NZ economy slips deeper into recession

What a difference can be in a week. Last week mark the tell tale sign of New Zealand economy slips deeper into recession. Well, truth is the recession is gathering momentum for the past year. Since financial crisis in finance sector of the economy, over 20 finance companies have closed door due to run in deposit. One by one they fall like dominoes. When property companies and house buyers face trouble, their lenders would also face trouble. This has been going on for the past year. Now it get worse.
Last week mark a new day. A property investment fund, AMP Capital New Zealand freezes money because of a run on investment. ie more people withdrawing than people join and invest.

READ HERE

Then New Zealand dollar, the kiwidollar as they fondly call it in forex market fall vis-a-vis USD from 75cent to 72cent.

The Reserve Bank Governor has lowerwed the benchmark interest rate by 25 basis point last week. That contribute to lower kiwidollar as the difference with other currencies interest rate is less, make it less attractive.

Over the weekend, the opposition leader fight back.

Yesterday, Opposition leader John Key announced a raft of tax cut and Govt infrastructure spending to the tune of NZ$5billion to kickstart the economy should National Party get elected. Very Keynesian.
About time and probably that just what we need to kickstart the economy. Job losses is predicted to hit 45000 by next quarter, and unemployment is predicted to hit 5%.

Meanwhile, it has been raining cats and dogs here for the past week.

Property investors' tax breaks may go

This may well be the trigger to cooling off the hot property market.



Jun 20, 2007

Finance Minister Michael Cullen is considering scrapping tax breaks available to property investors in a controversial bid to cool the runaway housing market.

Peter Trapp is one of the 200,000 Kiwis with a rental property and always has his eye out for a good property deal.

It can be lucrative. Even if you lose money on the rental property you're eligible for tax breaks. Trapp says that's fair enough.

"All businesses should be able to claim on expenses and pay taxes on the profits," he says.

Here is how the current system works. Supposing you earn $100,000 a year and buy a rental property. If the rent you're getting doesn't cover your mortgage and other bills and you say make a loss of $20,000, you can offset that against your income. So you wouldn't be taxed at $100,000 but at $80,000.

Those incentives mean rental properties are popular. Back in the early 1990s when those tax breaks were not available, just 70,000 people owned rental properties. Now about 200,000 New Zealanders do.

"It is a massive increase in investment into rental property which has placed further pressure on the property market," says Cullen.

Now the government is considering pulling the plug on landlords' tax breaks to stomp on the rampant housing market, although National says that will force rents up and hurt mortgage holders already facing high interest rates.

"Why isn't he satisfied with that impact on their pockets and their house values without adding another measure which may have the effect of pushing their house values down," says Bill English, National finance spokesman.

Others believe the government is picking the wrong target.

"The housing market is over heated because as I have been telling you for the last 13 years, we have inflated the demand by sending half the immigrants to this country to Auckland," says Winston Peters, New Zealand First Leader.

Cullen stresses it's just an idea at this stage and will need majority support in parliament.

"Not much point doing lots of work if you haven't got 61 votes. That's the nature of MMP politics," he says.

That is 61 votes property investors will hope Cullen doesn't get. They say renting will become even more expensive if the government goes ahead with the change.

Property Investors Federation vice-president Andrew King says the move is not necessary as the property market is already nearing the top end of the cycle. He says the government doesn't need to do anything to reduce property price growth as affordability is doing that on its own, as is the fact fewer immigrants are coming into the country.

King says putting investors off will cause rents to rise as there will be fewer properties available.

The issue involves Loss Attributing Qualifying Companies (LAQC) which are used to reduce tax when rental properties make a loss. Click here for an explanation of an LAQC.

Information on current rental prices and how they have changed over four years can be found at Crockers Property Group.