Hard to Argue With This

Philip Macalister: Why you can trust property

By Philip Macalister

5:30 AM Sunday Jul 22, 2012
Property investors aren't likely to lose all their investment buying a house.  Photo / Christine Cornege

Property investors aren’t likely to lose all their investment buying a house. Photo / Christine Cornege

It’s often asked why New Zealanders keep investing in residential property when the returns apparently aren’t that good.

The conviction this week of two directors and the chief executive of failed finance company Capital + Merchant provides a good answer.

As we know, 7000 people placed close to $200 million of their hard-earned savings with this company.

Following its rather spectacular failure, they aren’t going to get anything back.

Their only, belated, return is that they will see these men go to jail. That may give some comfort but it does nothing to help pay the bills.

One of the lessons of the global financial crisis has been the importance of understanding what happens with your money when you invest it.

As the corpse of the failed finance company sector is picked over we are learning that the most rotten ones, the ones where directors and managers end up in court and then jail, generally were doing things with investors’ money contrary to what they were given it for.

Some of the other collapses were more systemic and a result of market conditions.

With companies like Capital + Merchant, investors were giving money to do one thing, but the company was doing something else with those funds.

This lesson about knowing what happens to your money doesn’t just relate to finance companies. There are many other examples including “engineered” financial products like collateral debt obligations (CDOs). Very few people, including highly-qualified investment gurus, could understand how these contraptions worked.

Ultimately many of them didn’t work. Investors lost their money.

This is where the simplicity of residential property investment shines through.

It’s a cliche that investors can touch, feel and see their investments. Sure there may be unpleasant aspects like dealing with recalcitrant tenants and the like. But these are problems they can see, understand and fix.

When money is put into some of these other things, like finance companies on a fixed term, it can be difficult, or impossible, to get money out quickly.

The answer to my original question – why property? – is simple. Property investors aren’t likely to lose all their investment buying a house. And for people invested in this sector at the moment the returns aren’t too bad.

Philip Macalister is the publisher of the NZ Property Investor Magazine and www.landlords.co.nz

By Philip Macalister

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And Some More Valuable Spending…

Councils fighting each other, wahoo!

From The Herald again:

Waikato ratepayers hit with big legal bills

By Nikki Preston

5:30 AM Monday Jul 23, 2012
Hamilton mayor Julie Hardaker. Photo /  Christine Cornege

Hamilton mayor Julie Hardaker. Photo / Christine Cornege

Waikato ratepayers are paying hundreds of thousands of dollars for legal advice sought by councils fighting each other and on issues from the V8s debacle down to cutting down mangroves.

The Waikato’s five largest councils – Hamilton City Council, Waikato Regional Council, Waipa District Council, Waikato District Council and Matamata-Piako District Council – spend more than $1 million a year on expert external legal costs.

The figures were supplied to the Herald under the Official Information Act.

Rest of Article

What a fantastic. use of ratepayers money!

Council PR at Ratepayer’s Cost

Ugh, just check this out from the Herald:

Auckland Council’s glossy view ‘an appalling waste’

By Wayne Thompson

5:30 AM Monday Jul 23, 2012
Some ratepayers resent the cost of The Auckland Plan. Photo / Greg Bowker

Some ratepayers resent the cost of The Auckland Plan. Photo / Greg Bowker

Auckland Council has spent $411,000 producing a glossy book about how it wants to create the world’s most liveable city by 2040.

The Auckland Plan has 380 pages as well as a 60-page addendum of projects, and makes much use of large colour pictures.

The production cost – working out at $41 a copy – was obtained from the council under the Official Information Act.

In response to Herald inquiries, the council said 10,000 copies were printed and made available free at council service centres and libraries.

They also went to Government agencies, other local authorities, universities, lobby groups and people who had offered comments on a 252-page draft plan late last year.

A northern ratepayer who wrote one of the 1140 submissions on the plan’s Urban Auckland growth chapter said last night she was disgusted to hear the book’s cost.

Rest of Article

They spend money like it’s water.

Councils Trying to Hold onto Their Control

A while ago, the then minister of local government announced a series of changes that he was going to bring in.  They were around councils getting back to their core services (instead of the long list of crap they undertake these days) and restricting rate rises to inflation etc.

