Auckland housing market

[Bjauck]

It isn't free from tax, and it is treated harsher than many other things for that tax as depreciation is not an accepted expense.

The justification for many investors paying current Auckland prices is that they are buying in the expectation that the return from their investment will chiefly be from anticipated capital appreciation. Consequently they are prepared for their net taxable rent income (net of expenses and interest) to be minimal, non-existent or even negative.

Per $1000 investment in housing Landlords would end paying much less in tax than $1000 in shares or $1000 in bonds or fixed interest. So, despite the application of the same tax rules (depreciation* and recent budget notwithstanding), in reality, property investment enables the landlord's return to be relatively free of tax, compared with other investment types.

*Most residential buildings appreciate in value...so the depreciation would be recovered on sale anyway.

[artemis]

... Per $1000 investment in housing Landlords would end paying much less in tax than $1000 in shares ....

Not if it is capital gain.

[iceman]

Not if it is capital gain.

Exactly. I mainly invest long term in shares and my capital gain is tax free. No different to housing !

[Bjauck]

Exactly. I mainly invest long term in shares and my capital gain is tax free. No different to housing !

You can always find exceptions. It depends on the individual that's for certain..but I think the average individual investor in the average NZX company with average dividend yield, would have a tax burden far exceeding that of the average individual landlord with an average Auckland rental property.

What's more that investment in rental housing can be leveraged much more readily than the same value investment in shares. So if both real estate and equity markets increase by (say) 10% then with the easier leveraging, the real estate investment will produce greater untaxed capital return. That coupled with zero or negative net rent (by virtue of expenses and interest), will mean there is much less tax produced from the returns of that $1000 investment in rental housing in actuality - much less as a % of the returns.

I am not referring to traders but to long term investors in both rental housing and shares. The tax take from the return from the same value of equity in the average (Auckland) rental housing investment would be less than the tax take from the return an investment of the same value in an average portfolio of shares.

[Bjauck]

According to Barfoot's, currently the Gross rent yield on the average Auckland property is 3.33%. Expenses are deductible from the gross rent. The dividend return on NZX 50 is about 5% (I am basing that on the NZX 50 Portfolio Fund). So even comparing cash investments in both rental property and shares, there would be more tax to pay on the income from an average investment in shares.

However in reality, rental housing investors are likely to borrow to fund a property purchase. An avenue much less likely for investors in shares. The mortgage interest being deductible from gross rent. With mortgage interest rates at about 5.5%. Even those investors who provide up to perhaps 50% of the purchase price using their own equity, could end up with sufficient mortgage interest (and other expenses) to reduced their net rent return to zero. They will end up with a minimal tax burden. These long term investors will be relying on capital appreciation to provide the return on their investments.

These are for average share investments and average properties. You can obviously find and invest in NZ shares that have no dividends and rental properties that furnish a higher than average rental return.

http://www.barfoot.co.nz/market-reports/2015/april/suburb-report

[Bjauck]

The values in the Auckland house market have increased by 14.6% in the past year. That is compared to to an increase of about 7.7% in the NZ50 capital index.

An investor paying cash for the average Auckland home a year ago would have seen an unrealised tax-free capital increase of 14.6%. The taxable Rent yield after expenses would have been under 3%. However many/most investors would purchase the property with a mortgage. With a 50% mortgage, the taxable rent yield has been reduced to about 0% yet the leveraging has given the landlord/ investor an unrealised tax-free return of 29.2% in the past year.

The dividend yield on the NZ50 was about 5%.

The real world lighter actual tax burden on the returns from typical investments in rental housing compared with other investments including overseas investments, fixed interest and shares is not a recent phenomenon. It has contributed to the large percent of NZ household wealth that is in rental housing as opposed to financial investments.

http://www.stuff.co.nz/life-style/ho...800000-says-qv

[Bjauck]

Year-on-year price growth is now 16.1%.
http://www.nzherald.co.nz/business/n...462255&ref=rss

For the Landlord who has a mortgage, this translates into even greater unrealised percentage growth in equity. That is a good investment performance. Bill English has said that a rental housing warrant of fitness would reduce rental housing supply. If the demand for residential housing by investors were reduced and consequently the pressure on prices alleviated, then surely that would be a good thing. It could mean that potential first home buyers would be less likely to be out-bid by investors. Those successful first home buyers would then mean less demand for rental properties.

Whatever, in the absence of meaningful changes in the housing market, Auckland will continue down the path to have housing owned by fewer yet wealthier overseas and domestic investors, whose heirs will inherit and become landlords, with the rest of the population becoming perpetual tenants. A landed aristocracy and a peasant class in the making if you will. Just like how the old country used to be. Unless there is a big correction round the corner...or, unfortunately less likely, housing developments occur at the level needed to match immigration and population growth.

[vorno]

It's getting at the stage where I think I'll have to move out of Auckland.

[artemis]

...... If the demand for residential housing by investors were reduced and consequently the pressure on prices alleviated, then surely that would be a good thing. It could mean that potential first home buyers would be less likely to be out-bid by investors. Those successful first home buyers would then mean less demand for rental properties......

Unless migration continues to increase, or even maintain present level.

[vorno]

Unless migration continues to increase, or even maintain present level.

Lets say migration rates half, that still means a net gain of ~25,000 people (whole of NZ). They can't even build 10,000 homes a year in Auckland - not to mention the existing networks are buckling at the seams.

As strange as it may sound we almost "need" a crash.