Island Life by David Slack

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Island Life: Green Acres

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  • Yamis,

    I have 2,500 in an ASB managed retirement investment fund or whatever the hell they are called.

    Does that make me an investor?

    Very nice of the govermment to match my 3% input each pay :)

    So far ASB has made me about 40 dollars in nearly a year. Thanks guys. I'd probably make more than that selling my toe nail clippings on trade me.

    Since Nov 2006 • 903 posts Report Reply

  • Yamis,

    It's all in the leverage. You could have made that in other investments,if you were prepared to borrow to the extent that you have against your house. (Also, is 45000 your deposit + all your payments? Your deposit + all payments is the appropriate base figure).

    I'll have to ponder this over an instant coffee and a drive in my 3,500 dollar Nissan.

    I'm sitting typing here to avoid planning for my year 13 geo class tomorrow. If I get out of the house altogether I'll be far more successful.

    Since Nov 2006 • 903 posts Report Reply

  • Stephen Judd,

    My name is Stephen Judd, and I'm a procrastinator. Hi, Yamis!

    Um, yes, you're an investor, and boy, that's lousy performance (see my remarks on managed funds above).

    Wellington • Since Nov 2006 • 3122 posts Report Reply

  • Rich of Observationz,

    Property is the only leveraged investment an average person can make (ok, there are managed investments that use leverage to boost yield, but they haven't worked well).

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • James Green,

    So, so many things I could say here. But before I respond, I find it interesting that no-one has mentioned the D-word.

    As someone who rents two houses from the bank, one for personal enjoyment, the other for profit, the single biggest difference between the two is DEPRECIATION.

    (Incidentally, I would like to disagree with Stephen that if Yamis rent is similar to his mortgage repayment, then that should be excluded from the return. So perhaps deposit+payments-hypothetical rent).

    At current prices, I would imagine the only reason most people buy investment properties is related to depreciation, and its flow-on taxation benefits. I think that (in my part of the woods anyway) that capital gains (tax) is a red herring. Depreciation turns cashflow negative properties into cashflow positive. This means that, even if a capital gain is your ultimate goal, it is not costing you anything (and may even be paying you), while it appreciates. In contrast, buying shares with a loan (margin lending), the dividends don't pay the loan interest, so you are paying interest in the hope that it will appreciate. Thus, depreciation facilitates property speculation. It seems especially ridiculous that you can depreciate an item increasing in value. If you buy a lawnmower to mow your investment's lawns, the mower loses value and will die one day. However, the house, at least in the current climate, is increasing in value, but you can pretend that it's not.

    Changing the rules around the use of depreciation on residential investment properties would certainly be an interesting idea. However, like most strategies it would have some unintended effects.

    Long term will it also mean a downgrade in the quality of our houses as landlords do the bare minimum to keep the house livable?

    You see, that's not actually true. Depreciation ultimately is what facilitates landlords to improve their properties. Eventually, over time, the depreciation clawback when you sell makes it more economically viable to renovate (as the capital expenditure cancels out the depreciation). So if depreciation was removed, then it might make landlords less inclined to make improvements.

    Thus far, my current best idea is thinking that instead of having depreciation, improvements on residential property could be expensed, rather capitalised. This would encourage landlords to improve their properties, but would remove some of the slightly sill tax benefits.

    Finally, I'd just like to point out that if someone had purchased 45,000 of Mainfreight shares 2 years ago, they would now be worth 132,000, and if you'd bought 3 years ago, even more than that. And there would probably be $5000 in dividends etc. in that time. Naturally, not all investments are quite that good, but I'd still probably be better off if I'd stuck with shares rather than buying a house. And of course, shares never leak sewerage.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • James Green,

    Property is the only leveraged investment an average person can make (ok, there are managed investments that use leverage to boost yield, but they haven't worked well).

    ASB will lend you up to 70% of the value of quite a range of shares. The rates are a little less favourable than mortgage, but it's still not too bad. Unless of course, by average you mean people that are a little faint-hearted. A number of australian shares offer warrants, which are also quite attractive in terms of leverage, plus you don't have ongoing interest costs.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • Che Tibby,

    At current prices, I would imagine the only reason most people buy investment properties is related to depreciation, and its flow-on taxation benefits.

    loss-attributing qualified companies (LAQC's) are the third(?) largest number of company in nzl by type.

    and, they're nothing more than a vehicle for negative gearing of investment properties, as james indicates.

    so, what you have is people using my tax dollar to drive up property values beyond what i can afford to buy, and then no capital gains to claw my tax dollar back.

    makes me a little angry, actually. in fact, one might say, "it's a fucking rort, and should be stopped"

    the back of an envelope • Since Nov 2006 • 2042 posts Report Reply

  • James Green,

    While LAQCs do help, if you own the property in your own name, you can gain very similar benefits. In fact, I'm sure I read somewhere recently that there has been a burst of investment property buying by people in the 39c tax bracket. A rather unintended consequence of having a higher top marginal tax rate. Another cunning trick would be to make losses attributable (either from LAQC or directly owned) deductable only at 33c, not 39c.

