Property Values

The latest Budget has removed the tax advantages of putting your property into a LAQC (Loss Attributing Qualifying Company) – it used to be that after depreciation, you could make an “on paper” loss on your property, and use it to reduce your tax liability on your other income.  But if you made a profit, you paid tax at company tax rates, which was an advantage if you earned enough to be in the top tax bracket.

But there are still good reasons for having your investment properyt in a LAQC.  Having your investment “ring-fenced” can save you from risking your other assets if things go badly wrong.  For example, imagine that a slow leak from your poorly-maintained plumbing has caused a slip which has destroyed the neighbouring house, and their insurance company is suing – if you own the property in your personal name rather than a company, then all your personal assets such as your family home could be on the line.

Also, if you enter into a new relationship after purchasing the property, or buy it with money you have inherited, and don’t want it to become matrimonial property, having it owned by a company is worth checking out.

Apartments … houses …  town-houses … what’s the difference in the legal ownership structure?

Fee Simple:

you own your own building on your own piece of land, and nobody else shares your land.  If you have more than one dwelling (eg flats) on your land, you can’t sell them separately, unless you change over to a different title structure first.

Unit Title:

you own your own piece with your apartment in it, and possibly an accessory unit,  and have an undivided share in the communal areas such as garden, lift, hallways etc with the other unit owners.  You have membership of an owners’ committee known as a Body Corporate.  You pay a regular levy to the Body Corporate to cover the shared expenses such as building insurance, maintenance, rubbish removal.  You pay your rates separately.  The Body Corporate has formal rules – most of them restrict you from keeping pets, but don’t restrict renting your apartment out.

Company Share:

this was the way buildings were divided before the 1972 Unit Titles Act – a Company owns the building, and you buy numbered shares in the company, which entitle you to live in a specific apartment.  Your levy includes rates, since technically you don’t have a separate apartment title to have rates charged against, so rates are levied against the building as a whole.  Companies can more easily make their own rules than unit titles can - a few don’t allow you to rent out at all, most allow existing residents to rent out to approved tenants for up to a year while they are away, a few allow investors to buy & rent out apartments, but one I know of (Mansfield Towers) charges a 20% higher levy for rented apartments.  You usually need to meet with the company directors to be approved as a purchaser, but they cannot unreasonably withhold consent or withhold it in breach of the Human Rights Act.

Cross Lease:

is where flat owners each own an undivided share of the land their building is on, and a leasehold estate. They rent the piece of land and their own flat from the other owners – no money actually changes hands, since you owe each other equal amounts.  As the land is undivided, you do not usually have your own garden – some cross lease owners fence off separate areas by common agreement, but there is nothing to really stop the neighbour having a bbq in front of your lounge windows.  If a cross leased property is extended or an outbuilding added it is not enough to get the neighbour to sign your building consent – the title needs to be changed to reflect the new footprint of your building on the flats plan.

Leasehold land:

you own the building, and someone else owns the land.  You usually have a 999 year right to continue to renew your lease, so they can’t make you pick up your building and go away, but every 7 years they can put up the rental you pay for the land – it is usually about 6% of the land value at the renewal time, which means that since interest rates are usually higher than 6%, and land values increase during the 7 years, the land-owners are lucky to be averaging a return of 5%, so you are making a better investment than the land-owners.

After negative reports on the housing market all last year, the news came out in January that median house prices in January had increased by 9.5% in Wellington city in the year to December 2009.  Overall, the economy grew a little during 2009, and house sales were 24% ahead of 2008.

Many people had been deferring moving for fear of selling their home for less than it may previously have been worth – this news was all they needed.  Consequently, February saw such a flood of homes onto the market that buyers had much more choice than usual.  Buyers started to say things like “this house has 90% of what I want, but there’s so much coming on the market that if I wait, one might come up with 100% next week.”  So houses started taking longer to sell, and a few sellers who really couldn’t wait took less.  It took until mid APril for the number of buyers and sellers to become even again.

Now that winter is coming on,  the numbers of homes coming onto the market has decreased, and the number of offers for each property has increased.

According to the Chief Economist at BNZ, our recovery has been driven by the lowest mortgage rates in 40 years, net immigration of about 20,000, tax-cuts, infrastructure spending, and catch-up consumer spending deferred from the previous year.  Fewer new homes are built each year than we need.  He expects the NZ economy to grow 3% this year and house prices to creep up a little, and says anyone wanting to build a house should do so sooner rather than later before the supply of tradesmen dries up again.

When investors buy properties, they factor any extra costs such as taxes into the return needed to make it worth owning those properties.  For some years, rents haven’t been high enough to cover the mortgage and other outgoings, so investors have been buying in expectation of a capital gain.  If those gains are going to be taxed, they will factor that in as well, and if they can’t get sufficient rental returns to cover those costs, they simply won’t buy.  This will lead to a shortage of rental properties, which in turn will lead to desperate tenants prepared to pay higher rent to secure a property.

This means that higher rents, ie pain for the poorest and most vulnerable members of our society, would be a direct result of any introduction of capital gains tax.  It is a common misconception that investors are causing house prices to rise, whereas in fact it rare for an investor to buy a home where there are competing offers, as it is the owner-occupiers who are usually willing to pay more.

Closed tender programs, now sometimes called deadlone marketing, mean that the property is shown for about 2 weeks, then all offers are taken to the owners at the same time. This makes buyers make their best offer, as they are worried about missing out on the property if someone else offers more, but unlike auction, they don’t know what the other buyers are offering.  So closed tender is the best way to get a top price.  When the market was at its slowest, 50% of homes marketed by tender sold at tender close.  Now things are warming up, 80% sell at tender.  Buyers like it because they know they won’t show up to the first open home to find their perfect home is already under conditional offer, and that they will have time to think and to do their due diligence.   Sellers love it because they have the best possible chance of a premium price in a short time-frame, whcih means less stress, and less outlay on advertising.