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Property investors got off lightly

Friday, May 21st 2010, 6:07AM 11 Comments

by Philip Macalister

Property investors have been holding their breath for a long period of time waiting to see whether the government’s threats to give them the bash would come true.

They can now breathe a sigh of relief. The government was, as many expected, more mouth than biff.

The Budget included the predictable. Changes to depreciation; no capital gains tax; no stamp duty and no land tax.

The big worry was that some sort of ring-fencing of losses in LAQCs for property investment would be announced.

I have argued many times before that to single out one sector was unfair.

The changes it is making to LAQCs and qualifying companies have some logic to them. What is pleasing is that the changes are across the board, not just to property owning entities.

Also pleasing is that the government is closing down those who are rorting the system through Working For Families. I suspect this is a small minority of investors.

These changes to LAQCs make sense and will encourage investors to look at how they have structured their investments. Structuring has always been a hot topic for investors and will remain so.

It will be interesting to see how investors address this issues (email your thoughts to or leave a comment below).

The biggest losers are tenants. There is no doubt rents will rise. Investors need to ensure their cash flows remain robust.  In some ways it is no surprise that tenants are the losers when a National-led government is in power.

While a number of commentators have said this is a good Budget for the savings industry and people who invest in financial assets, I don’t think it will make a material change to residential property investment.

Sure there will be some who are less enthused by the sector, but it will still remain popular.

What will change is the sort of strategies used. To move away from highly geared investments which rely on capital gains to work isn’t a bad thing.
« Key on property investors' menu too?Budget hasn't put off property investors »

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Comments from our readers

On 21 May 2010 at 10:29 am Geoff Nairn said:
I'm not sure I agree with the comment that rents will doubtless rise. Rental rates are more dependent on supply & demand issues combined with market capacity to pay than on the landlord's demand for higher rent. Although residential property prices have remained remarkably resilient in the face of some of the fiercest headwinds we have seen for decades, prices on average have softened and consequently the ROC that rents represent have improved. Given that supply still exceeds demand in many centres, I think that tenants will win out against any move by landlords to extract higher returns.
On 21 May 2010 at 11:14 am John said:
I agree with the heading of your article. I think property investors did get away lightly, and I believe this is perfectly just. Provision of housing to those that wish to rent is a very valuable service.

I think dropping the top tax rate from 38 to 33 percent will have a bigger impact than the depreciation. Thats 5% less you can claim back. I will be raising my rents to cover some of the drop in tax that can be claimed back. Tennants should count themselves lucky - imagine if the Govt had made them pay GST on their rent in the interests of fairness?
On 21 May 2010 at 4:30 pm Nancy said:
Rents will go up because:
1. GST - all rates, insurance, management fee, repairs and maintenance will now be 2.2% dearer because of the increase in GST from 12.5 to 15%. This would be passed on no different from any business that pass on the GST increase on the goods & services they provide. this wont be a large increase and $5 pw will more than cover this.

2.Loss of Deprecaistion allowance - has a higher impact would translate to about $35 pw average increase. How much of this gets pass on will depend on the area, the amount landlord can absorb after weighing this against any income tax saving they might get. Even if they can't or don't pass on the full amount, some will flow through to tenants.
On 21 May 2010 at 6:53 pm peter said:
Has any one out there put there rent up even by $10 when they advertise there rental. Sometimes this small increase means potential tenants are put off. If you are to raise yor rent make sure you rental has all the bells and whistles renters are looking for. This involves spending smart money.
I would rather get $10 less on my rental than have it sitting idle for 2 weeks
No I dont think rents will rise (in the short term) as there is too much competition
On 22 May 2010 at 1:05 am lawrence said:
All landlords would be for rent up, why do we have to work for government, bank, insurance's time for us to protect ourselves!
On 22 May 2010 at 2:48 pm Anthony said:
Just wondering how many LAQC landlords have given personal guarantees over their bank loans? For those that haven't, the LAQC proposals will be worse than many realise.
On 22 May 2010 at 8:11 pm OC said:
I predict economists will look back at these changes and conclude they have caused a significant increase in rents as they will significantly impact the future supply of rental accomodation:

1) As already pointed almost all expenses involved in leasing out a property will rise with the GST, hence lowering net rental income.
2) The removal of the depreciation allowance for tax purposes will substantially reduce after tax returns.
3) The higher level of GST will increase the cost of new housing stock again reducing rental returns.