    On the other hand, while I used to see the merits in higher marginal tax rates, I've decided that it merely enhances a very familiar distortion. Having a business, any business, appears to be a good way to minimise tax and enhance wealth, by diverting income to things you'd buy anyway. I have memories of kids driving round in 'farm' vehicles (and by that I mean a nice new car purchased for the 'farm' business, not some sort of beat up old ute). A salaried person buys their newspaper, a farmer buys it for the business. etc. etc. Thus, high marginal tax rates afflict those with a 'normal' job ... and give business-people's accountants more work to do. Oh, and of course, that's also Che's tax dollar going on the accountant, because it's also a business expense.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • Martha Craig,

    I'm a bit confused. Do the renters want to own or not? Or is it a case of having given up? Because I think renting is awesome. So is clever investment.

    I don't know how to do clever investment. I haven't a clue. I tried a super fund once, and seemed to make about $3.60 over two years.

    Houses are easy investment and happen to conveniently coincide with the need to live somewhere. I'm sure there are better ones, but I don't understand them.

    Of course, I had to give up a Mt Vic lifestyle to own a house. I think people need to acknowledge that for generations people have compromised where they want to live for home ownership. That is kind of how it happens.

    Petone • Since Nov 2006 • 23 posts Report Reply

  • Span .,

    I'm another owner. We bought about four and a half years ago, after six months of looking and missing out on more desirable properties in better areas. While I'm happy where we are, and it ticks a lot of boxes, we would have needed a lot more money, even then, to buy in the Nice Areas.

    Of my friends those who have bought have been able to do so because of a windfall from various sources, as was the case for us. Without it while we would probably be in a house by now we would certainly not have been able to buy when we did, and we would now have a crippling mortgage, instead of one that is comfortably achievable.

    We're also a couple, which means two incomes towards a deposit and then a mortgage - all my single friends are pretty much without hope and resigned to renting. Throw in the fact that we are both pretty frugal anyway, and in reasonably well paying jobs with no student loans, and we have everything to our advantage, i.e. we are far from typical, sadly.

    I don't think too much about what we would get if we sold, because although the value of our place has gone up considerably so has the price of all the other places we might want to buy.

    Auckland, NZ • Since Nov 2006 • 112 posts Report Reply

  • James Green,

    I thought a nice worked example might better demonstrate the weird advantage that depreciation gives to renters over investors. Seeing as Stephen and Joanna were both talking about Haitaitai, this is vaguely worked out to there.
    So, the initial figures will be familiar to a regular home-owner

    $500,000 Purchase Price (Median for Eastern Wellington)

    -$40,000 Interest
    -$2,000 Rates
    -$500 Insurance
    -$1,000 Repairs
    -$1,000 General

    So you now own a big asset, which hurts you in the pocket to the tune of $44,500 a year.
    Now, if you were renting that house and it cost $450, then you've saved some over the year.

    $23,400 Annual rent

    This then leaves you with a $21,100 net loss, over if you were renting. Now, here is where it gets a bit interesting. If you are actually Mr X, property investor, and you also have a nice salaried job of say $90,000, then you claim that loss against you big fat salary, and you get a $8229 tax refund. Mmmm tasty. So now you are only r $12,771 hurting. Niiiiice.
    Then you get to depreciate the value of the house. Thus, you have a hypothetical loss of:

    -$9,000 Depreciation

    And although you didn't actually pay that money, you still get a tax saving. Niiice.

    $3510 Tax Refund #2

    -$9,361 Net Cash

    So you are now comfortably better off than the person who just owns the house. You might then get an accountant to write off part of your own house/rent/powerbill etc. as a business expense, further increasing your gain.

    Then Mr X considers that houses in Eastern Wellington have risen 17% in the last year, and hope that they will do at least 10% this year

    $50,000 Capital Gain

    This means that Mr X hopes to make $40,639, although the capital gain is unrealised. However, if the house is sold for more, Tax Refund #2 is repayable, so it's closer to 37,000.

