It’s the day after  the budget and already the doom and gloom merchants are talking about the great property crash due to depreciation being removed from property investment.

Obviously this is a great topic to focus on because there is a whole lot of misunderstanding, myths and untruths about the property investment market and it is easy to make bold statements like “the property market due to crash because of the budget”…. what a load of old bollocks.

Yes there will be some people who will struggle with keeping their investment property because the ability  to claim depreciation put some money back into their pocket which allowed them to pay the mortgage. Without this injection of cash from the government these folks will not be able to maintain the mortgage and will need to sell. That’s a fact. However think about this…will the small numbers of people (and I mean relative to the overall property market) who must sell be enough to cause the Real Estate Market to tumble? I don’t think so.

Let’s look at why.

To begin with the rental market makes up approximately 34% of households in NZ with the other 66% of people owning their homes.

We also know that on average landlords have approximately 2 rental properties each, with some having many but a lot of people have dipped their toes into the water and own just 1 rental property.

So taking that little bit of info it means that statistically we can only have maximum of 17% of homeowners are landlords and the number will actually be less than that due to the great number of people who own more than 2 investment properties.

Ask yourself this question now, of the 17% of people who own the properties that people are renting, how many will now go out and sell their investment properties for less than what they paid for them?

That’s the big question….how many of you out there will sell your investment property for less than what you paid for it?

After all that’s the definition of the property market crashing, the value of the market based on what people are paying today vs what people will pay tomorrow.

Even if 100% of property investors rushed out and tried to sell their properties tomorrow the market would not crash….. not unless those investors had to sell…that’s the kicker, if the investors had to sell, i.e someone else made the decision as to what price the property was going to be sold for as the case if for mortgagee sales, then you would see the prices drop, however if 100% of the property investors went out tomorrow to sell I doubt any of them would be saying “you know what, we paid $300,000 for this property and now we are not going to get that extra $600 per annum back from the government so lets sell our property for less than what we paid for it”….can you see that happening. I didn’t think so.

What I think will happen is that some people will panic sell….. that’s not unusual, some people will do the smart thing and visit a financial adviser who can work out for them exactly what the difference will be in costs and then work out what the best strategy is with regard to holding on, putting rents up, selling now, selling later….those people will be few and far between, some people will sit and hold and put the rents up accordingly and just like in 1984 when the Aussie governement did this watch rents skyrocket because of the following.

1. There is now no benefit having a new property over an old property when it comes to depreciation.
2. With no demand for new properties the developers will not build.
3. With no new properties coming on to the market the demand for rentals will increase.
4. With increasing demand on rentals the Rent will go up quickly just like they did in Oz in 1984
5. Property prices will increase as the yields increase and property that once was not good for investment becomes viable as a property investment.
6. Developers come back into the market as the demand for new housing makes it profitable for them to build again.

Obviously this cycle will continue with ups and downs but over the long term I still see property being more expensive to buy in 2020 than it is today.

So it’s the day after the budget, don’t go out and sell your investment property unless you already were planning on selling.

Remember one thing, the reason why investors were allowed to claim deductions is because property investing is a business and as in any business it is the user who pays. In this case it is the tenant who is the user and it is the tenant who will ultimately pay.

The herald states that this budget will cost landlords $235 million next year, I think the more accurate statement would be the budget will cost Tenants $235 million next year.

Today I read about a new product being released in Australia for investors. Fantastic.
Hopefully ANZ will bring this product over the ditch as well and provide it here for kiwi investors.

The following is an excerpt from the article.

The ANZ Portfolio mortgage operates like a line of credit and is geared to enable investors to consolidate multiple loans under the one facility with the added convenience of up to 12 sub accounts. Equity can be released quickly when opportunities arise allowing investors to move quickly when required.

The investment market looks particularly strong at present. Prices have largely remained stable across most markets over the last few years while rental values have continued to increase.

“Given the ongoing pressure of property undersupply and increasing demand due to migration we see considerable potential for the investment market over the coming 12-18 months.“

Mr Bock said that the product had been a year and a half in development and admitted that there was “an element of coincidence” in the present investment market potential and the product launch.

The timing, he said “couldn’t have been better.”

City suites are on the rise
4:00AM Sunday May 24, 2009
By Jane Phare
Older investors are helping fuel a resurgence in the inner-city Auckland apartment market.

The sector is bouncing back after two years suffering from leaky building fears, over-supply and banks refusing to lend the same percentages on “shoebox” apartments as other properties.

Last year’s Auckland City Council valuations showed inner-city values had dropped by 3 per cent, compared with an average increase of 12 per cent.