The interesting thing is that none of these factors will impact other investment classes in NZ. Shares and fixed income do not attract GST when an investor deploys capital, they do not depreciate and have much lower levels of costs associated with receiving income.

As a result I think we'll see a substantial reduction in both commercial and residential property investment as capital flows to more tax advantaged forms of investment.
On 23 May 2010 at 9:39 am John Cooper said:
No one has mentioned the fact that when you sell your house under the old system you have to pay back the money that has been depreciated over the years. With these tax changes it just means that the goverment has stoped giving out short term loans.
On 23 May 2010 at 10:18 pm stevo said:
These changes add more incentive to make improvements of the non building types that still can be depreciated which attract higher depreciation rates and improve the value of the property to renters and purchasers.

Light fittings
Driveways and Paths

Just get your receipts wriiten up properly if you know what i mean
On 26 May 2010 at 1:26 pm Richard said:
This loan was very handy when you are struggling to increase your investement portfolio. The payback for those with property has not gone away, you will still have to pay tax on building depreciation that has already been claimed. But if you invested to rent out long term, as a retirement scheme, you will possibly be in a lower tax bracket when you sell (with tax cuts a distinct probability) so you may not have to pay back everything you got, it is also an interest free loan.
One thing no one has mentioned. Some people have never separated out chattels from the property and so never claimed depreciation at the allowed level on things like carpet, stove etc. I understand IRD now have a list of allowed items that can be depreciated. Surely these items must now be allowed to be depreciated separately, there will be some repreive for those who have never had a separete depreciation schedule.
On 26 May 2010 at 11:03 pm President of Property said:
You're right John, interest free loan - but more like a student - long term interest free loan not short term....and what about any losses carried forward offsetting tax payments on potential unrealized capital gains which would be income even if dividend.

Should depreciation claw back repayments be drip feed back at the rate you claimed them?

I don't get a free toaster or flybuy points for saying this but I bet they sure are going to get busy at Valuit doing Chattel valuations for those that purchased within the last 12 months.

My rents are due to go up and it sure will be more than 60 days before the 1st of October just to make sure it is in the tenants budget.
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AIA 4.55 2.55 2.69 2.79
ANZ 4.44 3.15 3.25 3.39
ANZ Special - 2.55 2.69 2.79
ASB Bank 4.45 2.55 2.69 2.79
Bluestone 3.49 3.49 3.49 3.49
BNZ - Classic - 2.55 2.69 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 3.15 3.29 3.39
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
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China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online - - - -
Heretaunga Building Society 4.99 3.85 3.95 -
HSBC Premier 4.49 2.45 2.60 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 3.69 2.45 2.65 2.79
Kainga Ora 4.43 2.93 3.07 3.24
Kiwibank 3.40 3.30 3.54 3.54
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.55 2.79 2.79
Liberty 5.69 - - -
Nelson Building Society 4.95 3.45 3.49 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
SBS Bank 4.54 3.05 3.19 3.25
Lender Flt 1yr 2yr 3yr
SBS Bank Special - 2.55 2.69 2.75
The Co-operative Bank - Owner Occ 4.40 2.55 2.69 2.79
The Co-operative Bank - Standard 4.40 3.05 3.19 3.29
TSB Bank 5.34 3.29 3.45 3.59
TSB Special 4.54 2.49 2.65 2.79
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 3.15 3.29 3.39
Westpac - Offset 4.59 - - -
Westpac Special - 2.55 2.69 2.79
Median 4.55 3.00 3.13 3.02

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