    Having looked over this, it would seem that if you can't currently afford to buy a house, buy a rental property(!)
    I'd also be very wary about buying in a far-flung area. If Stephen's expected bubble burst comes, the person who bought a house in Cannon's Creek will still have a house in a place they don't want, and be unable to find a seller. The person buying a house in a more desireable area will still have buyers (but for less), but if you don't have to sell, at least you're living where you want to be.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • Jackie Clark,

    I'm an owner - in Mt Eden.I like owning my own home because I can let it fall down around my ears, or not, and no-one has a right to say anything about it.We're in a fairly unusual situation in that we have about 70% or so equity in this house. And it's a largeish property in an area that is in high demand. Our mortgage is such that we could afford to pay it on one income, and in fact, will have to in the coming weeks for a short while, while the husband is between jobs.
    I've thought long and hard about this renting vs owning thing. And I feel sorry for people who dream of home ownership and can't afford it. It's all very well for people who prefer to rent, but what if you want to live in a big city? I mean, all the jobs are there. Chances are you are going to have to rent from now on, or buy outside your means and get one of those 50 year mortgages, or have a job earning shit loads and hope like hell that you retain that job. It's a bugger, alright.

    Mt Eden, Auckland • Since Nov 2006 • 3136 posts Report Reply

  • Che Tibby,

    james, great figures. i've seen similar, and agree its the only way to go.

    but, what irks me is the $12k per annum mr. x is making back off the tax payer. it's that very money that is, imho, driving up housing.

    and not because the occasional investor is doing it, but because there are tens of thousands of people doing this every year.

    i can't remember the exact figure, but if it is 30k of these companies, that's 3.6 billion out of the tax take (based on james' figures).

    now, you could see that as a boon for investors, but i see it as 'false investment' via government subsidy.

    the back of an envelope • Since Nov 2006 • 2042 posts Report Reply

  • James Green,

    Oh yeah. In case it wasn't clear, that is entirely my point. In some ways it doesn't seem like a lot as a percentage of the house, but there is a comfortable advantage for the investor.

    I've seen some graphs lately, with number of investment properties owned in different income brackets over time, suggesting that 60-100k individuals had been buying up in the last decade.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • merc,

    James you have nailed it. I laugh when I'm told by people about the investment property tax depreciation they get back, like am I supposed to be happy for them and forget that they riding on my tax? We don't have an investment property so we never get invited anywhere for dinner, now I know why, I got to get me some of that depreciation mojo. I love the comments in the Herald from the politicians with investment properties, Pillay sort of inferred she did it as a public good, because, you know, the poor people need housing. I don't want to be a landlord because, you know, come the revolution, first they look for the callouses then they find your depreciation stash in the boot of the Chrysler.

    Since Dec 2006 • 2471 posts Report Reply

  • Che Tibby,

    yup... and investors try to argue that "we need to free up more land for housing", "it's overseas investors, blah frickin blah.

    the problem is subsidies...

    where did you see those figures james? are they public, or, otherwise

    the back of an envelope • Since Nov 2006 • 2042 posts Report Reply

  • Robyn Gallagher,

    I have 2,500 in an ASB managed retirement investment fund
    ...
    So far ASB has made me about 40 dollars in nearly a year.

    Oh dear.

    My ordinary ASB savings account, which has never topped $2500, earned me about $70 in interest last year.

    Raglan • Since Nov 2006 • 1946 posts Report Reply

  • Russell Brown,

    We bought our little house in Pt Chev eight years ago for $253,000, after several years of what now seems like heroic scrimping and saving (although it was a small inheritance that actually got us over the line).

    Market value shot up in the next few years and, even though Housing NZ properties in the street will always put a cap on prices, it might fetch $550,000 after a scrub-up.

    Which is fine. But we need to make it bigger, soon, which means that our fairly manageable mortgage gets quite a bit less manageable. There will also be the major pain-in-the-ass factor of losing my home office for some time. The alternative is selling and buying a bigger place further out, which brings its own pain-in-the-ass factor, especially wrt to schooling. Sigh ...

    Maybe if we rented we'd have been able to pay more into our retirement fund ...

    But I like owning. After years of dealing with annoying landlords, it was really exciting to walk into a place that we could live in for as long as we wanted. The kids feel secure.

    Nonetheless, I can see why anyone who isn't already in the market wouldn't want to bother, especially without a family and the associated nesting urge. If I was in my 20s, I wouldn't be too keen on living like a monk for years whilst deep-down knowing I'd never catch up with the Ponsonby baby-boomer with five investment properties and a designer P habit.

    The interesting factor in Auckland is apartments. I visited someone in a city apartment last weekend and standing on his balcony brought home to me how many people, including families, are already living apartment lives. But how many people buy apartments to live in themselves?