But property experts said activity in the market had risen by as much as 50 per cent in recent months.

They attribute the improvement to lower interest rates, first-time buyers choosing apartments instead of expensive houses and the lure of better returns than the 3 or 4 per cent offered by banks.

That’s brought new investors into the market, including older people. Bayleys is targeting “mature professionals” and family investors looking for a competitive return as it markets suites on the top floor of the five-star Westin Hotel at Lighter Quay in the Viaduct.
They range in size from 32sq m to 75sq m with a fixed return of 6 to 8 per cent. Among the 24 rooms is a suite where David Beckham and Sir Elton John stayed during their last visits to New Zealand.

The surge in interest has made life harder for bargain hunters such as long-time property investor Terry Rota, who specialises in buying city apartments to add to his portfolio or resell on Trade Me.

Rota said investors were “rampant” at the lower end of the market. Six months ago he could buy a 40-50sq m apartment – the smallest most banks will lend on – for $140,000. Now that sum would only buy a 32sq m property.

Signs the bargains were drying up emerged late last year. In November Rota offered $100,000 for a one-bedroom inner-city apartment with a $140,000 reserve, but the property was turned in.

After interest rates dropped in December, the same apartment was re-auctioned and sold for $167,000.

Martin Dunn, of City Sales, spotted an opening when he realised older investors were starting to buy apartments.

Realising they feared their property would be trashed by tenants, and not wanting to be lumbered with the day-to-day management, his company last week launched a new venture.

It is offering 23,000 apartment owners $10,000 free insurance coverage for malicious damage if City Sales managed the apartment as part of an “aggressive” expansion of its rental and property management department.

Graham Smith, manager of Barfoot & Thompson’s city residential office, said activity in the apartment market had increased 50 per cent in recent months.

Small apartments were achieving prices “acceptable to the vendors” rather than being passed in.

Rachel Dovey, Bayley’s residential manager for the city apartment market, said lower interest rates meant properties in the “sub-$300,000″ bracket were being “snaffled up” by investors because of the good return.

But property investor Andrew King warned new investors to be “wary”.

“It is a business and it is risky.” King, vice-president of the New Zealand Property Investors’ Federation, criticised get-rich-quick property seminars that pushed people into buying property without educating them properly.

He said there were plenty of good books on property investment and free advice available from property investment associations.

Today the New Zealand sharemarket crept ahead early, helped by small gains for some leading stocks.

The property market on the other hand experienced  a 9.3% decline in national property values over the past year (compared with 8.9% last month).

There are signs though of elevated buyer activity in the market, with more people attending open homes and increased sales.

Interest Rates are set to drop again at the next meeting of the Reserve Bank and so what does all that mean to you?

Our receommendation is visiting a Qualified Financial Planner who can help you determine what is appropriate for you.

At Professional Investment Services we can help you understand what is appropriate for you, wether that is just paying down the mortgage, investing in the sharemarket or buying an investment property.

The following formula does not take into consideration any rental income you might have so for property investors ignore this one.
I will let you know how that is calculated next time.

If you are looking to start trading shares visit this site for a handy little tool:  Stock Trader ProIf you are interested in Property investment visit this site for a handy property tool: Property ProAdd up total Taxable income.

Multiply your joint taxable income by 35%

Divide this figure by the Variable interest rate plus 1%

The figure you get is the amount of money you can borrow based on your taxable income.

Remember most lenders don’t use this formula anymore however it gives you a nice ball park figure. Some lenders will lend you more and some lenders less.

So using a 60k figure for he household the amount they could borrow would be

$60,000 x 35% = $21,000
$21,000 / 7.4% = $280,000

A 20% deposite would be required to purchase in most cases these days so on $350,000 thats $70,000.

So that family could buy a $350,000 property if they had the $70k deposit.

At Professional Investment Services we have a wide range of lending calculators to help you determine your borrowing capacity.

From Interest.co.nz

April 3rd, 2009
Auckland’s largest real estate agency group, Barfoot and Thompson, has reported sales volumes jumped in March to a 20 month high as buyers “returned with a vengeance” and sellers accepted a slight fall in prices to clear the market.

“Certainly in March, the Auckland housing market emerged from its hibernation,” Barfoot and Thompson Managing Director Peter Thompson said in a statement titled ‘Buyers return to Auckland housing market with vengeance.’

Barfoot’s average sale price in March was NZ$491,780, down 5.8% from March 2008 and down 4.1% from February. It reported 924 sales, up 65.3% from February and up 46.2% from a year ago. The March average was down 8.7% 12.8% from Barfoot’s peak average of NZ$538,478 in December 2007 NZ$564,162 in March 2007.

