The last payment on one of my mortgages is due to be paid in June this year. The net cost of borrowing is currently around 2.3% which compares favourably with the margin facility currently costing about 2.9% (and compounding monthly), the yield on good quality short term bonds at around 4-5% and there are many equities which offer yields above 4%.
The other factor in favour of taking out a new mortgage is that the only storage space available for the title deeds is a filing cabinet at home – there is no room in my safe deposit box. I understand that lost title deeds cannot be replaced effectively making the property unsellable and unmortgageable. Taking out a new mortgage mitigates that risk.
The negatives are (i) the interest rate is a floating rate and will cost me more as interest rates rise and (ii) it's a P+I mortgage which will have an impact on cash flow. That said, it's a small property and the mortgage will be correspondingly small.
I'm currently inclined to take out a mortgage for a relatively small amount ... assuming the bank will lend to someone with no employment income.
Showing posts with label Real Estate. Show all posts
Showing posts with label Real Estate. Show all posts
Monday, April 30, 2018
Sunday, February 18, 2018
New Zealand's Property Market – dysfunctional by design
The affordability of housing in New Zealand or lack thereof has been the subject of endless commentary and it is undeniable that, relative to income levels, housing in parts of New Zealand, specifically Auckland, is very expensive both to buy and to rent. Demands that the government do something to make housing more affordable for buyers and renters alike have been continuous for probably the best part of a decade now. In spite of which, house prices have continued to march upwards as have rents to a much lesser degree.
Both the centre-left National government which held office until the 2017 election and the far-left Labour led coalition which subsequently took power took a number of steps with the announced intention of making housing more affordable and raising the quality of rental accommodation. These are laudable objectives. Unfortunately, the actions taken or announced by both parties have had, and were always going to have, precisely the opposite effect. Put simply, the laws of supply and demand have, time and again, proven to be more powerful than government decree.
Taxes make housing more expensive
It remains a rather inconvenient fact that capital gains taxes act as a deterrent to selling. People don't line up to pay taxes that they can legitimately avoid by not selling. New Zealand experienced this with the 1972 Labour Government's disastrous "property speculation" tax which did more to push property prices higher than the OPEC led double digit inflation of the time. Far from punishing speculators, it made them rich at the expense of people trying to get a foothold on the property ladder. The causative link between capital gains taxes and higher property prices has been a near-universal experience. Australia in the 1990s and Hong Kong over the last decade serve as other examples. There's an academic study by the Swiss National Bank which essential explains that people respond to incentives. So it should come as no surprise that when the National government introduced a two year bright line test, property prices continued higher. Labour is extending the bright line test to five years because, in the words of Revenue Minister Stuart Nash "This proposal will ensure residential property speculators pay income tax on their gains and makes property speculation less attractive." Nash is also promising a "comprehensive" capital gains tax regime. Leaving aside the fact that Nash is in ignorance of existing tax laws which make activities carried on for the purpose of making a gain taxable so that any one who carries on business as a property speculator should already paying tax, history and Economics 101 will tell us that, absent other factors, these taxes will have the opposite effect on housing prices.
The only example I can think of where capital gains taxes co-incided with lowering of property prices is Singapore. However, Singapore also introduced draconian transaction taxes on foreign buyers and domestic investors as well as ensuring a significant increase in the supply of new housing. The former would have reduced demand and the latter made more stock available to the smaller pool of potential buyers – so no surprise that prices fell.
The rental market is also subject to the law of supply and demand
New Zealand also suffers from a shortage of good quality rental accommodation at affordable rental levels. Or so politicians, the media and other groups keep telling us. And yes, there is some really awful rental stock out there. With the announced intention of either removing "unfair" tax advantages held by property investors or making sure that rental properties are warm and safe for tenants, a succession of legislative changes were made including the abolition of depreciation allowances (even though depreciation is a very real expense) and mandatory requirements for the installation of smoke detectors and insulation. We now have proposals to increase the required notice period to evict a tenant and to have an annual "warrant of fitness" requirement for rental accommodation. All of these are a significant cost which is supposedly going to be cheerfully borne by the wealthy landlords along with rates demands which seem to increase by more than the rate of inflation every year. Unfortunately, as any economics student will be able to explain in jargon-free English, increased costs lead to reduced supply. Given that some of the expenses are flat fee items rather than percentage items, the impact will be felt most acutely at the lower end of the market (i.e. where more rental accommodation is most needed). Expect to see more articles about New Zealand's Rental Crisis and the Reduction in Rental Stock as this plays out and the incentives to invest in residential real estate are inverted into disincentives.
