Heavy borrowing offshore adds a lot of risk to the NZ economy, and the large money inflows drive the NZ $ dollar higher, hurting our exporters and tourism.
Love banks or hate them, a bank failure would be disastrous for many ordinary Kiwis so is to be avoided at all costs.
It is interesting is that the government has recently removed the tax deductions for depreciation on property investments.
Now the RBNZ has brought in the minimum 20% deposit rules.
Despite the usual hot air from the Beehive, and “jawboning” from the RBNZ, we are actually seeing some resolve from the powers that be to cool down property markets.
And if Labour gets elected in 2014, they are talking a capital gains tax too - and they could win. I do wonder why John Key is trying, since most voters hate 3rd term governments within 6 months of their re-election.
A dimmer future for property capital gains?
Well, maybe only muted capital gains, since 80% to 90% of Kiwis firmly believe that property is the best investment.
Supply and demand comes into it too. Recent statistics show that Kiwis are flocking to the big cities even more than other Western countries, so Christchurch , Wellington and especially Auckland will have much more housing demand than the regions.
If someone had 4 or 5 houses in Christchurch, chances are they took a big hit in the earthquake. Insurance does not make up such losses either, just ask the Christchurch people.
Property in the regions will probably be slow.
Property in Auckland might still be under pressure and rise in value.
Governments and the RBNZ have shown resolve, and will do more to stop overheating property if they have to,
Labour will win the 2014 or 2017 election and introduce capital gains tax.
Borrowing money to buy property – gearing – and letting the rent pay the mortgage has usually worked well for many. However future gains might be quite a lot less, and tax advantages could be trimmed further.
No gearing & looking for income
Tom is nearing retirement and has 3 rental properties with the mortgages finally paid off.
The income is $400 pw rent x 3 - $39,000 pa. after expenses & before tax.
Only a 3.25% pa. return (before tax) on an investment of $400,000 per rental.
Tom has for a long time enjoyed good capital gains as well, but now he is wondering.
Tom & his wife also want to buy a big 4wd SUV and caravan for about $100,000, but they can’t a raise the cash unless they sell one of their properties.
Tom loves property, but …………..
He can see he might be better set up if he has;
- $150,000 of his money in bonds, on and offshore, since they are liquid, are low risk and pay income.
- Keep 2 properties for now since he loves it and understands it.
- $150,000 of his money in shares (mainly offshore) for the purposes of diversification, potential growth and liquidity.
He decides to sell the property with the least potential / highest maintenance. He then buys his 4wd SUV and caravan, and invests the remaining $300,000 into bonds and shares split 50/50.
Now he is fairly well diversified too
Later on, his wife contracts very nasty health condition and he needs $50,000 urgently for treatment. He can easily access this cash from his bond and share portfolios.
As life would have it, about the same time his son runs into an emergency and needs some cash. Once again Tom has access to cash and is able to help.
Over time he has also been nicely surprised to find that bonds and shares have served him well too.
Historically a mix of bonds, property and shares has done as well as property, but with more diversification, and much easier access to cash
Supplied by Alan Clarke, financial & retirement adviser, & author. His second book is virtually complete, & he also writes regular articles for the media & on line – see www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge.