When is a Business, not a Business

“When is a Business, not a Business“
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies“

Ernest Benn

When is a business, not a business, when you are a Residential Landlord, it seems.  This Government seems to rush out legislation before it has fully analysed the consequences and even thought through how it will be enforced and the detail of it. This is the only taxable business, that I know, that pays tax on its income, but can’t claim it’s legitimate expenses. The announcement of the extension of the Brightline period to 10 years and the removal of an investor being able to claim their mortgage interest cost against taxable income was announced before the Government had thought through the extent of the legislation, as Grant Robertson also announced new builds will be exempt from this for a period.

What is a new build?
Is it a new house purchased 1,2,3 years ago?
Or do you have to purchase it off the plans?
How long will existing deductibility last for?

It may have been better to get the full legislation thought through before enacting pieces of it, but this was a political move, rather than an economic one. Ultimately this Country has a shortage of houses, both for purchasers and renters to live in, as is supported by the huge emergency housing cost the Government is currently carrying, and penalising the private investor sector, will only exacerbate this. Those that stay in the market will increase rents to cover the increased cost, it is a business, and with demand so high I would suggest they will still tenant their properties. This will also have the affect of the well-established investor continuing to thrive, whilst those new to the industry either leaving it or be discouraged from entering it.

The cost of housing in New Zealand can’t be blamed on the poor old investor, but the value of land and Council, Vector, Watercare etc costs. Looking at the new builds we are funding in Auckland, these costs total approximately 8-10% of the full development cost, the vast majority of which are purely local Council fees, and you add to this GST at 15% of sales value and you find over 20% of your development cost is effectively local Council costs or Govt tax, excluding any tax on profit. Auckland, and in fact most larger population centres around their district are severely restricted by developable land. Auckland can only really spread North / Northwest and South, and some of these areas are still a number of years away from having services to enable residential sub-divisions to occur, which puts upward pressure on land values for suitably zoned properties with the ability to access water, wastewater etc.

The World is starting to look towards life after Covid, purely because vaccines are being rolled out through many Countries, and as a result there is hope that the “Old Normal “may return.  However, Covid is here to stay, and we will need to live with it, vaccination or not, as it’s ability to change will mean vaccines will have to be continuously upgraded, just like the Flu. Just as it was 40-50 years ago, you must prove you are vaccinated to be able to travel overseas, and I would suggest our slow vaccination roll out will mean we will be very protective of opening our borders and providing any freedom of travel to New Zealanders wanting to travel overseas. The Government has already stated it will revisit our travel bubble with Australia, should they open their borders to other Countries, which Australia will presumably be keen to do, as they chase the tourist dollar.

The financing markets are steady, presumably a bit of wait and see what effect the Government property investment legislation has on the market and prices. Economists have already expressed their view that interest rate rises will be pushed out further into the future, with some of the heat coming off the Reserve Bank to raise the OCR in an attempt to slow the housing market. However, early indications are that there has only been a slight slowing of price rises across the Country, and sales volumes and demand remaining at very high levels.

Competition in the non-Bank space remains strong, but there appears to have been a slight firming of pricing recently, and security location has become more of an issue, which indicates a nervousness in this part of the lending markets.

We still have funders chasing us for opportunities, so don’t hesitate to contact us if you have an opportunity you would like to discuss.