As a real example, after paying rates, agency fees, repairs, taxes etc only 37% of the gross rent received on my single Auckland rental property ended up in my pocket. Based on the latest rates valuation, that's a yield of less than 0.6% (six tenths of one percent). And that's in a good year with 52 weeks' occupancy and no major repair bills. Even if I doubled the rent, it's still a lousy investment.
And government policy is to make the situation worse
The shiny new government's announced initiatives include scrapping a number of plans to expand existing roads or build new ones as well as building new low-cost housing areas on the far fringes of Auckland. It's not hard to predict the outcome: the already desperately congested roads will become even more congested with a combination of population growth and people having to commute longer distances to work adding to the number of cars on the roads. The uncosted light railway to Auckland Airport will be an ultra-expensive irrelevance to almost all commuters.
And the proposed prohibition on foreign investment in New Zealand residential property, the one thing the Labour government promised which would have had some impact on the demand for property is, I am told, being reconsidered.
Short version
Investing in rental property in New Zealand is discouraged as a matter of government policy and government practice. Expect to see rental accommodation continue to become more expensive and harder to find as rational investors invest elsewhere.
As an investor myself, I have abandoned plans to invest further in New Zealand residential property but will keep my existing property as a store of wealth and a portfolio diversifier in spite of the almost non-existent yield.
Both the centre-left National government which held office until the 2017 election and the far-left Labour led coalition which subsequently took power took a number of steps with the announced intention of making housing more affordable and raising the quality of rental accommodation. These are laudable objectives. Unfortunately, the actions taken or announced by both parties have had, and were always going to have, precisely the opposite effect. Put simply, the laws of supply and demand have, time and again, proven to be more powerful than government decree.
Taxes make housing more expensive
It remains a rather inconvenient fact that capital gains taxes act as a deterrent to selling. People don't line up to pay taxes that they can legitimately avoid by not selling. New Zealand experienced this with the 1972 Labour Government's disastrous "property speculation" tax which did more to push property prices higher than the OPEC led double digit inflation of the time. Far from punishing speculators, it made them rich at the expense of people trying to get a foothold on the property ladder. The causative link between capital gains taxes and higher property prices has been a near-universal experience. Australia in the 1990s and Hong Kong over the last decade serve as other examples. There's an academic study by the Swiss National Bank which essential explains that people respond to incentives. So it should come as no surprise that when the National government introduced a two year bright line test, property prices continued higher. Labour is extending the bright line test to five years because, in the words of Revenue Minister Stuart Nash "This proposal will ensure residential property speculators pay income tax on their gains and makes property speculation less attractive." Nash is also promising a "comprehensive" capital gains tax regime. Leaving aside the fact that Nash is in ignorance of existing tax laws which make activities carried on for the purpose of making a gain taxable so that any one who carries on business as a property speculator should already paying tax, history and Economics 101 will tell us that, absent other factors, these taxes will have the opposite effect on housing prices.
The only example I can think of where capital gains taxes co-incided with lowering of property prices is Singapore. However, Singapore also introduced draconian transaction taxes on foreign buyers and domestic investors as well as ensuring a significant increase in the supply of new housing. The former would have reduced demand and the latter made more stock available to the smaller pool of potential buyers – so no surprise that prices fell.
The rental market is also subject to the law of supply and demand
New Zealand also suffers from a shortage of good quality rental accommodation at affordable rental levels. Or so politicians, the media and other groups keep telling us. And yes, there is some really awful rental stock out there. With the announced intention of either removing "unfair" tax advantages held by property investors or making sure that rental properties are warm and safe for tenants, a succession of legislative changes were made including the abolition of depreciation allowances (even though depreciation is a very real expense) and mandatory requirements for the installation of smoke detectors and insulation. We now have proposals to increase the required notice period to evict a tenant and to have an annual "warrant of fitness" requirement for rental accommodation. All of these are a significant cost which is supposedly going to be cheerfully borne by the wealthy landlords along with rates demands which seem to increase by more than the rate of inflation every year. Unfortunately, as any economics student will be able to explain in jargon-free English, increased costs lead to reduced supply. Given that some of the expenses are flat fee items rather than percentage items, the impact will be felt most acutely at the lower end of the market (i.e. where more rental accommodation is most needed). Expect to see more articles about New Zealand's Rental Crisis and the Reduction in Rental Stock as this plays out and the incentives to invest in residential real estate are inverted into disincentives.
As a real example, after paying rates, agency fees, repairs, taxes etc only 37% of the gross rent received on my single Auckland rental property ended up in my pocket. Based on the latest rates valuation, that's a yield of less than 0.6% (six tenths of one percent). And that's in a good year with 52 weeks' occupancy and no major repair bills. Even if I doubled the rent, it's still a lousy investment.
