Housing crisis!

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#869557 31-Jul-2013 20:38

gzt: There was a comment much earlier about first home buyers saving longer and starting out with an apartment before looking at a 750K house (so stop moaning lol ; ). Apologies for the missing quote just could not find it.

I agree with that view to an extent but there are problems with it. One of them is the current approach of the banks due to the immaturity of the apartment market. Buyer will often need more deposit for a $350K apartment than for that $750K house.

Immaturity = the banks know a huge part of the market can't tell the difference between good stuff and crap and there is a lot of crap out there.

Apartments have another issue, Body Corporate fees.
These fees can cost significant sums of money depending on how they are set up, do they have a "sinking fund", how old is the building, how much maintenance , insurance, rates, communal ground etc.

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#869558 31-Jul-2013 20:47

ajobbins:
sir1963: The flip side is that landlords will also not invest in maintenance and build to a lower standard.
Also if they do not make as much through capital gain they will do it directly through rent, so rents will increase to compensate.

If they increase rent, that's income for them too, so they would have to pay income tax on it. Same if they skimp on maintenance. That would increase their tax burden at the same time as potentially minimising their capital gains.

The argument that raising taxes reduces investment is a proven fallacy.

Actually the extra cash flow allows them to invest in additional properties, the extra debt leaves them tax neutral.

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#869572 31-Jul-2013 20:59

gzt: There was a comment much earlier about first home buyers saving longer and starting out with an apartment before looking at a 750K house (so stop moaning lol ; ). Apologies for the missing quote just could not find it.

I agree with that view to an extent but there are problems with it. One of them is the current approach of the banks due to the immaturity of the apartment market. Buyer will often need more deposit for a $350K apartment than for that $750K house.

Immaturity = the banks know a huge part of the market can't tell the difference between good stuff and crap and there is a lot of crap out there.

Just realised I could reduce that $350K to $150K and it would still be a close thing. ; ).

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#869580 31-Jul-2013 21:21

this is what people don't understand when it comes to taxation. you can't just buy a rental house from your pocket money and start making money. two kinds of people buy rental houses

1)
mr X has a house that's worth 500,000 (that's fair isn't it)
because he bought it in 2000, it cost him 250,000
he has paid off the entire 250,000 of that house over the years

he buys another house for 750,000 but only borrows 250,000; the 500,000 he gets from mortgaging his rental house. this way he pays 250,000 of mortage and his rental loses money on the whopping 500,000 giving his a 30 deduction on his 'loses', but in reality he gets a discount off his 750,000 house.

2)
mr y has no money to buy a rental house but he is willing to do a bit of hard work
he buys a house with 2-3 extra rooms and rents them out
his housemates help pays his mortgage, his bills, etc
if he puts in a bit of smart DIY he could add value to his house
whether or not the market goes up or down s/he doesn't actually lose anything as the housemates has got everything covered
over time he will own the house and he can do what mr X does

at first glance it seems that the rich get richer, but it doesn't have to be, if you choose option 2, within your means and smartly. there have been people who are bitten and lose a lot of money if they buy the wrong house, hence a lot a lot of research and calculation needs to be done if you cannot afford option 1.

what if the property market crash? well ... if your property is the correct kind there will still be renters. if not, you're stuffed. but - people still need a roof don't they? as someone said rent hasn't gone up in the last 8 years, well then perhaps it won't go down much either (if your property is desirable to rent.

but in all honesty, the talk of the market crashing like Italy etc ... it all comes down to immigration. if your population expands (I really find it hard to believe a population of 4 million is going to shrink, somehow) there will be demand for housing - if not, where are people going to live?

Edit: i'm comparing auckland with the likes of australia: sydney and melbourne, perth and i think it's fair. usually what happens there, happens here in a couple of years. the last couple of years there have been up up up due to housing shortage.

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#869596 31-Jul-2013 21:53

joker97: this is what people don't understand when it comes to taxation. you can't just buy a rental house from your pocket money and start making money. two kinds of people buy rental houses

1)
mr X has a house that's worth 500,000 (that's fair isn't it)
because he bought it in 2000, it cost him 250,000
he has paid off the entire 250,000 of that house over the years

he buys another house for 750,000 but only borrows 250,000; the 500,000 he gets from mortgaging his rental house. this way he pays 250,000 of mortage and his rental loses money on the whopping 500,000 giving his a 30 deduction on his 'loses', but in reality he gets a discount off his 750,000 house.

