REVIEW:
MARKET UPDATE 2010: Bounce?
More than a hundred and thirty investors came together in Auckland City late last week (12 November) to hear three experts share their view of the current economic picture (both the local scene and the global one), the property market, the finance sector, political and tax changes in the wind -- and to share the outlook for 2010 and beyond.
Empower Education's annual MARKET UPDATE™ evening this year featured investor Olly Newland, Westpac chief economist Brendan O'Donovan, and chartered accountant Stephen Tsang. It was a really good night and covered a wide range of useful topics of interest to investors and property owners.
Those attending benefited from the long experience -- and different styles -- of the three impartial experts. As, always, the focus was 'What's on the horizon that can affect us as property owners and investors?' We came together to find out how other investors are facing the challenges and to get an idea about how we can respond.
They also discussed the pressures investors and owners face at present, gave attention to emerging trends and risks -- including the very tangible impact of recent and imminent taxation reform affecting property investment, and looked at options available to deal successfully with them.
An audio set of the session is available now.
Olly Newland opened the evening with reflections on the widespread effects of the global financial crisis - a survey of the room confirmed that most people have been affected either directly or indirectly. He shared lessons from previous booms and busts, and discussed what it feels like to be counter-cyclical - investing against the trend. Olly said he's always gotten his best deals during recessions, but it can be hard.
One thing is for sure, he explained, now is a time to actively look ahead, rather than to drift along. But, is the current 'flat' time (if that's what it is) the best time to get in?
As Olly explained, housing is one of the three basic human needs -- and politicians upset the property market at their peril. He took a look at the local market, and discussed the underpinnings of the NZ market e.g. continued population growth - and examined the evidence some say implies a looming housing shortage.
The absence of consumer inflation in the last boom is worrying -- even before the stimulus bail out trillions -- so we're in for inflation, in Olly's view.
Where are we now? The NZ economy is in the middle of the "capitulation phase" Olly said. Mortgagee sales, bankruptcies, business failures -- these are symptoms of recession -- so by earlier definition this seems a good time to be investing carefully.
Remember, he said, mortgagee sales take time to work through the system. A terrible amount has been lost to the finance company collapses and Blue Chip and the likes. He discussed how these losses have affected the main trading banks and their treatment of their customers. Chasing bad debts has seen a change in emphasis and personnel at banks - collection department type managers operate differently and so you need to behave differently, he explained.
Olly described some of the signs to look for in the market - signs of inflation and other indicators of market direction. He pointed out the high value of independent advice -- think of it as an insurance policy, he said. Always get a second opinion.
He talked about the high emotions that can show up in tough times -- another reason to get external advice.
Don't get greedy, don't believe all you're told, don't believe the spruikers, he said. Deal with the fact you will strike dud deals - not too many hopefully. Olly shared real examples of success in this current environment and gave tips about what to do and what NOT do (for example, it's not a time to take big risks.)
Olly spelled out which sectors to avoid like the plague and pointed out two strategies you can use right NOW to strengthen your position. Taking the long view, he talked about the relentless rise in values - and described techniques to help you get on the right side of that, sharing a bulletproof strategy for the long term.
He spoke strongly about the folly of tax evasion, the need to recognise when you adopt a dealer's attitude and the need to use the time you've got wisely.
Brendan O'Donovan then gave his perspective, liberally citing facts and figures as he addressed the questions: Are we heading into a period of high inflation? What's the global and local effect of the bailout and stimulus trillions? How long will Central Banks keep easy credit conditions in place in an effort to stimulate recovery and what's the effect of that?
What's the short term and medium term outlook for interest rates? What's best for a borrower right now? Floating, fixed, short or long term? Have we missed our chance, for the time being, to fix low and long?
How long will the current 'spike' in house price inflation last? Is there really going to be a housing shortage? What are house prices doing now and likely to do? Is this a time to sell? Or buy? Or wait? The NZ property market - Brendan gave an 18 month forecast. He explained that different price brackets are affected differently. Price is only part of the story. You also have to consider volumes. So, how deep and long-lived is any market bounce?
Calculating the true value of a rental property to an investor is complicated by the uncertainty around the tax reforms -- these factors DO work their way through into market reality, he showed.
Are we really short of land near cities? What the town planners say. Does an ageing population mean we'll have a surplus of big houses, or not? Are we likely to see a surge in construction prices, or is there enough idle capacity to handle increased demand?
Brendan talked about current migration patterns and their changing effects and on which NZ markets -- what's behind the change, and how long will it last? He explained that the recent migration boom is different from the migration boom of the mid-2000s and described how ex-pat Kiwis in Australia faced a different experience of the downturn there.
The Reserve Bank of NZ is forcing new liquidity requirements on our trading banks, so is the Australian Reserve -- given our banks are mainly Australian owned, what's the effect of that on our mortgage financing? (And deposit rates?) In a word: major.