And government policy is to make the situation worse
The shiny new government's announced initiatives include scrapping a number of plans to expand existing roads or build new ones as well as building new low-cost housing areas on the far fringes of Auckland. It's not hard to predict the outcome: the already desperately congested roads will become even more congested with a combination of population growth and people having to commute longer distances to work adding to the number of cars on the roads. The uncosted light railway to Auckland Airport will be an ultra-expensive irrelevance to almost all commuters.
And the proposed prohibition on foreign investment in New Zealand residential property, the one thing the Labour government promised which would have had some impact on the demand for property is, I am told, being reconsidered.
Short version
Investing in rental property in New Zealand is discouraged as a matter of government policy and government practice. Expect to see rental accommodation continue to become more expensive and harder to find as rational investors invest elsewhere.
As an investor myself, I have abandoned plans to invest further in New Zealand residential property but will keep my existing property as a store of wealth and a portfolio diversifier in spite of the almost non-existent yield.
Wednesday, August 20, 2014
Mrs Traineeinvestor goes shopping
Mrs Traineeinvestor (aka my better 99%) purchased a carparking space yesterday. While the price of carparks is (IMHO) very expensive, in relative terms, she got a very good deal. Carparks in our building rarely come on the market - the last transaction was in 2013 at $X and the vendor of the only one currently offered is asking $X+25%. Mrs Traineeinvestor's purchase was in a good building in the same area at about half $X.
While I still view the price paid as high, current changes in the neighbourhood will likely make the supply shortage even more accute in the not too distant future.
The net yield on gross cost is about 2.2% - not great but better than bank deposits.
While I still view the price paid as high, current changes in the neighbourhood will likely make the supply shortage even more accute in the not too distant future.
The net yield on gross cost is about 2.2% - not great but better than bank deposits.
Thursday, June 19, 2014
Tenant rollover
Due to extenuating personal circumstances, I allowed a tenant to break a lease early. I was very pleased to find a new tenant for the same rental within less than a week of putting the property on the market. As a result, I am only out of pocket the cost of cleaning the unit and a half share of the stamp duty on the new lease (which I could have deducted from the tenant's deposit but decided not to).
Makes me wonder whether all the claims of falling rental levels are all that reliable or whether I am under renting the unit?
Makes me wonder whether all the claims of falling rental levels are all that reliable or whether I am under renting the unit?
Wednesday, February 19, 2014
Hong Kong Property - Tai Kok Tsui
On Tuesday, I had the good fortune to be provided with a brief tour of Tai Kok Tsui/Olympic area by Dr Bubb from GEI. While I had some familiarity with the area, it was a very informative tour and I have a much better understanding of how rapidly the area is gentrifying and the potential for that process to continue.
From an investment perspective, if it were not for the double stamp duty, I would have been sorely tempted to do further due diligence into some smaller residential units and smaller street level retail units in older buildings. The combination of affordability in absolute terms and the process of gentrification are very appealing. Unfortunately, at this time the combination of low yields and punitive stamp duties are something of a deterrent.
I will be keeping a close eye on this area. If prices revert to levels which provide decent real returns and/or the anti-investment stamp duties imposed by the HKSAR government are removed, I would put this area at the top of my list of places to invest.
For those interested in this area, Dr Bubb has created a thread on the GEI website.
From an investment perspective, if it were not for the double stamp duty, I would have been sorely tempted to do further due diligence into some smaller residential units and smaller street level retail units in older buildings. The combination of affordability in absolute terms and the process of gentrification are very appealing. Unfortunately, at this time the combination of low yields and punitive stamp duties are something of a deterrent.
I will be keeping a close eye on this area. If prices revert to levels which provide decent real returns and/or the anti-investment stamp duties imposed by the HKSAR government are removed, I would put this area at the top of my list of places to invest.
For those interested in this area, Dr Bubb has created a thread on the GEI website.
Thursday, November 28, 2013
The expected downside of property ownership
I like property as an asset class - security, leverage, cash flow. It helps that all of my property investments have done well (with the exception of one lemon purchased in the 1990s). But like all investments it has its downside and I am experiencing some issues:
1. house in New Zealand: this has been a great investment, It has (probably) at least doubled in value, my current tenants have been there for about six years now (I think) and it has always been cash flow positive. But ... it's a house and houses have roofs and roofs need to be repaired from time to time and for this house that time is now (some other work will be done at the same time). In synch with the roof needing repairs, a water pipe burst and I have go a repair bill for that as well. None of this is covered by insurance. The bottom line - most of the net rent between now and March will be used to settle these bills. The good news is that the tenants wish to stay while this is being done. The better news is that rents have been rising in Auckland so I should be able to get a rent increase early 2014 once the work has been done.
