Invest in Real Estate? Hell Yes part 1

Invest in Real Estate ? Hell Yes !

by Gavin Hamilton - Professionals Star Real Estate Ltd - Licensed Real Estate Agents  - view Gavin's profile here

 

 

 

 

 

 

 

 

 

Popular investment concern today seems to be that an unreasonable amount of Kiwi money is placed in the residential market, why is this so and what can be done to dissuade this behaviour? The media has been full of Reserve bank warnings of a new ‘Property boom ‘, Treasury has reversed their projection of further falls in the values of our real estate, Bernard Hickey and Kieran Trass are calling a false end to the slump; its very confusing to me .

These people do not seem to understand why Kiwis love property, these are my thoughts:-

 

I do not see the current market being in a state of either boom or slump. There is a state of equilibrium that gives to the public a sense that is safe to make a move and so they are. Figures since January this year strongly indicate a return to the trends set over the past decades and apparently sustainable volumes (significantly less than at the peak levels of 07/06).

Tony Alexander of the BNZ, who I find to have been the most accurate and most moderate of the commentators, makes no case for gloom. He observes a significant increase in net migration, a major decline in the construction of new homes, a lack of mezzanine funders so loved by developers to facilitate any construction and no glut of homes available to purchase as factors that will inhibit decline in house prices. I think he is correct and that the balance attained will be maintained until end 2010 early 2011 after which I think they will rise as improving global conditions increase the availability of money

* Houses are a safer than average place to put your money.

 

This is a low wage economy with a large pool of poorly educated / low skilled employees. (A high number of the skilled/educated people we do generate live overseas.) There is little chance this segment of the population will be able to save 10-20% of the cost of a home; we will see an increasing %age of our population as tenants for life. Actually, with consumer debt levels high across society as a whole, many people today cannot aspire to home ownership. Financial illiteracy means a colossal number of our nation have no understanding of the effect of compound interest. A car loan from the bank for $20,000.00 over 5 years at 14% will cost $28500.00 - a whopping 42.5% increase. Apply that effect to student loans, credit cards, flat screen TV’s, cars and the rest and it is clear there will be no shortage of rental tenants in the long term.

Many children of older citizens who might have expected an inheritance that enabled a home purchase will be left empty handed as a result of the Blue Chip /Bridgecorp etc. etc. brigade. Literally billions of dollars have been vaporised by these companies.

 

* No shortage of paying customers.

 

Investors seeking to invest in vehicles other than Real Estate have some major obstacles to overcome. Lack of transparency, lack of protection from unscrupulous operators and seemingly no recourse or recovery options being not the least of them. Well defended by trusts, complex company structures and sophisticated mechanisms designed to confuse, these operators take advantage of the trusting and uninformed without being held to account. Investing in shares and business generally suffers the same drawbacks. Few Ma and Pa investors with some dollars to invest could make much sense of a prospectus and are left at a disadvantage dealing with investment advisers. I do believe the public will be a lot less trusting in future.

 

* Shortage of attractive options

 

Investors buying property other than for speculative purposes do enjoy the ability to deduct losses they may incur from taxes they pay. In the event the property is held for a longer term the rental income will in time generate an increased tax liability as the rent rises with time. If the tax deductibility is disallowed on rental homes when they lose money it follows tax could not be charged on rental property that generates a profit. The cancellation of tax benefits would see many properties sold as the returns would become unacceptably low , rents for the decreasing number of available properties would escalate ( as in Sydney today ) and a problem would arise for the public unable to afford or secure a home to rent. Well funded investors will enjoy higher rents and less competition as the more heavily geared Ma and Pa investors sell up. I can’t see such tax free income being tolerated by the government, if it was the rush to residential would be huge. The Government already has mechanisms in place to pursue speculators and property traders; it just does so with the efficiency and gusto that it chases the financial miscreants. The situation with capital increases in share values is the same, where purchase is done with the intention to invest long term there is no tax liability and where there is evidence of trading for short term profit such profits are liable to be taxed. I hear no call for a new tax on share capital increases.

There is no evidence to support the idea that a capital gains tax plays any part at all to control house price increases, indeed Australian house prices are even less affordable than ours even on their higher average income levels.

I do not believe we will see the current conditions alter.

 

* Tax incentives.

 

When you invest in property it’s easy, understandable and largely safe. Real Estate agents are tightly controlled by legislation, the forms and processes are common, lawyers and accountants and banks provide advocacy, valuations and information freely available to minimise risk.

Any person competent to drive a car or operate a cheque book can manage a rental portfolio if they can be bothered and no-one can steal your flat and live in Spain on the proceeds

Mistakes are avoidable with a little prudence and my experience shows that time forgives those that do occur. Interestingly, we should not forget it was not the real estate industry that perpetrated the grand theft, it was the finance companies and unregulated property spruikers in New Zealand and the Bankers in America and Europe with their super tricky instruments.

 

* Real Estate is self manageable.

 

The biggest single contributor to the increasing cost of housing is actually governmental in the form of taxes, levies compliance, development charges and beaurocratic process. In Howick the tax content of the median house is between $100-150,000.00 , a staggering sum that is in many cases as much as the cost of land . (Australia is similar) These costs come about as a result of social and planning decisions that are extremely unlikely to be reversed. Accordingly, new homes will continue to rise in price and will drag the second hand homes with them. (The other effect is that the same money levels will buy smaller and smaller dwelling units.) In any case property bought now will be worth a lot more in 15 years than it is today and is a sterling contributor to a retirement plan.

 

* Property will increase in value