“We sold close to 300 homes more in March than in any month in the whole of 2008,” Thompson said.

Thompson said factors affecting March’s sales activity were the traditional March spike, further falls in the Reserve Bank OCR, bank mortgage rates reaching new lows and knowledge that tax cuts were about to kick in.

“A recovery of this order is greater than any expectation, and it may well contain an element of released intention,” Thompson said.

“Buyers may be sensing that market prices are close to the bottom of the cycle and have made the decision to act,” he said.

“At the same time sellers are accepting that a price that is on average only 6 percent below values being achieved 12 months ago is realistic in the current market, and are ready to accept.”

“It means that the market is active, and the housing market is edging further back to normality.”

“Another indicator of returning confidence is the level of interest shown at auctions. In March we saw our best attendance numbers for 12 months, and we sold some 65 to 70 percent of all the homes that we put to the market.”

“In February, we reported prices firmed on modest turnover, while this month turnover was extremely strong with prices coming off marginally.”

Here are all our Real Estate sector charts, including REINZ medians, Rents, Mortgagee listings, Housing confidence and others.

Source: http://www.interest.co.nz/ratesblog/index.php/2009/0/03/auckland-housing-market-out-of-hibernation-barfoot-thompson-says/

Today I thought I would share the answer I gave to a client who bought their first home last year before being introduced to us here at Professional Investment Services.

His question to me was this

“Ultimately I’d like to land bank somewhere (hopefully
another depression will come in about 7-8 years), then when we can afford to
build, we’d retain the first home (starter property) as a rental and build on the new section”

My reply

I’m not a big fan of land banking unless you have tonnes of cash, the IRD will not allow the interest to be a tax deduction and you have no income coming from the property itself so you are left paying for everything.

For example if the section cost you say $100,000 and interest rates were 6% then it would cost you $6,000 per annum plus rates to hold onto the section or on a weekly basis at least $120 per week. Compare that with holding onto a $260,000 property at the mount for as little as $4 per week.

The other issue you have later on down the track is that the “starter property” will have had two things occur, it would have increased in value (fingers crossed) and you would have reduced some of the mortgage. These are two very good outcomes however if you now make the “starter” property a rental it means you are going to borrow 100% to finance your new home. This means you will have a large non – deductible loan with a smaller tax deductible loan on your rental making the overall package less tax effective.

The best way to do this at the time would be to sell the starter home, use the equity to purchase your new home and then buy another property to use as the rental. This is the most efficient way from a taxation perspective as you will now have the 100% borrowing against the investment property which maximises your tax benefits and you have a smaller non-deductible loan on your new home.

I hope that makes sense.

I would also recommend looking at a debt management system between now and whenever you are going to buy your next property, mortgages are very efficient at making money for banks. The amount of interest you pay to a bank is extraordinary yet there are simple ways to minimise this. Remember every dollar in interest that you don’t have to pay to the bank is an extra dollar in your pocket.

It seems as each day goes by someone somewhere is saying buy property now whilst someone else is saying stay away.

So whats the right answer?

Well Interest rates have been dropping however a subtle change has appeared in the last week or so, the banks have started putting the fixed rates up.

Property sales volumes are at levels not seen for years and the prices have started to slide however lending criteria is harder than ever so getting the funding is becoming very difficult which means prices could go even lower.

Well just last week I thought I would get an agent in, someone who has been selling in my area for a long time and see wether or not one of my properties in the Bayfair area should be sold. The exercise would also give me some more feedback on if it’s a good time to buy.

Mike is knowledgeable and has been selling in my street for years, in fact I bought the current property from him 4 years ago.

I thought I would ask Mike to give me an idea of what my rental property would sell for in this market and I knew he would not try and “buy the listing” which is a practice where agents tell you a high number only to condition you over the marketing period into accpeting a lower price.

The property is in the Bayfair area of the mount and has been a rental property for many years. The tenants love it as it is only a few minutes walk to the beach via either a beach access or along concord avenue. Bayfair is only a couple of minutes in the car and I am told you can walk there (I’m not a big walker) in about 12 minutes.

The information Mike gave me was not good news as a seller and so as I did the numbers I came to the conclusion that I should not sell the property as the rent I am currently getting is more than the interest I would save in paying out the loan.

So this was a fairly easy calculation to do in this instance. The answer was don’t sell.

But what about buying right now, well, if you take the above example and imagine that I had decided to sell the property you would be able to own that little piece of Mount Maunganui for $4 per week if you borrowed 100% of the money to purchase it and you were only on $40,000 per annum. That is amazing.

