written
Investment property in the major metropolitan areas generally makes a loss for up to 10 years before it starts to make a profit”
he goes on the say that the ability to offset business set up costs against other income
“ Isn’t a subsidy or a loophole, it’s a standard tax practice that is applied broadly against hundreds of thousands of businesses across New Zealand and is based on the principle that the costs associated with establishing a business and running a business should be deductible from overall income”

However the bill does appear to shift the loses to future years, so rather than reduce your tax liability the year it was earned you can offset it against profits from future years.

 c  Provide that the excess amounts are carried forward to later income years in which the person derives residential income. 

Some will think these changes fair and good. What I am concerned about is the way this change has been achieved and the longer-term consequences. To place it under this innocuous title is deceptive and give the appearance it is being hidden.

Secondly it is going to have a devastating effect on rental supply and our country is not ready for private landlords to withdraw from the market. I have written many times about how, we as a country need the private landlord, but yet again we are steadily driving them out. Remember that 4/5 rental properties are privately owned. There is already a shortage of rental properties in most centers and this will only get worse. One of the key reasons to buy a rental property is now gone. The inevitable result is we will see the most vulnerable and marginalized people unable to find rental accommodation and an increase in homelessness

Example . My daughter and son in law were fortunate enough to move into their own home last week. They have been paying $450 pw for a very basic three-bedroom house in a pretty rough area. I personally thought they were paying $50 a week too much. That same house is now being advertised at $490 pw and from what the kids have told me, has a queue of prospective and desperate tenants lined up to take it.

Useless fact .

Jonquils are basically Daffodils but have multiple flower head clusters and a strong scent . Daffodils are the yellow headed flowers we all know and associate with spring. They all come under the family “Narcissus” . Narcissus was a very good looking ancient Creek bloke who walked by a pool of water while hunting, decided to have a drink, saw his reflection in the water, fell in love with his own reflection and because he couldn’t have perfection decided to kill himself . I’m sure it made sense to him at the time! Out of his remains grew the Narcissus or Daffodil.

I invite you to give me some comments or what your thoughts are on the articles that I have written. I look forward to hear from you

 

 

 

So Where Are Prices Going Now ?

In last Septembers newsletter article headed ‘”Is it a Boom or a Correction ?” we argued the case for where property prices in Whangarei were heading. (To see the article click on the link Here ). This article based growth on a conservative 8 % growth year on year. Conservative because the historical growth figure for property in NZ is actually 10%. We tracked both the Auckland and Whangarei markets as we tend to play follow the leader with Auckland.

We have updated the graphs below to show how prices are tracking against the 8% predicted line. These graphs are based on the REINZ figures which are based on median prices. These are different from the figures CoreLogic provide as theirs are based on average prices. As a rule Corelogics’ average figures are higher than REINZs’ median figure.

Auckland graph

As you can see Auckland is just below the 8% line and looks like it will reach it this year. The dip in the red line is because we have only included the first three months of the full year. This will straighten out towards the end of the year. The scary aspect to this graph is, if we were to use the historic 10% Auckland growth line that history dictates, then the red line would currently be sitting at just over 1.3 million.

We chose the more conservative 8% because when we first graphed this trend, Auckland prices were sitting at just over $600,000 and a figure of $900,000 seemed like moonbeams! 1.3 million seems like moonbeams now but in 12 months time it may surprise.

Whangarei Graph

As can be seen from the green line Whangarei is in catch-up mode, with $70,000 added to the median price since 2014. If this chart is correct then we have another $110,000 to go before we hit the predictive line of $450,000.

While this amount seems hard to believe, the figures from Corelogic are showing huge growth in the provinces, with Hamilton and Tauranga now hitting 23.3% and 22.6% growth per annum, faster than Auckland which is now down to 16.9%. (16.9% is still dramatic growth rate and based on the average Auckland price of $931,061 that will add another $157,339 dollars to the average Auckland house by this time next year. Million dollar houses will be the average Auckland house price)

It’s hard to find any evidence that this type of growth won’t happen. We would have to see at least one of the prime drivers going in the wrong direction and we don’t. Interest rates are heading down, emigration is rising, housing supply is diminishing, building materials are rising, and rents are rising.

This week the NZ Herald had an article on Aucklanders’ buying in the provinces. This was based on research by CoreLogic and contained the following statement.

‘Auckland investors and movers bought 23.9 per cent of all properties sold in Whangarei, 19.5 per cent of Tauranga sales and 17.2 per cent of homes in Hamilton……..CoreLogic senior research analyst Nick Goodall said Auckland investor interest in Whangarei had “kicked up” over the past year or so,”

It is fair to say more of this interest has been in the investment sector, but we are getting our share of people moving into the district to live. It has been said that only a very small proportion of Aucklanders are selling up to move to the provinces but if you do the maths, a small percentage is all it takes. For example let’s say 1% of Aucklanders decide to relocate. It’s a small proportion of the Auckland market but it is it still 14,000 people and that is a huge amount of internal migration when you consider the size of the populations they move into.

So do we predict the Whangarei market still has $110,000 growth in it? The answer is YES!. At this stage there is nothing standing in the way.

 

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