What does it all mean?

Ok, the dust has settled a little after the election process, it's been an interesting time trying to work out what impact Labours policies on housing will have on investors.

I have deliberately been avoiding commenting earlier, as there has been very little actual detail available and to be fair that is still the case on most of the main points.

However, lets look at the main areas of concern for investors.

1. Capital gains tax - whether or not this actually comes into force is yet to be seen, however, if it does, it will not be implemented until their next term in power, so we have a 3yr reprieve. It is interesting to note that Capital gains tax is alive and well in most other developed countries and has very little to do with the property market per se. It is simply a tax gathering exercise. The side effect of a Capital Gains tax, it's that it tends to create a "lock in effect" IE investors won't sell - which by default would suggest that there will be less stock on the market, less stock creates demand, demand pushes prices up... As night follows day.

2. Brightline test - which is in effect a quasi capital gains tax, this will be extended from the current 2yrs to 5yrs. It is not likely to be applied retrospectively. Personally, my belief is that this will have little impact on investors, who should be by default engaged in a mid to long term hold pattern. One of the most common mistakes that many investors make is selling too early, so this rule may create a more disciplined holding behavior.

3. Banning foreign speculators from buying existing New Zealand homes. This policy aims to remove from the market foreign speculators who could potentially push prices out of reach of first home buyers. Note that Australians are exempt under this policy. This is expected to come into force in early 2018. The general consensus, however appears to be that this will have little impact on the housing market, some report showing that foreign buyers make up less than 3% of all property transactions.

4. Ring fencing losses - this is by far the most discussed policy by investors and is likely to have the greatest impact.

As you will know, the intention is to remove the ability to offset losses from investment properties against your taxable income, and will be staged over a 5 year time frame.

Many new investors are highly geared and rely on these rebates to assist their cash flow. Those that have larger portfolios, containing a mix of both positive and negatively geared properties, will manage better, it is the new investor, highly geared and under capitalised that may suffer.

So what to do?

First - to not panic. Five years gives some time to plan.

Build up buffers - perhaps that increased equity that may have gone into a another deposit should now be kept aside as a buffer. Yes, this means that you are using debt to fund debt, however if applied in a growth market, over time the gains should outstrip the costs. So the key focus here is to purchase in strong growth locations.

Also, if the "cost of providing" rental accomodation increases, then it is fair to assume that the end user "the tenant" will eventually be expected to pay more in rent.

The minimum wage is being increased, they will have more disposable income.

Ensure you have a debt management process in place, reviewing interest rates and terms, so that you are not left with all your debt locked away, at higher rates in the event of a lower interest rate market. Equally of course interest rates may increase, however, there seems to be a fairly consistent feeling amongst those in the industry that rates are not likely to gallop away from us any time soon.

5. Will the market slow down? Is the growth over?

I've had a number of people asking this question. I think that the key thing to remember is that property has always been cyclical in its growth patterns. Auckland in particular has been due to flatten off and so that can not really be directly related to these changes. So, yes, we may see a general slow down, however its to be expected, the impact of the LVR rules, the tightening servicing criteria of the banks, have all contributed to this.

In this last growth cycle, Auckland (overall) saw a increase in values of 52% - however the cycle from 2002 - 2007 saw 86% growth. There is still a huge under supply of housing in Auckland. 60% of people coming into NZ, stay in Auckland.

I've seen a number of headlines - for example

"House prices could drop as much as 10 or 13 per cent over the next three years, it has been predicted".

However, when you balance that against the very strong growth that has taken place in some locations over the last 4-5 years, the headline is not really that dramatic at all.

CoreLogic head of research Nick Goodall said he was unconvinced prices would drop substantially. For prices to fall, owners would have to be forced to sell.

So to wrap up:

1. Look for undervalued markets to purchase in, for example the Wellington market has historically performed well under a labor government and it still relatively well priced.

2. Consider counter cyclical markets - Christchurch has been through a flat couple of years, the inner city rebuild has really taken off and with the increase of workers, we would expect to see the current trend change. There is also the advantage of well priced new property close to the CBD for prices that Aucklanders would struggle to believe..

3. Keep in mind that this is a long term game.

4. Build up buffers.

5. Look for opportunity and finally...

DO NOT BASE YOUR INVESTMENT STRATEGY ON MEDIA HEADLINES !!