Brendan showed how the current taxation review queers the pitch and demonstrated that big effects can flow from seemingly small actions. He shared a few lessons from recent history and blew our socks off with a surprising forecast of the immediate effect on house values if a 1% land tax was introduced. How much room has the government really got to move on tax, he asked, and shared his view. Is outlawing LAQCs on the cards? What effect would that have? What's the real focus of the tax review -- surely NOT just property investment?
What are the chances of a long recession? Or a 'double-dip'? Different effects for different economies, Brendan explained, citing US household debt versus NZ household debt -- and gave us some comfort. He also outlined the snap-back ability of the US economy ... a pattern of volatility which affects the world ... but is doing so differently this time. The old 'US sneezes' equation has changed and he told us why.
Like Australia's resource-dominated economy, the commodity-driven NZ economy is becoming more dependent on urbanisation of Asia, particularly China. Brendan delivered some staggering growth numbers that predict our economic future -- and, if we are wise, can guide our future investment intentions and targets. China itself, he explained, is changing its investment behaviour ... with big implications for NZ land sales.
In response to a question about gold, he shared how the gold price is tied to inflation expectations, and gave his view of the value of investing in it.
He told us the old saying, 'the banks are bastards' is only part of the picture and showed why the banks are prepared to pay more for deposit rates at present ... but must pass that on to mortgages and other borrowers.
After supper, accountant Stephen Tsang, himself of Chinese origin, picked up on Brendan's comments about the Chinese market becoming the powerhouse of the world economy -- and outlined why we can expect considerably more Asian migration to NZ.
There have been recent significant shifts in immigration policy, he detailed, which will have inevitable effects on demand in our property market. The English language requirement is now not so tough, and the money requirement not a big deal for many e.g. Hong Kong Chinese.
Stephen says he agrees with Olly regarding the needs hierarchy - but pointed out there are significant cultural differences in the view of how much space is required. This is important.
Using examples of his own clients, he explained how a dynamic world economy (e.g. on-again-off-again China resource demand) affects expat Kiwis returning home -- and the tax treatment of income.
Focussing on the practical impact for investors, Stephen discussed interest rates - they are rising and will continue to, he says. This creates costs and tax losses - and more pressure.
He disclosed two very recent developments of note: (1) regarding holding a personal residence in an LAQC and (2) moves by the IRD to redefine a 'dwelling' for GST purposes.
He busted some myths about LAQCs and showed that repealing LAQCs alone wouldn't greatly affect the tax take.
The reality, Stephen said, is that governments all around the world are looking for ways to pay for this recession - thus, IRD is looking for ways to squeeze money out of taxpayers - property investment being just one target.
The landmark new Associated Persons rules seeking to taint investors who also trade property have kicked in with effect from 6/10/09 - so far, Stephen explained, no-one's found a way around them. Say goodbye to structures that allow you to wear two hats, he said, and outlined the ONLY reliable way to avoid your profit on sale being taxed as income.
These changes to the tainting provisions have a high degree of complexity (and lunacy) in Stephen's opinion -- and will no doubt be the subject of dispute and discussion. How should we respond in the meantime?
He shared his and Mark Withers' best pick for what will arise out of the Tax Review underway now - and gave an indication of the forecast impact of that eventuality on property owners and investors. As he explained, the move to lower the personal income tax rate and keep the freeze on GST has to come from somewhere!
Stephen presented other tax options and their history and discussed the implications if they were re-adopted. "The absolute worst nightmare for investors would be ..."
Face it, Stephen said: Some action will be taken on tax. The government was already under pressure to close what were seen as loopholes. Radio ads screaming 'Let the taxman pay your mortgage' were bad enough -- things have just got worse with the downturn.
Olly followed up and ended the night with some figures debunking the value effect forecasts of a land tax. New taxes are likely, he said, but we've been through them before. "I've seen taxes come and go - much worse than the ones being predicted."
Olly gave his recommendations for profitable buying now, with a comment on inner city apartments, sharing his minimum standards -- and a quick buying guide.
Pay attention to your tenants and be prepared to give incentives to keep them, or to get a lease, he said.
He discussed what you should not be investing in. This is NZ, he said, keep it to scale. "NZ is like Fiji on steroids," was a memorable line. Olly warned us to watch out for syndicates buying big buildings in small towns, to avoid large scale commercial, and any development projects.
Olly finished up with a very useful real-world discussion about sources of finance and shared his advice for handling and pursuing finance in this market.
All in all, the evening produced worthwhile ideas, enlightening discussion and up-to-date information. We all heard a good number of useful things -- information to chew over and consider as investors (or property buyers or sellers) facing the challenges of today's market. We got a look into the future, with some down-to-earth descriptions of our various options.
An audio set of the session is available now:
MARKET UPDATE™ 2010: Bounce? (Nov 2009) audio set
Two audio CDs (approximately two hours total running time) plus 30 page Course Notes booklet.
The cost is $69 + P&H and you can order it here.
Best wishes,
Peter Aranyi
Empower Education 17/11/09
PS You can see details of the speakers' other books and audio programmes on our website.
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