Making the same rental property investment mistake all over again

New Zealand property investors and savers are making the same mistake all over again and the nation is encouraging them. They have assumed interest rates will be at their current level forever and decided now is the time to jump in and buy rental property.

It is all just too tempting and everyone is being so helpful, including the banks, the government and the Reserve Bank. Rental investors are out borrowing and buying again, believing prices have bottomed out. House sales volumes have bounced strongly in March and April and prices appear to have bottomed for now.

It all seems to make so much sense when they do their calculations showing positive cash flow from their investments when interest rates are 5.5 per cent. They can kid themselves that this may even be profitable before the inevitable capital gains and tax deductions from their personal income tax add the icing to their cakes.

They have decided to jump on the band-wagon again to feed their property investment addiction and no one is standing up and telling them to avoid the temptation. Everyone is encouraging them and it will cost this nation all over again.

Reserve Bank Governor Alan Bollard has done his very best to fire up the engine running this economy in the last 5 years, which has been consumer spending and residential property investment powered by equity withdrawal from rising housing net worth. Bollard cut the Official Cash Rate from 8.25 per cent to 2.5 per cent in the space of nine months, the biggest and fastest fall in the OCR to its lowest level in history.

Lo and behold, the one year fixed mortgage rate dropped from an average 9.87 per cent in March last year to around 5.50 per cent now. No wonder house price volumes picked up in March and April. The Reserve Bank has fuelled the fire by lending $8.25 billion to the banks since November through the Term Auction Facility, which was designed to tide the banks over while funding supplies from international capital markets were tight.

It's clear now it has just been used as a cheap source of funding to pump more money into the housing market. The banks have not refinanced their short term foreign debts onto longer terms. There has been just one guaranteed bank bond issue on international markets since September.

Meanwhile massive tax incentives for property investment are apparently locked in place. These wheezes include the lack of a capital gains tax and allowing rental property investors to offset rental losses against their personal incomes using Loss Attributing Qualifying Companies (LAQCs).

The government has also only cut the top marginal tax rate by 1 cent to 38 cents, leaving the incentives in place to game the system by setting up family trusts and corporate vehicles to avoid tax.

There was no mention of this in the government's briefing last week when setting up the Tax Working Group to review the system here. http://www.treasury.govt.nz/publications/media-speeches/media/08may09a

We can only hope that the likes of Gareth Morgan, Rob McLeod and Arthur Grimes have the balls to recommend some change.

The banks are also doing their level best to fuel the madness all over again. In the last 4 months banks have pumped an extra $1.6 billion into housing loans, while at the same time sucking $1.1 billion out of loans to businesses.

Just to show how much they really love the security of land and property rather than the ideas, people and machines in other productive businesses, the banks also pumped an extra $1.6 billion into farm loans, almost all of which are secured by land.

Banks have reverted to conservative type when the pressure came on. They are lending money to a household with a salary and a house before they take a risk with a loan to a business. New Zealand is making the same damned mistake all over again.

We are investing our savings in rental property or land rather than in productive people and business ideas. Isn't this the approach that got us into this mess of low productivity growth and stagnant per capita income growth?

We have learnt nothing. Interest rates will rise over 8 per cent again and this little boomlet will bust again. We will wonder all over again how we let this happen.

The usual property investment myopia will have struck again and our economic leaders will have failed yet again to exercise some leadership and vision.

Plus ca change.

 

 

 

Photo: Herald on Sunday