2. window inspection on apartments in Hong Kong: two units have received notices for mandatory window inspection. The cost for the first one is $600. The second one will be a bit more as it is a larger unit. If I have to replace any windows, that would potentially cost HK$10-15,000 depending on which window(s) need to be done. Rather oddly, I have not received a notice for my oldest unit - I assume the government is doing some kind of roster and I will get one in due course.
3. vacancies: the bane of every property investor's existence. I have been very fortunate to have gone for such a long period without a vacancy. I was particularly fortunate that the tenant of one property agreed to stay on at a reduced rental while building renovation work was being carried on. That happy state of affairs will come to an end in mid-February 2014 as a tenant has just exercised her right of early termination (nothing to do with rent levels). I will find out then how far rents have fallen.
In the overall scheme of things, these are trivial matters and ones which every property investor needs to allow for when making investment decisions.
1. house in New Zealand: this has been a great investment, It has (probably) at least doubled in value, my current tenants have been there for about six years now (I think) and it has always been cash flow positive. But ... it's a house and houses have roofs and roofs need to be repaired from time to time and for this house that time is now (some other work will be done at the same time). In synch with the roof needing repairs, a water pipe burst and I have go a repair bill for that as well. None of this is covered by insurance. The bottom line - most of the net rent between now and March will be used to settle these bills. The good news is that the tenants wish to stay while this is being done. The better news is that rents have been rising in Auckland so I should be able to get a rent increase early 2014 once the work has been done.
2. window inspection on apartments in Hong Kong: two units have received notices for mandatory window inspection. The cost for the first one is $600. The second one will be a bit more as it is a larger unit. If I have to replace any windows, that would potentially cost HK$10-15,000 depending on which window(s) need to be done. Rather oddly, I have not received a notice for my oldest unit - I assume the government is doing some kind of roster and I will get one in due course.
3. vacancies: the bane of every property investor's existence. I have been very fortunate to have gone for such a long period without a vacancy. I was particularly fortunate that the tenant of one property agreed to stay on at a reduced rental while building renovation work was being carried on. That happy state of affairs will come to an end in mid-February 2014 as a tenant has just exercised her right of early termination (nothing to do with rent levels). I will find out then how far rents have fallen.
In the overall scheme of things, these are trivial matters and ones which every property investor needs to allow for when making investment decisions.
Tuesday, October 29, 2013
Lease renewed
I have just renewed the lease on one of my properties. As this was the highest rental stream in the portfolio it was a relief to sign the tenant up for another two years (with break clause) at a rent that was only (approximately) two percent below the old rent. While the new rent is (probably) a little below the current market, I am still much better off having the unbroken cash flow from a lower rent than getting a higher rent after a short vacancy and incurring all the usual costs involved in renting to a new tenant.
While it is inevitable that there will be vacancies from time to time, starting my retirement with full occupancy on the Hong Kong properties (and having one mortgage free) is a nice.
While it is inevitable that there will be vacancies from time to time, starting my retirement with full occupancy on the Hong Kong properties (and having one mortgage free) is a nice.
Wednesday, September 25, 2013
China's ghost cities not so ghostly
A huge amount has been written about China's real estate "bubble". While a lot of what is written can be dismissed as the frothy ramblings of permabears who see bubbles everywhere, there have been a number of points of legitimate concerns about China's housing market. One claim which I have always had difficulty reconciling with the China's urbanisation (and rational financial behaviour by investors) is the reports of "ghost cities" - large scale residential developments with associated retail shopping malls and other facilities which appear to be empty.
There is little room to dispute the fact that there are a lot of recently completed developments which are empty. However, it Nicole Wong of CLSA has provided a rational explanation for this phenomena - in China new developments are sold as empty shells and it typically takes about three years for a development to reach a point where it has a substantial level of occupancy. Since she visited 137 projects on a recent trip, it can be safely assumed that her position is supported by first hand observation (i.e. it is not just some random theory).
Further details and explanations are here.
While there are aspects of the Chinese real estate market which remain of concern, I am now have a reason for dismissing the "ghost city" claims.
There is little room to dispute the fact that there are a lot of recently completed developments which are empty. However, it Nicole Wong of CLSA has provided a rational explanation for this phenomena - in China new developments are sold as empty shells and it typically takes about three years for a development to reach a point where it has a substantial level of occupancy. Since she visited 137 projects on a recent trip, it can be safely assumed that her position is supported by first hand observation (i.e. it is not just some random theory).
Further details and explanations are here.
While there are aspects of the Chinese real estate market which remain of concern, I am now have a reason for dismissing the "ghost city" claims.
