Safe as houses?
Where to invest once the heat’s gone out of property
David Faulkner just bought a commercial property, out of which he’ll run his business.
Faulkner trains residential property managers for a living, and he owns a residential renter himself. But he’s one of many eyeing alternatives to put his money now the Government has declared a low-level war on residential landlords.
‘‘It wasn’t a case of, ‘OK, my God, let’s go commercial – but it was a good investment,’’ Faulkner says.
Part of his reason was commercial property isn’t subject to the policy changes that have convinced landlords that they’re the current Government’s least favourite group of voters.
Residential landlords have been sent a clear message that the days of massive capital gains are over.
Banks expect house prices to flatten this year, and dip in the longer term as interest rates start to rise, and Government policy changes are being fast-tracked to make it less attractive to be a landlord.
Investors buying residential rentals will have to pay tax on capital gains if they sell within 10 years, and investors are to progressively lose their ability to offset interest paid on home loans against rental income, a move Westpac economist Michael Gordon called the ‘‘most meaningful intervention into the housing market in decades’’.
There’s even been talk of rent freezes, parallelling wage freezes announced by the Government for even modestly-paid civil servants, including police and nurses.
The Reserve Bank has also been told to target sustainable house prices, and in its monthly Financial Stability Report the Reserve Bank said investors faced this decision: whether to invest in housing and rent it out, or to invest in other assets.
So what are the likely alternatives investors will turn to that could generate them lifechanging returns, as rentals have done for landlords?
Commercial and industrial property
Sharon Cullwick, executive officer of the Property Investors’ Federation, says a minority of her members are talking about shifting their focus to small commercial and industrial properties.
‘‘I’d say two in every 100 landlords I’ve spoken to say they will change their portfolios and are looking to go into small commercial and industrial,’’ Cullwick says.
Commercial property, like residential property, is an option where investors can borrow to invest, which is one of the major draws of households which have equity, but little ready cash.
Cullwick says the vast majority of her members have stopped buying residential rentals, and the policy changes would drive some landlords with large debts to sell properties after they lose their tax advantages.
‘‘I haven’t heard of anyone who’s borrowing more money.’’
But Nick Goodall, head of research at CoreLogic, which tracks the property market, says there’s no evidence yet that landlords are dumping rentals.
Goodall says houses have something other investments, other than bank deposits, do not have: An implicit guarantee that the Government would intervene to stop house prices falling too far, and that is appealing to households.
More rentals and new rentals
Goodall thinks the next big thing for residential property investors will be more residential investment property, but without the emphasis on making quick capital gains.
Instead of banking on big short-term gains, investors would see homes as assets they could pay off using rental income, gaining equity as the loan is paid down.
‘‘There’s still longterm appeal for buying
property,’’ Goodall says. ‘‘It’s still a good retirement plan.’’
The focus may change, however from competing to buy existing homes, to buying ‘‘new builds’’ as these will be exempted from the tax deductibility changes. This, Goodall says, would have the benefit of providing capital to expand housing supply.
All of this depends on pricing of homes.
Since May 1, Reserve Bank rules mean 95 per cent of all new loans to investors by big banks need to be less than 60 percent of the property value.
Faulkner reckons some residential landlords will seek to change the way they operate, maximising rental incomes, and trimming costs, including skimping on maintenance, and dumping their property managers, which could lead to problems for tenants.
Cullwick says around 70 per cent of her members believe they charge below market rent, and rent rises could be a tool they use to partially compensate for losing interest deductibility.
Investing in your own home
‘‘In Australia your house is your castle,’’ Cullwick says. ‘‘A lot of
first six months as a nomad remote worker/contractor. I chose the wrong accountant and they messed me over with the taxes and I suddenly had a £3500 ($6750) tax bill that I had to pay in one month. I was saving taxes to the side of my pay, but not enough because my accountant gave me the wrong advice.
I had to borrow that money from a very generous friend, who is letting me pay it off when I can. I feel terribly guilty and went into even further debt trying to get back from the UK to New Zealand during Covid. Flights were £2k ($3850) one way. I’m in a bit of hole that I’m trying to work my way out of, it feels a bit hopeless, and the patience of my friend is the only thing keeping me asleep at night! Your biggest financial win?