But of course the councils are fighting back.  They don’t want to lose this control (they would say services they provide) over the community.  They want to be able to continue to run pretty much everything in the community – because of course, they know best.

Whale Oil provides a good commentary on this issue.

He raises a good point when he says to the local government NZ president:

The problem is, Lawrence, the people you call a “community” quite often are not the people who are paying for these nice-to-haves. So of course they’d support it being paid for by someone else.

How about advocating for a form of poll-tax, where everyone over the age of 18 pays rates to the Council, not just property owners in the guise of ratepayers?  Then you can truly claim “the community” is prepared to pay for it, because everyone would be making a contribution.

A poll tax… now I wonder how councils would like that idea…

Too Much Easy Money

What’s wrong with lots of easy money you ask?  WEll plenty actually, especially when it robs you of any purpose in your life.

Just read this (from The Telegraph):

Money and drugs: the lethal cocktail for Eva Rausing

The sad life and death of Eva Rausing highlights the damage that inherited fortunes can cause

Eva Rausing multiplied her fortune – and her troubles – a thousand times, with her marriage to Hans Kristian Rausing, joint heir to the £4.5 billion Tetra Pak fortune

Image 1 of 2
Eva Rausing multiplied her fortune – and her troubles – a thousand times, with her marriage to Hans Kristian Rausing, joint heir to the £4.5 billion Tetra Pak fortune Photo: AP

By Harry Mount

8:17PM BST 11 Jul 2012

In 1944, Evelyn Waugh wrote a letter to an old friend, Coote Lygon, saying: “I am writing a very beautiful book, to bring tears, about very rich, beautiful, high-born people who live in palaces and have no troubles except what they make themselves and those are mainly the demons, sex and drink.”

The book was Brideshead Revisited – and the chief victim of those troubles was Lord Sebastian Flyte, a human parable of what too much money, charm and entitlement can do to your health.

If Waugh was writing Brideshead now, he’d throw in a third demon – drugs. Poor Eva Rausing, who was found dead this week, was the daughter of a rich American Pepsi-Cola executive who multiplied her fortune – and her troubles – a thousand times, with her marriage to Hans Kristian Rausing, joint heir to the £4.5 billion Tetra Pak fortune. It didn’t help that they met in rehab. As they don’t teach you in maths lessons in smart public schools, Predisposition Towards Drugs + Limitless Cash = Big Trouble.

There is a third element to the equation: too much playtime. It’s the drugs that actually shut down the body; but it’s the relentless dreariness of one empty day after another, with nothing to do – except the odd charity ball committee meeting and the forever unfinished screenplay – that buttresses the need for drugs.

Patrick Melrose, the gilded drug addict and feckless anti-hero of Edward St Aubyn’s novel Some Hope, puts it well: “Heroin was the only thing that really worked, the only thing that stopped him scampering around in a hamster’s wheel of unanswerable questions. Heroin was the missing chair leg, made with such precision that it matched every splinter of the break.”

Unemployment – whether it’s standing in the dole queue, or rattling around your Cadogan Place palazzo – is a real downer. And drink and drugs are well-designed devices for momentarily banishing the lows, and for just getting through the day; even the hangovers and comedowns are a pretty good way of filling the time.

Yep, this is a cautionary tale I reckon.  Too much money, time etc. and no purpose in life is a sure way to end up in the crapper.

And yet, this is what so many people are trying to achieve i.e. earn enough money so they don’t have to work.  But what then?  What do you do when you can lie in all day?  Or drink all day?  Or not shower or not change out of your pajamas?

When you become financially independent of work, you run up against a whole bunch of questions.  Such as “What do I do now?”, “How shall I be of use to the world?”, “What’s the purpose of life?”, “If I’m not going to be the IT/Property/Investment guy who will I be?” and so on.

And it’s important to answer these questions.  Humans aren’t good at uncertainty, we need to have some kind of purpose.  And this may be as simple as putting food on the table, looking after kids etc. but it needs to be ‘enough’ for us.