So should you buy? Again if you look at the above example the conclusion is pretty easy to see, Mount Maunganui still provides great long term growth prospects and if a property is only going to cost $4 per week to own then why wouldn’t you.

In ten years this recession and all the uncertainty it is causing will be a thing of the past and for all of us we will be ten years closer to retirement.

I say that there is no right nor wrong answer. Every single person , couple and family is different and so in my opinion you should only look to invest if you have sat down with a professional to see if an investment into property is appropriate for you and your situation, remember there are lots of other ways to invest.

If you don’t have an investment property at the moment I would recommend finding out if you qualify for one , get as much information about investing in real estate as you can and then get into the market.

If you already have a lot of properties and a high level of debt then make sure you keep an eye on the numbers. If interest rates start creeping up and your holding costs become unbearable you may be forced to sell which is not a nice situation to be in, sell now if you think this might be the case.

If you are cashed up….. Buy property, buy it now and buy plenty of it.

In general though I believe we are seeing some of the best conditions ever for getting into the investment property market.

I am heading to Australia again tomorrow so I thought I would provide you with this article from one of my Australian newsletters I receive.

Most of us would agree that Australia and New Zealand do have some very close correlations when it comes to investment, property and mortgages.

Professional Investment Services (powered by Financial Gain) has offices in both Australia and New Zealand so if you are thinking about moving across the ditch or perhaps investing in Australia do drop us a line at terry@nzpis.com

Remember also the main website is www.nzpis.com

Now heres the article…….

The global financial crisis has highlighted the flaws in the financial system
and has spread around the world, from market to market from sector to sector
with the increasing swiftness of a locomotive running down a hill.

Indeed, the size of the problem is so vast that it’s difficult
to comprehend the scale of what faces Australia’s bankers and the Australian
Government in the years to come.

Let’s look at this way; economists and governments treat banks
as special. In part because they know the important role they occupy in the
psychology of a nation – but also in part because they know that banks play a
central role in the growth and health of an economy.

The role they play is to create a forum in which savers can
store their wealth and through the mechanism of a bank this money then can be
lent, usually prudently through a series of Government and bank controls to home
buyers and entrepreneurs.

At least that’s the way it used to be, yet in the past five
years those controls appear to have evaporated in pursuit of market share.

In the spring of 2003, China, one of the great savings nations
of the world awoke, and in its determination to be part of the world financial
system began shipping its savings abroad.

Instead of being a lender nation China did this differently.
Used to central control and overly sensitive to the idea of capital outflows and
the effect it could have on its currency China simply exported its savings and
government profits, rather than creating Government debt and running a current
account deficit.

The amounts that were exported by the Asian saving nations to
the western debtor nations are simply staggering. According to the International
Monetary Fund and forecaster Consensus Economics between 2000 and 20008 America
alone absorbed $US5.7 trillion approximately 40% of its entire 2007 GDP.

This inflow of money had to go somewhere and it was the job of
the financial system to recycle it into debt, financial instruments and
investments and of course it did so with its usual ruthless efficiency, creating
housing booms, investment booms and consumption booms all over the world.

Of course by embracing that debt naturally means savings ratios
across the debtor nations plummeted – by 2005 the USA had a savings ratio of
just 1% – down from 10% just a decade earlier.

To understand the size of the
gap emerging in the market and the potential size of the problem that is
wrestling with, it’s worth trying to understand the size of the current account
deficit (CAD) as a percentage of GDP.

Fundamentally, this is an accurate picture of the effect of the
borrowing – the measurement of the CAD as a % of GDP gives an accurate
indication of its relative size to national output over time and therefore a
country’s economic position.

General economic theory holds that if the deficit reaches more
than -5% of GDP most economists consider it to be unsustainable since it
represents a constraint to domestic economic growth.

If the economy is growing at say 4% and the CAD reaches -5%,
then the economy cannot grow faster without spending more on imports which in
turn will increase the goods deficit and the CAD.

Right now the idea that Australia has been sheltered from the
worst of the global financial crisis is effectively shattered by understanding
our economic position.

Consensus Economics estimates Australia will have a CAD in 2009
of about -5.5% slightly worse that the USA and Ireland but significantly better
off than Spain which binged on overseas debt like few other nations.

What Does It Mean To Australia?

The short answer to this is no one really knows – estimations
for the clean up for this mess vary from an optimistic 2 years to Bill Gates’s
estimation of a decade. Even Alan Greenspan has called the current financial
crisis a “once in a 100 year event.”