    Auckland • Since Nov 2006 • 22848 posts Report Reply

  • Josh Addison,

    My partner and I move into our new house on the weekend. It's not exactly what we wanted, but it's pretty damn close, and it's had some work done (new kitchen and bathroom), so a big chunk of renovating has already been done for us. It's also (more or less) in the area we wanted - we could have got something cheaper if we'd been willing to suffer more of a commute, a sacrifice that other house-hunters I know are now taking for granted.

    Between the two of us, the mortgage is affordable - my worry is that we're not going to be able to afford to have kids (losing her income would be too much of a strain), which is a bit shit when you think about it.

    I've lost count of the number of times I've been told over the last 3 or 4 years that "the bubble is going to burst" - this could mean that it's never going to happen, or that we're about due...

    Onehunga, Auckland • Since Nov 2006 • 298 posts Report Reply

  • James Green,

    Merc: IRD allow you to choose in your first year of ownership if you wish to depreciate an asset. It could be that our MPs elect not to depreciate. Or not.

    Che: I kind of assume it was linked off a blog, so I'm reasonably confident they were public. My first thought was that it might have been I was particularly bored and was watching shitstorms on kiwiblog for a little light ent. I'm kind of annoyed that I can't find it. I usually pride myself on my information seeking skills, but I'm finding it harder to find stuff on the open internet these days. I guess especially because I don't really recall what the exact terms were that were used.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • Josh Addison,

    Oh, and I should say that one of the main reasons we could afford what we could was that I had savings, due to never having had a student loan (I just worked part time... and lived with my parents until I was 25). I'm pretty sure that makes me the exception these days.

    Onehunga, Auckland • Since Nov 2006 • 298 posts Report Reply

  • merc,

    Ways to make yourself feel real rich. I was told this by a real pro. Withdraw, borrow, purloin 800.00 cash, it must be 800.00 cash, in 50's and 20's. Pocket that wad, no purses wallets or nothing, a good goombah wad, rolled one, back pocket stuff. Go out, leave round 10.00am, go for breakfast, buy the biggie breakfast, buy a 50.00 mag to read while you eat, you'll need the fortification, tip the cook 20.00.
    Now, go out there and spend that whole wad on whatever, you're not allowed to think for more than an orange light, burn the whole lot, you have to 12.00 midnight.
    You will find out exactly who you are in less than a day.

    Since Dec 2006 • 2471 posts Report Reply

  • Yamis,

    I probably exaggerate a little but it would be under 100 bucks after their monthly fee comes out.

    Since Nov 2006 • 903 posts Report Reply

  • Yamis,

    So I guess you don't need any money as a gift now then Josh. Thanks for the heads up. I'll spend it where most of my disposable income goes... grog. ;)

    PS Have kids. You'll get accomodation supplement and the working for families package. I suggest 12 kids give or take 10.

    And yes, I wouldn't get near a house now if I was shopping on what I had 3 years ago. Our mortgage would be at least 100,000 more and so the repayments would be miles beyond us.

    It was purely getting rid of the student loan quickly and then teaching in Korea and saving my butt off there for 3 years wot did it. On 35,000 a year over there you get taxed about 7%... plus of course the other erm... work which is available which is taxed at about 7% less than that.

    Since Nov 2006 • 903 posts Report Reply

  • Stephen Judd,

    I've lost count of the number of times I've been told over the last 3 or 4 years that "the bubble is going to burst" - this could mean that it's never going to happen, or that we're about due...

    I should fess up here and note that I nearly bought when we moved to Auckland three years ago, but opted out, and I gnash my teeth at the capital gains we could have enjoyed but missed out on. On the other hand I've saved quite a chunky sum while living in a posh suburb (good school for my daughter, dontcher know) so it hasn't been all bad. But perhaps I have a bad case of sour grapes. You'll all be sorry! All of you!

    I do, I really do think it's a bubble. The biggest clue is how badly rents have lagged house prices. If there were really an accommodation shortage, rents should be a lot higher than they are.

    Sometimes I feel I'm verging on Tim Selwyn nutbar territory, but shorn of the yellow-peril racism he did have a point that our urban economy seems to be based on a) foreign credit to buy houses and consumer goodies and b) immigration to ensure the value of the collateral and c) hoping that we'll pay off the whole country on the never never. In my darker moments, If it weren't for the farmers and pretty landscapes, we'd be rooted.

    I contemplate our declining research investment, our continued reliance on agriculture and tourism, and the wilful blindness to the distorted economy based on house speculation, and foresee my offspring being peons in a retirement home theme park for foreigners.

    /totters off to pour out cheap wine and tend to the stove - surely we'll always have cheap good wine?

    Wellington • Since Nov 2006 • 3122 posts Report Reply

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