2)
mr y has no money to buy a rental house but he is willing to do a bit of hard work
he buys a house with 2-3 extra rooms and rents them out
his housemates help pays his mortgage, his bills, etc
if he puts in a bit of smart DIY he could add value to his house
whether or not the market goes up or down s/he doesn't actually lose anything as the housemates has got everything covered
over time he will own the house and he can do what mr X does

at first glance it seems that the rich get richer, but it doesn't have to be, if you choose option 2, within your means and smartly. there have been people who are bitten and lose a lot of money if they buy the wrong house, hence a lot a lot of research and calculation needs to be done if you cannot afford option 1.

what if the property market crash? well ... if your property is the correct kind there will still be renters. if not, you're stuffed. but - people still need a roof don't they? as someone said rent hasn't gone up in the last 8 years, well then perhaps it won't go down much either (if your property is desirable to rent.

but in all honesty, the talk of the market crashing like Italy etc ... it all comes down to immigration. if your population expands (I really find it hard to believe a population of 4 million is going to shrink, somehow) there will be demand for housing - if not, where are people going to live?

Edit: i'm comparing auckland with the likes of australia: sydney and melbourne, perth and i think it's fair. usually what happens there, happens here in a couple of years. the last couple of years there have been up up up due to housing shortage.

And there you have it completely wrong.
On the $500,000 property he will be getting rent which is income.
On the $500,000 property he will have a mortgage of which the INTEREST only is tax deductible , not ant capital repayments

So, at 6% ( I am actually paying less than this but the mat is nice), this comes to $30,000 in interest
If he gets $500 a week he will be making $25,000 pa

So the loss will be $5000

That $5000 will come from his pocket

If his property is structured in a way that he is able to bring the loss over to his wage he would get $1500 back in tax , if not the loss stays in the business to be written off against future profits.

So he is NOT deducting $500,000.

Now when he earns a profit he will not only pay tax on it, but unlike money earned from interest in a bank account, he will also pay ACC levies.

Now add into this all the management of the property, which can add up to quite a few hours a year, these hours are NOT tax deductible , nor are they paid, and you can easily loose 30-40 hours of your life chasing 1 bad tenant, again all unpaid.

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#869600 31-Jul-2013 21:58

joker97: this is what people don't understand when it comes to taxation. you can't just buy a rental house from your pocket money and start making money. two kinds of people buy rental houses

1)
mr X has a house that's worth 500,000 (that's fair isn't it)
because he bought it in 2000, it cost him 250,000
he has paid off the entire 250,000 of that house over the years

he buys another house for 750,000 but only borrows 250,000; the 500,000 he gets from mortgaging his rental house. this way he pays 250,000 of mortage and his rental loses money on the whopping 500,000 giving his a 30 deduction on his 'loses', but in reality he gets a discount off his 750,000 house.

2)
mr y has no money to buy a rental house but he is willing to do a bit of hard work
he buys a house with 2-3 extra rooms and rents them out
his housemates help pays his mortgage, his bills, etc
if he puts in a bit of smart DIY he could add value to his house
whether or not the market goes up or down s/he doesn't actually lose anything as the housemates has got everything covered
over time he will own the house and he can do what mr X does

at first glance it seems that the rich get richer, but it doesn't have to be, if you choose option 2, within your means and smartly. there have been people who are bitten and lose a lot of money if they buy the wrong house, hence a lot a lot of research and calculation needs to be done if you cannot afford option 1.

what if the property market crash? well ... if your property is the correct kind there will still be renters. if not, you're stuffed. but - people still need a roof don't they? as someone said rent hasn't gone up in the last 8 years, well then perhaps it won't go down much either (if your property is desirable to rent.

but in all honesty, the talk of the market crashing like Italy etc ... it all comes down to immigration. if your population expands (I really find it hard to believe a population of 4 million is going to shrink, somehow) there will be demand for housing - if not, where are people going to live?

Edit: i'm comparing auckland with the likes of australia: sydney and melbourne, perth and i think it's fair. usually what happens there, happens here in a couple of years. the last couple of years there have been up up up due to housing shortage.

And the property crash....
Well that is coming from the fact that a lot of older peoples ONLY major asset is their house. They do NOT have Kiwisaver etc as it was not around in their day, so as our ageing population gets older there will be a lot of old people wanting to get rid of that one asset or to down size that asset there will be fewer younger people around the buy it.