Whatever the case and who ever is right the news is grim – we
have had the first run on a bank in the UK since Benjamin Disraeli was Prime
Minister and hundreds of thousands of people have lost all or part of their
savings in failures which have been spectacular – with single funds like Bernie
Madoff’s collapsing and destroying $50 billion of investment, not to mention
local examples like Storm Financial.

In Crisis There Is Opportunity

The first wave of the crisis cleaned out the mid-tier of
Australia’s  retail banks with both St George and Bank West being swallowed
whole by Westpac and CBA respectively – and indeed in the home lending sector
Aussie Home Loans, flush with cash after a part sale to CBA gobbled up Wizard
Home Loans.

That apparently isn’t the end of the takeovers – industry rumor
has at least four other takeovers of various sizes mooted as the big four banks
scramble for market share at a time when their competitors are weak.

They are using this time too to clean out some of the hangover
of the past five years of aggressive competition for share – re-writing the
commission structures of businesses and mortgage brokers and returning some of
their third party business divisions to profitability.

To a certain extent Australia’s big four have been immune from
the overseas collapses – and the failure of some of the worlds’ biggest banks
has seen them leap up the league tables as their overseas competitors simply
collapse. ( This is called the Bradbury approach – named after the Australian
Olympic Speed Skate Stephen Bradbury – who won  Australia’s first ever Olympic
Gold Medal – when his competitors in the speed skating race simply fell at the
last corner – allowing him to cruise to a surprised gold).

In fact it is the aggressive second tier players – Macquarie
Bank and now all but defunct Babcock and Brown businesses which imported the
cheap debt laden, mathematical model driven valuation techniques that have
shouldered much of the burden of the collapse – Australia’s big four banks had
through either good luck or good management only relatively limited exposure to
the disasters overseas.

Financial probity of the banks aside it’s clear that we are
going to enter an era of newly straightened banking models where aggressive
market growth is not going to be the order of the day.

Quaker Banking Starts To Re-Emerge

The idea of Quaker banking – that is simply lending only a
percentage of what you have in deposits have already emerged in the home loan
and business lending market – non complying home loans and easy business credit
have all but disappeared and the market is awash with anecdotes of project
finance pulled in the middle of building and experienced importers being refused
credit.

The market – ever sensitive to the peril that the system faces
- has responded and household deposits, a core measure of the savings of average
Australians, started to accelerate in July last year.

Source APRA

This chart tracks the APRA
recorded household deposit amounts – including the effect of the takeover of St
George by Westpac and Bank West by CBA – it should be noted that the sudden jump
in deposits by ANZ in May 2008 was from a reclassification of assets not an
instant new source of funds.

The chart also shows that while Westpac may be the biggest bank
by market capitalization in Australia, CBA is enjoying the lion’s share of the
household deposits market and appears to be growing faster.

CoreData research shows the growth in CBA’s deposits is at
least in part being driven by the idea that the CBA brand is the safest in the
market.

At a time when consumers are valuing security over anything
else in the market – then that’s a distinct advantage.

The other thing that this chart shows is that even within this
small group there may be a two-tier banking system emerging – with Westpac and
CBA enjoying substantially better growth rates than NAB and ANZ  – an issue
worth watching as the effects of this crisis on consumer behaviour become
clear.

http://www.burning-pants.com/?p=343

The Reserve Bank yesterday reduced the official cash rate (OCR) by 150 basis
points to 3.5%.

Kiwibank was the first bank to reduce its rates with Westpac
following closely behind.

At the end of day all the other major banks had followed suite and made
reductions to rates across the board, some passing on up to 100 basis points or more.

All the major lenders floating rates are now between 6.45% and 6.95%,
six-month rates between 5.69% and 6.25%, one-year between 5.69% and 5.99% and
five-year fixed terms are now sitting between 5.95% and 6.95%.

Sovereign, SBS and Southern Cross Building Society also made huge reductions
to their rates in response to the Reserve Bank’s decision yesterday.

I was surprised by the big cut as I was predicting 100points. Professional Investment Services (powered by Financial Gain) expects another drop in March and in the mean time a lot of activity to be involved around real estate investments.

The phone was also hot with queries about the feasibility of breaking existing fixed rates. This needs to be assessed on a case by case basis and your expectation of what will happen to rates over the next few years is also important.

Professional planners will always make investment decisions by gathering as much information as they can. Services such as this are available to our clients and we are happy to chat with you about your options as interest rates drop.

Professional Investment Services (powered by financial gain) has strong relationships with LOANZ Limited and we can help you refinance if you require.

If you are selling a property drop us a line as we have a number of unique options that may be able to help you. Go Realty and Hot Properties are two ways that you can get your property sold right now if this is what you require.

You can find our main site right here www.nzpis.com