Tuesday, May 14, 2013
New lease signed - 12.8% increase
One of my tenants has decided to vacate at the end of May. The agent was instructed to advertise the property for rent on Thursday and a new tenant signed a provisional agreement last night.
The good news is that the new rent is 12.8% higher than the old rent.
The bad news is that I am not actually any better off because:
I would have been better off keeping the existing tenant at the old rental (which was not an option).
Still, it could be worse - I could have had an extended vacancy or a smaller rent increase.
The good news is that the new rent is 12.8% higher than the old rent.
The bad news is that I am not actually any better off because:
- there will be a five week vacancy between tenancies
- I have to pay the agent
- I have to pay the stamp duty
- I have to pay for the flat to be repainted, for the airconditioning units to be cleaned and some other minor touch up work
I would have been better off keeping the existing tenant at the old rental (which was not an option).
Still, it could be worse - I could have had an extended vacancy or a smaller rent increase.
Monday, April 29, 2013
Lease renewal
With property prices having fallen somewhat on very light volume and at least some people predicting much bigger declines to come, my attention has been on the leasing market. As a long term property investor, it is far more important to me to maintain occupancy than to extract the maximum fair market rent.
With that objective in mind, I have just agreed to renew a lease at an increased rental of 4.8%. Based on recent comparables (not many in this building), I had assesses the market rent as being slightly higher and would have represented a rental increase of 7.1%. However, if the tenant had not signed up for a new lease, I would have been faced with a vacancy of uncertain duration, at least some redecoration costs as well as agency commission. Settling for a little less than market rent to keep the tenant for another two years was unquestionably the right thing to do.
With that objective in mind, I have just agreed to renew a lease at an increased rental of 4.8%. Based on recent comparables (not many in this building), I had assesses the market rent as being slightly higher and would have represented a rental increase of 7.1%. However, if the tenant had not signed up for a new lease, I would have been faced with a vacancy of uncertain duration, at least some redecoration costs as well as agency commission. Settling for a little less than market rent to keep the tenant for another two years was unquestionably the right thing to do.
Friday, April 19, 2013
Cutting the rent during renovation work
I have previously posted about the levy for refurbishment of one of the buildings in which I own a flat. It turns out that the work is very extensive (which I should have expected from the size of the levy) and will including putting opaque plastic covers on all the windows for a few weeks, scaffolding over the entire building for a few months, retiling the exterior and removal of the air conditioning units for a while. The entire project is expected to take about six months.
Quite frankly, I couldn't blame the tenant if he wanted to move out. And he did consider it. And I would have agreed to early termination if he'd asked for it. It would have been unconscionable to hold a tenant to a lease in these circumstances. Given that it would be impossible to rent the flat to a new tenant while all this was going on and I would have to repaint the interior (and probably do a few other things) before a new tenant would move in, I offered to cut his rent by one third while all this was going on. He was happy to agree to that arrangement - a "win" for both parties. The tenant has a lower rent to compensate for the inconvenience and I will have at least some rental income instead of a vacancy and a redecoration bill.
Quite frankly, I couldn't blame the tenant if he wanted to move out. And he did consider it. And I would have agreed to early termination if he'd asked for it. It would have been unconscionable to hold a tenant to a lease in these circumstances. Given that it would be impossible to rent the flat to a new tenant while all this was going on and I would have to repaint the interior (and probably do a few other things) before a new tenant would move in, I offered to cut his rent by one third while all this was going on. He was happy to agree to that arrangement - a "win" for both parties. The tenant has a lower rent to compensate for the inconvenience and I will have at least some rental income instead of a vacancy and a redecoration bill.
Wednesday, April 10, 2013
Is fire insurance really necessary?
For many buildings the question does not arise at all - the cost of fire insurance for an apartment is included in the monthly management fees and you have to pay it. However, some buildings do not have block insurance and it is up to the individual owners to arrange their own fire insurance if they wish. If the property is mortgaged, the bank will insist on coverage at least equal to the amount of the outstanding insurance policy (and will steer you in the direction of their own insurance company).
One of my properties has no block insurance so the bank required me to take out a fire insurance policy equal to the amount of the mortgage loan. With the last mortgage payment falling due at the end of this month, I have been debating whether or not to continue to pay for fire insurance going forward.
The amount is not large but it is still an expense that I do not believe confers any real value. The possibility of a fire sufficiently large to damage my flat in an adequately maintained building is, in my view, remote. Accordingly, I have cancelled the policy.
One of my properties has no block insurance so the bank required me to take out a fire insurance policy equal to the amount of the mortgage loan. With the last mortgage payment falling due at the end of this month, I have been debating whether or not to continue to pay for fire insurance going forward.