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#869606 31-Jul-2013 22:04

sir1963:
joker97: this is what people don't understand when it comes to taxation. you can't just buy a rental house from your pocket money and start making money. two kinds of people buy rental houses

1)
mr X has a house that's worth 500,000 (that's fair isn't it)
because he bought it in 2000, it cost him 250,000
he has paid off the entire 250,000 of that house over the years

he buys another house for 750,000 but only borrows 250,000; the 500,000 he gets from mortgaging his rental house. this way he pays 250,000 of mortage and his rental loses money on the whopping 500,000 giving his a 30 deduction on his 'loses', but in reality he gets a discount off his 750,000 house.

2)
mr y has no money to buy a rental house but he is willing to do a bit of hard work
he buys a house with 2-3 extra rooms and rents them out
his housemates help pays his mortgage, his bills, etc
if he puts in a bit of smart DIY he could add value to his house
whether or not the market goes up or down s/he doesn't actually lose anything as the housemates has got everything covered
over time he will own the house and he can do what mr X does

at first glance it seems that the rich get richer, but it doesn't have to be, if you choose option 2, within your means and smartly. there have been people who are bitten and lose a lot of money if they buy the wrong house, hence a lot a lot of research and calculation needs to be done if you cannot afford option 1.

what if the property market crash? well ... if your property is the correct kind there will still be renters. if not, you're stuffed. but - people still need a roof don't they? as someone said rent hasn't gone up in the last 8 years, well then perhaps it won't go down much either (if your property is desirable to rent.

but in all honesty, the talk of the market crashing like Italy etc ... it all comes down to immigration. if your population expands (I really find it hard to believe a population of 4 million is going to shrink, somehow) there will be demand for housing - if not, where are people going to live?

Edit: i'm comparing auckland with the likes of australia: sydney and melbourne, perth and i think it's fair. usually what happens there, happens here in a couple of years. the last couple of years there have been up up up due to housing shortage.

And the property crash....
Well that is coming from the fact that a lot of older peoples ONLY major asset is their house. They do NOT have Kiwisaver etc as it was not around in their day, so as our ageing population gets older there will be a lot of old people wanting to get rid of that one asset or to down size that asset there will be fewer younger people around the buy it.

You understand that the property crash only affects those trying to sell during that time or until the prices recover. You don't lose value on assets until you SELL them.

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#869607 31-Jul-2013 22:06

he pays $5000 + outgoings say $5,000 a year.

so he pays $10,000 a year.

over 10 years he will own the 750,000 house by sitting on his arse drinking wine and paying $100,000 + a mortgage of $250,000 (ie loose change for someone you'd think would be earning a bit).

by which time if he is smart will have paid off enough on his 500,000 house for the rent to cover both mortgage and expense. so he will start getting taxed on this 500,000 house = no good.

hence he will buy another 500,000 house to rent out, this time drawing out more from his original 500,000 rental so he starts to lose money, and use it as deposit on the new 500,000 house, making sure that both house always loses money. if you remember he has no more mortgage to pay so he can top up his rental houses until he starts making money then he needs to lose some money somewhere - perhaps buy a bach

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#869612 31-Jul-2013 22:21

joker97: he pays $5000 + outgoings say $5,000 a year.

so he pays $10,000 a year.

over 10 years he will own the 750,000 house by sitting on his arse drinking wine and paying $100,000 + a mortgage of $250,000 (ie loose change for someone you'd think would be earning a bit).

by which time if he is smart will have paid off enough on his 500,000 house for the rent to cover both mortgage and expense. so he will start getting taxed on this 500,000 house = no good.

hence he will buy another 500,000 house to rent out, this time drawing out more from his original 500,000 rental so he starts to lose money, and use it as deposit on the new 500,000 house, making sure that both house always loses money. if you remember he has no more mortgage to pay so he can top up his rental houses until he starts making money then he needs to lose some money somewhere - perhaps buy a bach

Nope can NOT buy a batch, the IRD is VERY tight on the "intent" of the loan.
So if you take out money of the rentals for a batch the intent of the loan was for a batch and therefore the loan would NOT be deductible and if you tried you would be up for tax fraud.

