Property Investors - Responsible Business Operators or Public Enemy No 1?

22 Aug 2007

With the collapse of seven finance companies in the last 16 months, including three in the last eight days, Martin Evans, President of the NZ Property Investors� Federation, says that the worry for investors in managed funds and shares is the prospect of who might be next. He points out that property investors do not need to rely on fund managers or on shares in companies, which may or may not perform. They are mainly long-term holders of properties, purchasing when the market conditions favour buyers and selling to improve the quality of their portfolio when in an upward market. They have control of their investment and decide when to add value through renovation or redecoration.

However, there is still considerable debate as to whether property investors are responsible business operators or public enemy no 1. Many of the points raised during this debate indicate a degree of misunderstanding and misinformation regarding the facts of the situation. 

Well before Kiwisaver was even a gleam in the Minister of Finance’s eye, property investors have been prepared to save voluntarily by committing income to reduce debt and topping up mortgages in the early years of their investments.  These are the New Zealanders who are indeed providing for their retirement without any prompting from the Government.

It has been stated that no asset other than housing can be purchased as a stand-alone investment with 100% borrowing. This is incorrect.  You can only borrow this amount if you have other assets to support the borrowing. It is also possible to borrow a substantial portion of the cost to purchase shares, or another farm or a business.  In all these cases, the interest is tax deductible and, as long as you are not a trader, the capital gain is tax-free.

It has been claimed that rental activity is the only loss driven activity. This is incorrect as forestry investment operates at a loss for 20 odd years before there is any income and it is legal to claim all the losses of maintaining the forest and the interest costs.

Leveraging share purchases also usually runs at a loss as the percentage of dividends relative to the cost of the shares is often significantly less than the interest cost payable on the loan.

There have been proposals that tax losses from rental housing should be ring fenced so that these cannot be offset against other income. It has been claimed that the practice has increased substantially since ring fencing was abolished in 1991.  In actual fact, it has always been possible to claim against losses up to $10,000. It was this figure, designed to limit the claims of losses of  “Queen Street Farmers” of the 1980s, which was changed in 1991.

As recently as the end of July during TV One’s Agenda, the Prime Minister said she wanted the Select Committee inquiring into monetary policy to have a look at tax breaks for property investment.  One has to question why this form of investment is being singled out when the IRD deputy commissioner Robin Oliver told the parliamentary select committee inquiring in to housing affordability in June that there was no tax advantage to be achieved through housing investment. 

The facts support the view that property investors are acting in the same way as investors in other asset classes. They are looking for the best place to invest their capital.  The August ANZ Property Focus points out that there are early signs of moderation in the housing market, which will please the Reserve Bank. However Labour Cost Index and Quarterly Employment Survey recorded solid wage gains in the June Quarter and mortgage borrowing increased by 1.1 percent in June. The increases in total gross earnings will continue to continue to support the consumer spending and housing market.  Investing in property, and thereby voluntarily saving is a more responsible choice than the alternative of consumer spending.

Martin Evans encourages all who are interested in property investment to join their local Property Investors’ Association.  Members share knowledge freely with each other and newer investors learn how to manage the risks, which come with all investment.