 

Mandatory Licensing for Landlords

Yep, it’s true, not here, but in London.  Courtesy lovemoney.com:

Landlords hit by first mandatory licensing scheme

Christina Jordan

by Lovemoney Staff Christina Jordan on 10 July 2012  |  Comments 31 comments

One London council gets tough on rogue landlords, but is it fair that the good ones bear the brunt of the cost?

Landlords hit by first mandatory licensing scheme

A new scheme has been launched by Newham Council in East London to ensure that all properties let privately to tenants are licensed – and it’s local landlords that have to foot the bill.

It’s the first of its kind in the country and other councils are watching with interest to see if licensing is really the best way to combat sub-standard accommodation and rogue landlords.

Mountain to climb

Newham has more than its fair share of housing problems, including one of the largest numbers of illegal so-called ‘sheds with beds’ – often ramshackle structures housing whole families in unsuitable and sometimes dangerous accommodation.

In addition, the local authority recently wrote to over 1,000 housing associations across the UK to see if they could house 500 families that it can no longer support in the borough.

At the same time Newham Council wants to improve the quality of privately rented accommodation within the local area with its new licensing scheme. So how does it work?

The Newham deal

The property licensing scheme will come into force on the 1st January 2013, but all licenses must have been applied for before that date. In other words, landlords need to start applying now.

All properties will need a licence, rather than all landlords, which means that some landlords will need to get multiple licences to cover every one of their properties. There will be some 35,000 tenancies covered by the new licences – one in three of the borough’s households.

The cost of a licence is currently at a reduced rate of £150 for those who apply early, but after 1st January this will rise to £500 – for each property!

The licence lasts for up to five years, but the council can decide to limit its duration for landlords or properties where it thinks improvements need to be made. So if you are not up to scratch you may only be granted a year’s licence and told to make improvements in that time before reapplying.

Landlords who fail to apply for a licence could be subject to fines of up to £20,000 plus a rent repayment order for up to 12 months’ rental income. Ouch!

Well being a landlord of course I find this to be total BS.  How is charging landlords more going to help with their rental shortage?  All it’s going to do is add to the problem, firstly developers are going to be just that little bit less likely to build anything new since they’d get whacked with a 500 pound fee for every one they created per annum and secondly, existing landlords are just going to have to pass this cost on to their tenants.  Either that or spend less on their properties than they do now.

Either way, it just makes the situation worse, but council staff just can’t see this sort of stuff.

Inflation

Some time ago I heard Sir Ralph Norris on the radio.  He’s the ex CEO of CBA bank in Australia.

He was asked about how the current financial situation would play out, how it would be sorted out.  And his answer was that basically countries were going to have to inflate their way out of it.  Which would destroy people’s savings in the process.  So not a very attractive proposition at all.

And Bernard Hickey talks about this in his column today:

Why governments are looking for higher inflation and low interest rates to extinguish the unsustainable debt burden built up by generations spending more than they earned

Posted in Opinion July 8, 2012 – 10:05am, Bernard Hickey

By Bernard Hickey*

It’s time for me to commit heresy again by pointing out the dirty little secret of the developed world’s economic policy makers.

They are trying to engineer a modest burst of inflation to quietly devalue the debt crushing the life out of their economies.

This strategy ever so delicately rewards borrowers and punishes savers.

It’s not something central bankers and finance ministers will talk about openly, but behind closed doors this tactic is now being discussed and described as ‘Financial Repression’.

It’s a pretty sneaky trick and it goes something like this: the least disruptive way to get rid of debt is to reduce its real value by ensuring interest rates paid to term depositers and bond holders are lower than inflation.

Rest of Article

So this is kind of interesting I reckon.  I wonder how this will play out, will it go smoothly?  Or will there be all kinds of hardships, with savers being whacked and borrowers being encouraged.

Will it lead to some other kind of bubble?  With people perhaps borrowing too much?  Will a lot of people stop saving entirely?  There being no point at 0% returns and your capital being inflated away?

And the CEO Goes

Following on the footsteps of the chairman, the CEO of Barclays has stepped down.

From the Herald, this bit sums it up:

“He became a public enemy,” said George Jones, professor emeritus of government at the London School of Economics. “I think the media likes to have personalities they can make into villains. The public can understand that.