The amount is not large but it is still an expense that I do not believe confers any real value. The possibility of a fire sufficiently large to damage my flat in an adequately maintained building is, in my view, remote. Accordingly, I have cancelled the policy.
Monday, March 18, 2013
The downside of property ownership
Property has been a wonderful asset class for us. Cash comes in on a regular basis. Values go up. Mortgages amortise. Of course, there is no such thing as a free lunch. In addition to the high capital cost, periodic vacancies and the regular outgoings (rates running repairs), from time to time there will more substantial outgoings either for a major interior redecoration or a levy for building upgrades.
I have recently been hit with three such bills:
1. a building upgrade levy of HK$72,000
2. a building upgrade levy of HKD221,000
3. a bill for rectifyingan illegal non-compliant structure (same property as #2): HKD18,000
As far as the building levys are concerned, these are to be expected from time to time and are a necessary cost of maintaining the properties in good condition. Based on previous experience, a building levy will tend to enhance both the capital value and the rental income of a property (but will not outweigh movements in the market generally). Although I may bemoan the disruption to cash flow and the expense generally, I am fully aware that I am better off with the upgrade being done than not having an upgrade. However, I wish that building managers would add a little bit more to the monthly management fee and create a sinking fund for this type of work rather than hit us with these large one off bills.
The non-compliant structure came as a surprise. The structure concerned is the same for a number of flats in the building and pre-dates my purchase. It was discovered when the quotes for the building upgrade project were being obtained.
I have recently been hit with three such bills:
1. a building upgrade levy of HK$72,000
2. a building upgrade levy of HKD221,000
3. a bill for rectifying
As far as the building levys are concerned, these are to be expected from time to time and are a necessary cost of maintaining the properties in good condition. Based on previous experience, a building levy will tend to enhance both the capital value and the rental income of a property (but will not outweigh movements in the market generally). Although I may bemoan the disruption to cash flow and the expense generally, I am fully aware that I am better off with the upgrade being done than not having an upgrade. However, I wish that building managers would add a little bit more to the monthly management fee and create a sinking fund for this type of work rather than hit us with these large one off bills.
The non-compliant structure came as a surprise. The structure concerned is the same for a number of flats in the building and pre-dates my purchase. It was discovered when the quotes for the building upgrade project were being obtained.
Wednesday, December 12, 2012
No more bank consent letters
For a long time it has been my practice to obtain the consent of the bank holding the mortgage over a property whenever I lease the property out. Sometimes (not always) tenants will ask for a written confirmation from the bank and I have always been happy to obtain it (although it usually takes about two weeks which means it sometimes arrives after the tenancy has commenced).
Today I received a call from one of the banks and was informed that they are now charging HKD1,000 to issue approval letters. My response was that I would not be paying that charge and, going forward, would not be seeking bank consent for any new tenancies. The bank officer confirmed that he would cancel the request and that the bank did not require me to obtain bank consents for new leases.
This is fine from my perspective but it means that if any future tenant wants a bank consent letter, the tenant will have to pay the charge. I will not be.
Today I received a call from one of the banks and was informed that they are now charging HKD1,000 to issue approval letters. My response was that I would not be paying that charge and, going forward, would not be seeking bank consent for any new tenancies. The bank officer confirmed that he would cancel the request and that the bank did not require me to obtain bank consents for new leases.
This is fine from my perspective but it means that if any future tenant wants a bank consent letter, the tenant will have to pay the charge. I will not be.
Thursday, December 06, 2012
New lease signed
The tenant for one of my properties elected not to renew the lease when the term expired in November. In some ways, this was something of an important first test of how the rental market was holding up in the face of the government's cooling measures (primarily directed at sale and purchase transactions) and the redundancies which have hit the financial sector quite heavily this year. It didn't help that a brand new building in very close proximity had recently come on the market providing a good supply of brand new units with which I had to compete.
In the end, two similar offers came in at about the same time and I was able to sign a new provisional agreement at the same rent as the previous tenant was paying. The vacancy period is five weeks (which is about average) and after five years since the last substantive redecoration, the cosmetic tidy up work was about what I expected - some repainting, minor repairs etc.
In the end, two similar offers came in at about the same time and I was able to sign a new provisional agreement at the same rent as the previous tenant was paying. The vacancy period is five weeks (which is about average) and after five years since the last substantive redecoration, the cosmetic tidy up work was about what I expected - some repainting, minor repairs etc.
Monday, October 29, 2012
Extreme cooling measures
As countries which have lived beyond their means through excessive spending attempt to print their way out of economic trouble, they have created a huge supply liquidity in global markets. Higher asset prices and inflation have been predictable consequences. In the case of some property markets, we have also seen a relentless surge in demand for real assets from the growing number of PRC HNWIs. Hong Kong's property market has surged as a result, making housing less affordable for local residents.