My job – I get paid well, and I work really hard. I’m trying my best to upgrade my living circumstances by advancing my career. I’m the first person in my family to ever go to university and get a corporate job, so I’m trying really hard to make it all worth it and raise my family out of the lower-income bracket.
Your money philosophy?
I have chronic health issues which means I may not have a long, quality, able-bodied life. With this filter across everything, I am less tied to the future, which is both a freedom and a hindrance. I often think, what’s the point in having a retirement fund if I probably won’t live that long anyway! It means my money philosophy is centred around my human experience – I will spend whatever I want to get the experiences I want to feel fulfilled in my lifetime. This means a lot of travel and a lot less savings.
How have you learned about personal finances?
I am not good with money – very little financial literacy. I come from a family where we’ve struggled with money and I haven’t had a lot of money lessons growing up. It’s no fault of my parents as they can’t teach what they don’t know themselves. I didn’t realise how privileged some of my peers are to have parents who have family trusts or property investments, or they’ve been involved with the family business or investments while growing up. I had no access to this type of learning, and I can see friends/peers who did and have a much stronger foundation of saving/investing/spending wisely. Your biggest money lesson? Don’t get into credit card debt! My parents told me don’t ever get into credit card debt and I’ve held true to this as much as possible. I have a credit card now, but it’s only for emergencies.
What is the biggest challenge when it comes to achieving your financial goals?
Delayed gratification and seeing the bigger picture. I struggle to imagine a future, being retired and with a secure financial future and a home. Half because I don’t believe I’ll get there (health-wise) and half because I think some of that might be out of reach for me. I’m single, I’m from a ‘‘poor’’ family and our family don’t own property. That’s why my goal is closer than that – travel around Europe and spend all my money! At least I’ll die fulfilled and happy.
Tyren Temple, 24, already has a house deposit, but has struggled to buy. Now he has a plan for early retirement and financial freedom. Salary band: $65k-$75k Employment status: Full time Living situation: Renting
Belong to KiwiSaver? Yes, Simplicity
Have a student loan? Yes, currently more than $35k
Have a credit card? No, never What’s your financial goal and how do you plan to get there? Being financially free by the age of 45. By free, I mean not needing to work in order to live. Short term goals are to stick to an investing and savings plan to maximise my chances of reaching my long term goal.
How do you divvy up your paycheck?
I invest and save before I spend anything on wants or needs. Rather than having a strict budget for spending, I have a strict budget for savings and investing. This works for me because I divvy up my pay as it comes in, and I make do with what I have left to spend until next pay. I generally split my paycheck like this: Spending (rent, food, entertainment, transportation, clothes etc), 60 per cent; back-up emergency fund, 3 per cent; travel, 6 per cent; Investing, 25 per cent; gifting, 1 per cent, low risk ‘conservative’ fund, 5 per cent
Your best financial tip?
Set up an automatic payment from your bank account each business day (say, $5 – the cost of a coffee) into an account (eg, a conservative fund with Simplicity or any other similar company). It goes unnoticed and before long, you’re automatically saving $25 a week without seeing that saving within your bank account. It makes it easier to forget about it when the money doesn’t just get shifted into another bank account for you to easily see. I did this throughout uni until I gained more control over my savings and investing behaviour.
Your biggest financial risk or financial mistake?
When I first started investing, I put all of my eggs into one basket. The investment hasn’t been a big mistake, but it was poor judgement and I wish I had known to diversify my investments when I started. Your biggest financial win?
I saved up enough for a deposit on a house with my friends, until housing prices in Wellington shot through the roof. So not a ‘win’ because we’ve been kicked out of the property market due to prices, but still an achievement for not only myself, but my friends to have saved up some money that can now be used in other ways.
Your money philosophy? Save and invest until my money works harder than I do.
How have you learned about personal finances?
My grandfather taught me about the importance of investing. From there, I developed a strong interest in how money works and how I can make it work for me. Reading, listening and learning from others. I always recommend that people at least read Rich Dad, Poor Dad to understand the basics of time and money – it should be a book everyone is told to read in school.
Your biggest money lesson? Don’t let emotion control your investing behaviour because it’ll lead you down a path of constantly looking back in hindsight and with the thought of ‘‘what if...’’
What did you learn about money from your parents?
My parents taught me the value of earning money by encouraging me to get my first job when I was 14.
What is the biggest challenge to achieving your financial goals?
Unexpected life events. If everything remains constant, then I hope to get to where I need to be.