They can’t understand all this talk about LIBOR rates, but they know it was underhanded and the bankers made money.”

Yes, we don’t know the exact details but we know enough to know the hapless public were being shafted by the finance industry yet again so they could make ungodly amounts of money.  And we’re sick of it.  And we want someone held accountable.

Surely criminal prosecutions should now follow.

Libor Fallout

Well you know, they did kind of manipulate things, effectively stealing huge unkown amounts off of everyday people, so reluctantly (after all, it’s just a sort of white collar thing, it’s not like it was really anyone’s fault) the chairman of Barclays banks has decided to step down.  No doubt there’ll be a handsome exit fee paid for his troubles.

So he’ll take his massive chunk of cash and go on holiday for a while until the next cushy position comes up.

And since the public are in a bit of an outcry over this (well as much as the public ever get upset about this sort of thing), it looks like they’ll have to hold an enquiry into it.  You can tell the British government doesn’t want to, but feel they have no choice.

The public wants some action and so a few of the lucky or unlucky (depends on how you look at it) will fall on their swords and everyone will say “Right, justice has been done” and the bankers will have to work out a new way of screwing money out of your average schmo without, you know, just lending them money and charging them an interest rate.  Because you know, you can’t make any real money that way ffs!

Details Here and Here.

Property Articles

I have been reading the Sydney Morning Herald this morning and found a couple of quite interesting articles.

The first one is about the stamp duty exemption that has been in place for first home buyers, and how that is coming to an end.  And because it is, first home buyers are rushing to get deposits paid on apartments so that they can still get the stamp duty waived, which is around $20k on a $500 to $600k apartment.

This line caught my eye:

”In the last six days we sold 100 and in the last three months [we sold] 800 apartments, most of them under $600,000.”

Wow, 800 apartment sales in 3 months!  Work the commission out on that!  And it also just shows the size of the market over there.  Five times the population I guess, so that would be like selling 160 here, which is still a big number.

It’s also an interesting article because it shows what the young house buyers are looking for, something close to their work, and close to where they do their shopping and entertaining etc.  They don’t want to spend 2 hours a day on the motorway, or all weekend in the garden.  They just want something simple and easy to look after in the middle of the action.

 

The second article profiles a couple of developers and a couple of the projects they have worked on.  This article is good because it actually ‘does the numbers’ on their projects.  So you can see how much every thing has cost.

In their first development, they bought a house, knocked it down and put up 3.:

They started that project on Copeland Street in 2006 when they bought a large, dilapidated house for $775,000, before knocking it down and building three new terraces, which cost about $350,000 each. The first two sold in 2007 for $880,000 and $903,000, while the third sold in March for $1,072,000 – not a bad profit.

So that was obviously very successful, with a profit of around $1 million.  Not too shabby!

And in their second project, they converted a warehouse into 2 luxury homes.  And what’s neat about this article is that they list all their costs too.  Which is quite unusual.  You usually don’t see this.

So for instance:

Costs

Preliminaries $88,000

Demolition/rubbish removal $28,000

Excavation $18,950

Concrete $17,853

… (the whole list is in the article).

And this is quite useful stuff, and makes it all seem so real.

The other thing that was interesting about this article was this bit:

Time Planning and approval nine months, construction eight months.

So, I tend to think things can be done very quickly in Aussie, like they’re so gung-ho.  But planning took 9 months, just to convert 1 building into 2 homes.  And the construction time looks quite long too at 8 months.  I would have thought maybe 5 months for that.

In NZ the planning and approval would have taken like 12 months probably, but still I would have expected it to be like 4 months in Aussie.  Just goes to show the grass is not always greener.

And if we do the numbers on this one we get something like:

Costs

Purchase:        $1.27 million

Renovation:    $1 million approx.

Sales value at end: This is a bit of a guess, because the article says they are looking for $1.3 million for half.  So if they are both worth that, then that’s $2.6 million minimum, giving a profit of $330k.  Which is not as successful as their first project, and it has taken 17 months plus. But still, not bad.  Better than a day job I guess!

Also, they might be hoping these sell for a bit more, and of course they might do.