The government's previous attempts to cool the market through tighter borrowing restrictions and a special stamp duty on owners who resold within two years of purchase failed to stop prices from increasing (and may have actually contributed to subsequent increases). Higher deposit requirements certainly made housing less affordable for locals seeking to get on to the property ladder.
The latest measures increase and extend the special stamp duty to cover sales made within three years from the date of purchase. This will achieve nothing except reducing the supply in the secondary market. Given that the effect of the original special stamp duty was much the same and has been widely commented on, the government must know this which leaves figuring out why they did something which is widely known to have the opposite effect from what the government claim as an exercise for conspiracy theorists.
The 15% tax on buyers who are not Hong Kong permanent residents is one of the few times that Hong Kong has openly discriminated againts foreign buyers (investments in broadcasting telecommunications and the loyalty bonus for subscribers in the Tracker (HK:2800) IPO being others). It is clearly targeted at PRC buyers who have made their presence felt in the local market although it also catches local buyers who buy through a company.
Logic tells me that the 15% foreign buyer tax will deter at least some of the PRC buyers which will be negative both for property prices in general and for developers. On the other hand, they have created a situation were foreign buyers will be less willing to sell their properties. My HK$0.02 worth is that the combined effect of less demand and increased supply (more flats are being built) will, at the very least, take the heat out of the market and may actually result in a dip in prices.
A couple of further thoughts. The first is that the comercial and industrial sectors are running red hot as investors turn to these markets because they are not subject to special stamp duty or foreign ownership taxes. There has already been some bleating about locals being priced out of these markets and how higher rentals make it hard for local businesses (although it is not at all clear how the two are connected). The second is that local buyers will have to buy in their own names instead of through a company - because companies and individuals are taxed on a different basis, this amounts to a tax increase on property investors.
The government's previous attempts to cool the market through tighter borrowing restrictions and a special stamp duty on owners who resold within two years of purchase failed to stop prices from increasing (and may have actually contributed to subsequent increases). Higher deposit requirements certainly made housing less affordable for locals seeking to get on to the property ladder.
The latest measures increase and extend the special stamp duty to cover sales made within three years from the date of purchase. This will achieve nothing except reducing the supply in the secondary market. Given that the effect of the original special stamp duty was much the same and has been widely commented on, the government must know this which leaves figuring out why they did something which is widely known to have the opposite effect from what the government claim as an exercise for conspiracy theorists.
The 15% tax on buyers who are not Hong Kong permanent residents is one of the few times that Hong Kong has openly discriminated againts foreign buyers (investments in broadcasting telecommunications and the loyalty bonus for subscribers in the Tracker (HK:2800) IPO being others). It is clearly targeted at PRC buyers who have made their presence felt in the local market although it also catches local buyers who buy through a company.
Logic tells me that the 15% foreign buyer tax will deter at least some of the PRC buyers which will be negative both for property prices in general and for developers. On the other hand, they have created a situation were foreign buyers will be less willing to sell their properties. My HK$0.02 worth is that the combined effect of less demand and increased supply (more flats are being built) will, at the very least, take the heat out of the market and may actually result in a dip in prices.
A couple of further thoughts. The first is that the comercial and industrial sectors are running red hot as investors turn to these markets because they are not subject to special stamp duty or foreign ownership taxes. There has already been some bleating about locals being priced out of these markets and how higher rentals make it hard for local businesses (although it is not at all clear how the two are connected). The second is that local buyers will have to buy in their own names instead of through a company - because companies and individuals are taxed on a different basis, this amounts to a tax increase on property investors.
Friday, October 12, 2012
IMF - No housing bubble in Hong Kong
This link from AA Stocks quotes the IMF's Hong Kong representative saying that "Hong Kong has not seen any bubble yet despite stubbornly high property prices. While I'm happy to see support for the position I took back in March, I still regard the market as being expensive and poor value. I have no plans to add to the portfolio at current prices. Nor do I have any plans to sell - I'm quite happy to collect the rent and see the mortgages get paid down each month. Part of me says that a nice big correction would be a welcome opportunity to buy again although whether the banks would lend to someone with no income from employment may be something of an issue.
Monday, September 17, 2012
HKMA continues to squeeze the property market
The HKMA's latest round of measures intended to cool the property market by further restricting mortgage lending are unlikely to have much impact for the simple reason that so many properties are being purchased with cash and the impact of QE3 combined with China's monetary expansion means that there is plenty of very liquid buyers out there.
As with most of the previous measures, the two groups of people most affected as local owner-occupiers prevented from trading up because they can no longer get the financing and smaller investors who need mortgage financing to add to their portfolios. In effect, what the HKMA is doing (when combined with other government measures) is reducing the competition the very wealthy face when buying properties.
