Frank Newman: Investment analysis a waste of time?

Most property investors undertake some form of analysis before they make an investment decision.  They "Crunch the numbers" to forecast profit and in some cases they use quite sophisticated models to predict investment returns out some 10 years or so. 

This typically would involve estimating the future rental stream, expenses, interest rates, and a resale value of the property. The timing of those  future income steams and payments are then adjusted by what known as a discount rate to take account of the time value of money - because money in hand can be invested so net cash flow received sooner rather than later is worth more.

Frank Newman: High standards imposed by insurance companies

It seems insurance companies are requiring landlords and property managers to be much more vigilant in the way rental property is managed. The implications are that if a rental is not managed in a manner that minimises risks to an insurer, then they risk having their claims denied.

Here are two examples from a landlord’s insurance policy package currently being promoted by a major insurer. The examples relate to the Landlord’s Obligations clause, and claims for methamphetamine contamination.

Frank Newman: Tenant WOF and promising infrastructure

The Hawke's Bay District Health Board is taking a practical and enlightened view when it comes to rental property. They have introduced a two-session course called "Ready to Rent" which teaches tenants about their rights and responsibilities when renting and basic skills like cleanliness and heating.

In effect, those who complete the course receive a "warrant of fitness" in the form of a letter of support, which they can present when applying for properties. It appears to be a first for New Zealand, although similar schemes of the same name have been in running overseas for a number of years.

Frank Newman: Political manias and meltdowns

The election campaign has already brought up its share of extraordinary events: the self-mutilation of the Green Party leadership and the rise of Jacindamania. With those two events the campaign has been transformed as support shifts from NZ First and the Greens to Labour - although based on the latest polling it looks like NZ First will continue to hold the trump card come election night.

In amongst the manias and melt-downs there have been some policy announcements. Prior to the election I will summarise the party policies that particularly affect property investors, but one that is particularly eye-brow raising in a weird way is the announcement by the Opportunities (Gareth Morgan) Party (TOP).

Frank Newman: Closing the speculation tax loophole

Last week Labour announced further measures to crack down on property speculators. Their latest measure is to close the "loop-hole" on negative gearing, and is the third policy statement targeting residential property investors. The other two previously announced policies would ban overseas investors buying existing homes, and extend the capital gains tax (bright-line test) on rental houses from two years to five.

To recap, negative gearing is where an investor makes a loss from their investment, and offsets that loss against other income derived from another source. The effect is to reduce their taxable income, and therefore the amount of tax they pay (based on their marginal tax rate).

Frank Newman: Property market on the turn

The latest issue of Property Focus by the ANZ has some interesting, if somewhat sober, commentary about the current state of the property market. In essence they say the market has turned, but due to a lag effect it has yet to become evident in the annual property measures. 

They say, "On a 3-month annualised basis, nationwide prices are running at 1.9%, which is down from over 23% in mid-2016. Auckland and Christchurch prices are actually 6.7% and 10.2% lower respectively on the same measure; even if we account for volatility that’s an almighty thump…Nationally, house prices are still up 10.6% on a year ago according to the stratified measures, but annual changes lag turning points. Quarterly changes are noisier but more adept at picking changes in the market. The signal on this front (just +0.5% 3m/3m in February) indicates a clear slowdown."

Frank Newman: Valuations and statistics

A few months ago I reviewed two websites that had made finding property data whole lot easier: Trademe Property Insights (trademe.co.nz/property/insights) and Homes.co.nz.

Both apply a secret algorithm, to arrive at a suggested market value for residential properties, and provide a range of information about the property. They take what's called a desk top valuation approach - they look at recent sales in the area and compare the actual selling price of each property against its most recent capital value (as shown in the rates notice). They then apply that percentage change across all properties in the area to arrive at an estimated market value. No property inspection is carried out so the approach is inherently flawed. Both sites are upfront about these limitations and point it out in various disclaimers.

Frank Newman: Smart property data a click away

In recent months finding data about a property has become a whole lot easier, thanks to two free APPs.

Trademe has just released a new tool called ‘Property Insights’ which it says “provides property data and information about residential properties across New Zealand, empowering Kiwis to make better property decisions”.

Frank Newman: New rules for landlords

From 1 July, amendments to the Residential Tenancies Amendment Act will come into effect.  The changes cover a number of areas but here's the fine print regarding smoke alarms and insulation.

Smoke alarms

• From 1 July landlords will need to have working smoke alarms installed in all their residential rentals.

Frank Newman: Interest rates and lending restrictions

Last week the Reserve Bank left the Overnight Cash Rate (OCR) unchanged at 2.25%. The Monetary Policy statement that accompanied the announcement has some interesting commentary about what is ahead for property investors and homeowners.

When discussing the state of the property market and the future it said, "Low mortgage rates, high net immigration, and the shortage of housing in Auckland have contributed to high house price inflation.

Frank Newman: Property politics

The general election is more than a year away but the battle lines are already forming. 

Two combatants, Labour and the Greens, have entered into a formal Memorandum of Understanding (MOU) to work together with the simple objective of ousting National from the treasury benches.  It creates an interesting dynamic, given NZ First has repeated its view that it would not be part of a coalition that involved the Greens.

Frank Newman: Interest rate clarity

The big news of the week has been the Reserve Bank's decision to lower the Overnight Cash Rate (OCR) by a further 25 basis points to 2.5%.

Most of the trading banks reacted by lowering their flexible mortgage rates by the same amount. Kiwibank has the lowest variable rate mortgage on offer at 5.65%. Westpac is the only bank so far to cut a fixed-term rate, slicing 15 points off its two-year special rate to 4.24%. The lowest rate in the market place is 3.99% fixed for one year from SBS Bank. Interest rates are now at their lowest level in over 60 years.

Frank Newman: Property headlines

It was a big news week for property owners last week. The items are of particular interest have been  comments made by the Reserve Bank governor about interest rates, and a new 10-year fixed rate  mortgage has been offered by a major lender.

Firstly, the Governor's comments. Graeme Wheeler has poured an ice bucket of water on recent media speculation that the next more in Reserve Bank interest rates could be down. In a recent speech, in his typically measured way, he said a cut in the Official Cash Rate was very unlikely. What it boils down to is the economy does not need stimulus - it is in good shape and there are already a number of positive influences:

Frank Newman: Regulation risks for property investors

The ANZ Bank and the New Zealand Property Investors’ Federation (NZPIF) have released the findings of their annual property investors’ survey. It’s an interesting insight into the thinking of residential property investors and how that thinking has been shaped by government policy and market conditions. Members of the NZPIF tend to be larger investors who have been in the game for a number of years which is reflected in the results.  1156 property investors took part in the survey.  

The general themes to emerge are:

• Concerns about government regulation,
• Debt reduction, and
• An expectation that property prices will continue to rise.

Frank Newman: P labs a problem for landlords and home buyers

I have written about the P Lab problem a couple of times over the last few years. The first time was when the discovery of P Labs was fairly rare. Today the police are finding a new lab every 45 hours, and about two-thirds of these are operated from rented accommodation. It is such a problem nowadays that it can no longer be ignored. In my view landlords and property managers need to consider incorporating methamphetamine checks into their property management regime.

Meth contamination is a serious risk to those living in a contaminated building, especially children. According to some reports the short-term health problems range from migraines, nausea, respiratory difficulties, and skin irritations. Long-term problems may include cancer.