Then there is the risk of interest rates going back up to 20%, to cover $500,000 rent would have to be $2000 a week + rates, insurance, maintenance

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#869637 31-Jul-2013 23:25

sir1963:
Then there is the risk of interest rates going back up to 20%, to cover $500,000 rent would have to be $2000 a week + rates, insurance, maintenance

i presume if the interest rates go up to 20% these rich investors would a few years sell at a loss and move their money elsewhere ... i was just explaining who've been buying rentals in the past 15 years, and currently, and who knows perhaps the next 15 years but as you said it may not be so in the medium - long term future, but at the moment, this is what's happening

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#869642 31-Jul-2013 23:30

i still stand by my statement about the key to property prices is population growth. as long as there is nett immigration in a city there will be rise in house price unless suddenly all the rich people do not want to send their kids to the most desirable schools, or near the places with the most desirable beaches or convenience then things could change but unless that mentality changes they will all want to live in the same place that isn't going to get any larger hence increase in competition.

edit: whatever the 20% interest rate etc isn't going to make these guys who have traded up to million dollar houses any poorer, as i've calculated they already own their primary homes by then.

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#869656 1-Aug-2013 00:15

alasta:
A rental owning colleague of mine recently showed me his tax return and it was quite fascinating. After all the expenses on the property were taken into account the net return was stuff all, but there was a big advantage to him in that all the expenses are tax deductable. I suspect that's one of the reasons why renting is such good value compared with owning.

The part that people who don't invest in property look right passed when
they see the "now" in terms of disposable income from rental revenue after expenses and mortgage, is that he's also getting a rather large priced investment paid off by his tenants in the long term that equates to a huge return on his original investment of the deposit.

The original investment (deposit) is all that really matters. Once that is paid off by the tenants, technically he then gets an infinity return on investment, and his investment is insured from being burnt stolen and smashed. Not many paper investments offer that. When people realised that in the 90's, that's what started the boom for rental investment properties.

If he leverages the deposit again in the future to purchase another rental when there's enough equity in the first, then those little net incomes start to add up, while a lot of property is being paid by tenants at the same time. It's Monopoly but in the real world.

What you would need to calculate, is how long to pay off the deposit (original investment) and draw that back out of the properties equity. Then you realise it's a deferred income revenue or cash-flow while you still have control and ownership of that asset. That's how property investing works above the Mum and Dad investors that just focus on what's left over while the big investment, the mortgage is being paid off.

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#869657 1-Aug-2013 00:20

It's also why I don't understand why people do capital gains investing along the lines of doing a house up then selling it again. It's a quick cash fix like selling state owned enterprises. It's not a real investment you build up for the long haul like the Warren Buffets of the world.

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#869661 1-Aug-2013 00:36

sir1963:
And the property crash....

again, it depends on who is coming in. i presume you are kiwi born never lived in metropolitan overseas?

there are people currently in all parts of the world who pay millions and get a box and walk amongst polution, they turn on the tv and hear about this New Zealand ... your darn $800,000 4 bedroom 500m2 section house is a piece of heaven on earth come true ...

of course they might all run away from NZ ... in which case, yes, property crash ...

look - you don't need the entire world wanting to come here ... out of the 7 billion (- 4 million, yes stil = 7 billion) if ONE wants to come to your auckland every week you need to find 52 more houses for these fellas. yes, i have ignored the rest of the immigration emigration of non house owners who aren't buying or selling houses, these people move around, yes.

immigration policy is the government's problem which you have no control over. we are not talking about "foreigners" buying stuff over the internet ... these are "immigration" (population, real people taking up space) we are talking about.

again, i don't see the 4 million population of NZ shrinking.

but yeah that's just me

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#869662 1-Aug-2013 00:41

sir1963:
ajobbins:
sir1963: The flip side is that landlords will also not invest in maintenance and build to a lower standard.
Also if they do not make as much through capital gain they will do it directly through rent, so rents will increase to compensate.

If they increase rent, that's income for them too, so they would have to pay income tax on it. Same if they skimp on maintenance. That would increase their tax burden at the same time as potentially minimising their capital gains.

The argument that raising taxes reduces investment is a proven fallacy.

Actually the extra cash flow allows them to invest in additional properties, the extra debt leaves them tax neutral.

Yep, you don't want money sitting in a bank for that reason. It needs to be going in to the next investment, or changing the mortgage on the current one to pay it off quicker. The world's richest people don't let their money sit still where it will become income and taxed.

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