Right now, money is cheap!
Following an announcement from the Reserve Bank in the last week keeping the Official Cash Rate unchanged, and signalling a likely drop in May, banks have responded and are now offering mortgage interest rates below 4%. Compare that to the 15% interest rate when our office opened in 1990, and it is a different world.
What has the availability of cheap money done? Well, it has meant that people can borrow more and still service the debt, and this has driven property prices up – particularly in Auckland where the median house price hit about $840,000 a year ago. There comes a point when property prices hit a ceiling and people simply cannot afford any more, when their debt levels are very high, and when the Government gets nervous. Around the world, the GFC highlighted a number of markets where people owed more than their property was worth. That was called negative equity, and mortgage defaults caused housing markets to wobble - particularly in the US.
In New Zealand, as house prices continued to grow considerably faster than the rate of inflation, the Reserve Bank brought in Loan to Value Ratio (LVR) restrictions to reduce the chance of a housing market crash. With bank lending at lower levels and lower interest rates, most investors saw themselves building long-term equity faster, and starting to make a profit. That is a good thing and the true purpose of any investment. Things must have worked because the LVR’s were eased for banks from the start of the year, but interestingly, Government also slipped in a change in December which has largely been ignored. This is about ring-fencing tax losses Back when our office opened in 1990, everyone was making a tax loss on their rental investments. People were transferring those tax losses to offset their personal income, and getting tax refunds from the tax they had prepaid during the year. With lending available up to 95% of the property value, those refunds were often used as a deposit to buy more property. There have been a lot of changes in the years since, but investors have been able to offset any losses they had – even if they were much smaller. The change, which will come in from 1 April 2019 means that any property losses can no longer be transferred to offset personal income. They need to stay with the property.
Why this is interesting now is that a large number of investors, and I would suspect the majority of them, aren’t actually making a loss. I know, I’m not. There may be individual properties that make a loss, but if an investor has a portfolio of property, the properties can be pooled and the losses from one offset against profits of another. This provides a benefit to those people who are looking to take advantage of the cheap money and the more relaxed LVR’s, to purchase additional property.
The market likes opportunity. The largest group of property investors in New Zealand only own one or two properties. They are middle New Zealand, and people trying to get ahead. Sure, their tax losses – if they have a tax loss – can carry forward and offset future profits, but for the most part, people who are trying hard to get ahead, need help now. The intention of this change was to try and make it easier for first-home buyers in the market, but it just may spark investors to look to add to their portfolios so that they can take advantage of any tax losses today, rather than in the future. If you are looking to add to your portfolio, and would like advice on the likely rental for a property, or just talk about this some more, please do consult with our Business Development Team. They are more than happy to help.
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