Olly Newland’s 2005 Outlook for NZ

An Overview
***********
This is election year. If the socialists run true to form they will
do their damnedest to ensure a booming economy until after the
election. As soon as they get re-elected in September — just see
what nasties they will wheel out shortly after!

I have no doubt that that the property market will be one of the
first in the firing line — particularly the tax-free status of much
of the profits it can bring.

Be prepared for some form of capital gains tax dressed up as a
something else (e.g. stamp duty) and all sorts of clever tricks that
will apply more to investors rather than first time home owners.
This will all be brought in under the excuse that “we are merely
getting in line with other countries”. Which is true enough.

Australia has a fearsome capital gains tax (even on one’s own
home) plus a nasty stamp duty both when buying and selling. Don’t
forget that stamp duty is nothing new to kiwis. In New Zealand
commercial property transactions groaned under the weight of stamp
duty on purchases until only a few years ago — as did residential
property about 25 years ago. Commercial leases were also taxed
through a stamp duty.

The USA has capital gains tax, as does the U.K. These both apply
to the family home and investment property. You read it here first
folks. Don’t say later that you were surprised.

However such taxes can carry big benefits. If a person selling
their property has to pay a chunk in tax then their first reaction
is push the price up to cover the extra cost. Secondly, people
become reluctant to sell in case they incur a tax — hence
causing a shortage. I’m old enough to remember the Property
Speculation tax of 1973 which drove up prices 50% because so many
people withdrew their properties from sale rather than pay the tax.

And earlier (I still have the paperwork) when the Land Sales
Regulations were imposed as a wartime measure freezing the price of
property (and rents) for years. I also remember how people got
around the rules: a property may have been sold for (say) 2,000
pounds, the same price for which it had been bought five years earlier
but an EXTRA 1,000 pounds was demanded for the chattels which were
not price-regulated. “Carpet Money” was a standing joke among
property investors and dealers right through the 40’s and much of
the 50’s.

Those were also the days of the Fair Rents act where sitting
tenants could not be evicted and had their rents frozen at 1930’s
levels. The only way to get them out (and increase the rent) was to
wait until they died or to bribe them out. Fun days indeed!

Things may be more sophisticated now but the message should be
clear: Governments are capable of anything “for the greater good” so
don’t be surprised if and when they drop some big and nasty rule
change in your lap. It’s all been done before and it’s great fun to
see how it all eventually unravels and blows up in the face of the
pointy-heads who dreamt it up in the first place.

To sum up, I think this year will see a softening of the
residential market but with still some spectacular sales which will
be advertised widely by those with agendas to pursue. You know who
I’m talking about: agents, bankers, developers and hucksters with a
vested interest in propping the market up. Already the statistics
tell us it now takes longer to sell a property, that prices are down
in many regions, and that building consent applications are also
down.

Commercial
**********
The commercial market, on the other hand, is still strong, strong,
strong! — mainly because of the higher yields. Even so some people
who are away with the fairies are still buying trophy properties
at 3-4% yields. Eventually they will bang their heads on the
kitchen wall and try to understand why they did it.

Flats
*****
Auckland, in common with some other parts of the country, is slowly
sinking under a glut of cheap flats. Whether they are rented out or
lived in by owners each cheap flat takes a house hunter out of the
market. Flats are getting harder and harder to let and rents are
falling steadily.

Expensive luxury apartments and useful family homes are largely
unaffected, but the cheap end of the market is heading for the
doldrums. If you have some cheap flats, lock in your good tenants
long-term with inducements of all kinds: a $10 per week reduction in
rent may save you thousands in vacancies later down the track.

Worse still, there are hundreds if not thousands of flats still
being built yet to come on stream. One company advertises full page
newspaper ads offering you the opportunity to buy an apartment off
the plans for only a thousand dollars down.

Think about it. Why does a developer advertise his apartments
for only $1,000 down? A written test not less than 500 words will
be emailed to all readers of this article which must be completed
and emailed back for marking within seven days. (Joke – it’s
obvious.)

Interest Rates
**************
Get ready for steeper interest rate rises. Interest rates are on the
rise worldwide. Whether the NZ Reserve Bank raises them this month
or next is of little importance.
The point is they will rise sooner rather than later.

Readers of my earlier columns will recall me saying that all
investors should add 2% to their current interest payments and
deduct 10% off their rents — and get out of the market of the
numbers don’t stack up. This still applies. So do the exercise again
and stop dreaming that it will all get better tomorrow.

To most people still enjoying fixed interest rates an interest
rate increase merely means a bottle of wine more or less a week.
That’s not the point. If interest rates get too tough values will
fall — and that will take wine off the table for a long time.

On another hilarious matter, Dr Cullen fell head-first into a
trap a week or two ago by saying that people should buy shares
rather than property. This nonsense was neatly summed up in a daily
paper cartoon the day after showing a tramp on a park bench writing
to Dr Cullen and asking if he could swap his Equiticorp shares for a
mortgage.

This blooper is on the same level as Dr Brash’s comment some
years ago that people should rent rather than own a home as it was
cheaper. The trouble was that Dr Brash didn’t explain who would own
all the houses that all these renters would want to live in.

Interest rates are still relatively benign and another quarter
or half a percent could be tolerated (just!) Traditional interest
rates were always around 8% on first and 10% on second mortgage.
Anything over those rates means either inflation or (horror of
horrors) ‘stagflation’ — being a mixture of recession and inflation
— the investor’s worst nightmare.

Having lived through recession, hyper-inflation, and
stagflation, I can assure you: inflation is better.

Australia
*********
What happens in Australia comes across the ditch sooner or later.
In Australia, especially Sydney, property values have fallen three
months in a row, auction clearances are at an all-time-low and
there is much talk about a bust. Anyone that can bowl under arm
deserves all they get. But seriously folks, Australia’s market
is always more extreme than New Zealand, tending to overshoot
one way or the other. Nevertheless the message is clear.

Keep an eye on Australia and learn. If things get horrible in
Queensland or Sydney or Melbourne then it will surely get sticky
here as well.

Those of you who want to follow the Australian property market
should click into http://www.domain.com.au which is a useful site for both
private sellers and real estate agents. On this site you can follow
the fate of various properties and email the sellers driving them
silly with questions.

2005 will be a very interesting year all round. To those of you
still thinking but not acting I have one word of advice: Get off
your bums and do something, anything, but stop dreaming!

Olly Newland
March 2005
©Olly Newland 2004 All rights reserved.

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