While it would now be more difficult to get mortgage financing for any new investment properties, since I was not planning to buy again at current price levels, this does not affect me. What it does do is reinforce my decision not to make any early repayments on my existing mortgages.
As with most of the previous measures, the two groups of people most affected as local owner-occupiers prevented from trading up because they can no longer get the financing and smaller investors who need mortgage financing to add to their portfolios. In effect, what the HKMA is doing (when combined with other government measures) is reducing the competition the very wealthy face when buying properties.
While it would now be more difficult to get mortgage financing for any new investment properties, since I was not planning to buy again at current price levels, this does not affect me. What it does do is reinforce my decision not to make any early repayments on my existing mortgages.
Tuesday, June 12, 2012
Building refurbishment levy
Yesterday I received a notice that one of the buildings I own an apartment in is going to have some restoration work done to the exterior and common areas. The building in question is not over forty years old and has been well maintained over the years - the last substantial work was done in 2003/2004 and was being completed at around the time I purchased the property.
As a landlord, this affects me in three ways:
As a landlord, this affects me in three ways:
- I will have to pay a building levy in two installments - half now and half in December. This is the equivalent of four months of net of outgoings rent
- while the work is being carried out there will be disruption to the occupants of the building - scaffolding, workers in the common areas, noise etc. Depending on the timing of the work this may affect any vacancy that may arise or the amount of rent I am able to negotiate
- in the longer term, the work will enhance the appearance of the building and help it to maintain its value and its appear to prospective tenants
Tuesday, June 05, 2012
Property regulation - New Zealand style
Much has been written about the efforts by the Hong Kong government to control increases in the prices of Hong Kong residential property prices - punitive stamp duty rates and more restricted access to mortgage finance.
Other countries have adopted similar measures, including China, Singapore and New Zealand. Given the sate of the New Zealand economy you would have thought that they would be doing everything possible to encourage investment. Sadly not - not only does New Zealand have a set of tenancy laws which are drafted and administered on the principle that landlords are evil parasites and tenants their innocent victims, not only do rates demands (local property taxes) march inexorably upwards each year at rates far beyond either inflation or rental increases but they have now decided that landlords should not be able to claim depreciation on their buildings. Given the already dismal yields, you either have to take a very long term view or conclude that your money is better off invested elsewhere. All this on top of an increase in GST which bumps up my expenses with no corresponding increase in income.
I've concluded that it is very difficult to justify further investment in New Zealand real estate and that investing in shares is a better proposition (much like Hong Kong at the moment, although for different reasons). Given how few companies that I would be interested in are listed in New Zealand, it is more likely that the money will end up in Australia....effectively New Zealand government policy has pushed my money offshore.
And in case you were wondering what set off this rant - I have just done my New Zealand tax return for 2011/2012 and found that due to the elimination of building depreciation my tax bill has gone up by 126 percent.
Quite frankly, it would almost be rational to sell up and move on but the properties still appeal as a long term store of value that will at least throw off enough after tax income to cover some of the costs of time spent in New Zealand each year. Put differently, the one positive from all of this is that the same policies which are squeezing the landlords are also discouraging new investment in a city which has a growing population.
Other countries have adopted similar measures, including China, Singapore and New Zealand. Given the sate of the New Zealand economy you would have thought that they would be doing everything possible to encourage investment. Sadly not - not only does New Zealand have a set of tenancy laws which are drafted and administered on the principle that landlords are evil parasites and tenants their innocent victims, not only do rates demands (local property taxes) march inexorably upwards each year at rates far beyond either inflation or rental increases but they have now decided that landlords should not be able to claim depreciation on their buildings. Given the already dismal yields, you either have to take a very long term view or conclude that your money is better off invested elsewhere. All this on top of an increase in GST which bumps up my expenses with no corresponding increase in income.
I've concluded that it is very difficult to justify further investment in New Zealand real estate and that investing in shares is a better proposition (much like Hong Kong at the moment, although for different reasons). Given how few companies that I would be interested in are listed in New Zealand, it is more likely that the money will end up in Australia....effectively New Zealand government policy has pushed my money offshore.
And in case you were wondering what set off this rant - I have just done my New Zealand tax return for 2011/2012 and found that due to the elimination of building depreciation my tax bill has gone up by 126 percent.
Quite frankly, it would almost be rational to sell up and move on but the properties still appeal as a long term store of value that will at least throw off enough after tax income to cover some of the costs of time spent in New Zealand each year. Put differently, the one positive from all of this is that the same policies which are squeezing the landlords are also discouraging new investment in a city which has a growing population.
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