Article: Property Investment

Interest Rates, Affordability And Tax Loopholes with Frank NewmanInterest Rates, Affordability And Tax Loopholes with Frank Newman

The latest issue of ANZ Property Focus has some useful commentary about fixed rate mortgages.

They state, “The 1 year rate remains the lowest point on the curve. It is also where we see the ‘sweet spot’, on the view that the risk is that we see the RBNZ leave the OCR on hold for a longer, rather than shorter period. This is largely a reflection of the risks around inflation…we believe engaging in a strategy of rolling a string of back-to-back 1 year terms is appealing…at which time it may be appropriate to lengthen the term of fixes. Consider, for example the choice between fixing for 2 years or a plan to fix for back-to-back 1 year terms….Within the ’back-to-back 1 year’ strategy, it may pay to stagger borrowings into perhaps 2-3 tranches so that only a portion of debt is rolling over on any particular date, to avoid inflexibility.”

That’s good advice. The one-year fixed term rate is the lowest on offer and postpones the decision on fixing for a longer term to time when mortgages rates are still likely to be at historically low levels.

Looking longer-term, the ANZ does not expect any change in the Reserve Bank’s Official Cash Rate until late 2018, and then the rises are expected to be in increments of 25 basis points.

Affordability and risk
There has been a lot of election talk about housing affordability. There are various ways to measure affordability but Demographia take a simple price-to-income approach which links median house prices to median household incomes.

Their 2017 study found Auckland was severely unaffordable with a 10x price-to-income multiple, up from 5.9x when they carried out their first survey in 2004.  Auckland was the fourth least affordable among the 92 major housing markets internationally. The other “unaffordable” housing markets in New Zealand were Christchurch at 5.9x and Wellington at 5.7x.

This price-to-income approach is similar to the price-earnings (PE) multiple that sharemarket investors will be familiar with. The PE multiple is the relationship between an investments market value and annual earnings. For example, if a company listed on the stock exchange is trading at $1, and is earning 10 cents a share then it has a PE ratio of 10x. This is a mechanism to measure how expensive a share price is, and its risk. High PE stocks carry additional risk in that there is an expectation built into the price that earnings will grow in the future to justify the high PE valuation.

And so it is with property markets trading at a high price-to-income multiple. At some point a high price-to-income property market will become unaffordable and property prices will decline or level out for a number of years - which is the current status of the Auckland market.

Tax loopholes
Last week the government announced its “final decisions on proposals to address base erosion and profit shifting” - in other words, closing loopholes on international tax dodgers.

The announcement was made without a lot of fanfare, which is not surprising given when the matter was first raised the “problem” was downplayed as not a problem by then Prime Minister, John Key. It now seems there was, and is, a problem with New Zealand being a treated as a tax haven by multinationals and foreign trusts.

The announcement says, the new measures will:

· Stop foreign parents charging their New Zealand subsidiaries high interest rates to
reduce their taxable profits in New Zealand.

· Stop multinationals using artificial arrangements to avoid having a taxable
presence in New Zealand.

· Ensure multinationals are taxed in accordance with the economic substance of
their activities in New Zealand.

· Make it easier for Inland Revenue to investigate uncooperative multinational companies.

· Counter strategies that multinationals have used to exploit gaps and mismatches
in different countries’ domestic tax rules to avoid paying tax anywhere in the
world.

The last of these measures will drill down into the tax status of a foreign trust and require those trusts that are not paying tax in any overseas jurisdiction to pay New Zealand tax on their foreign income. That will close the door on the loop-hole that exists at the moment and put an end to the international tax avoiders and their high priced lawyers and accountants exploiting a hole in the New Zealand tax net.

It is expected that the measures will be included in a tax bill to be introduced by the end of the year, for enactment by July 2018.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)


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