My previous post on Auckland’s housing market prompted considerable interest. Even if there were areas of disagreement, simply seeing this level of interest left me feeling more optimistic about the potential for us to find solutions. I think Maggie said it best when she remarked:
In this post, I want to discuss in more detail some of the policies which could be used to address the demand for houses, especially demand associated with investment. First let me present a case for implementing such measures.
My rationale for higher property taxes is actually fairly straightforward: Put simply, property in New Zealand seems to be taxed lightly relative to other countries in the OECD. Grimes (2003) suggests New Zealand collects 5.7% of taxes from property versus 8.3% for the OECD on average. This means the proportion of tax revenue we raise from property is ~45% less than the proportion collected by other countries in the OECD. Moreover the proportion of tax revenues collected from property in New Zealand has been declining fairly rapidly over time.
As a result, it should come as no surprise that every man, woman, and mangy dog in our great little country (and places elsewhere) is investing their spare dosh into the property market. Even those who wouldn’t recognise an asset bubble from a doggy hydrobath (NB: These are very fun BTW, for all involved).
I also think dynamics are important: That is, in an increasingly liberalised global economy (which incidentally is something I generally support), then we can expect differences in taxes between countries to influence investment patterns across those countries. So aspiring for closer economic relations with Fantasia, or any other country, is all well and good – provided we consider whether misalignment in our respective tax systems has the potential to distort investment decisions. And if so then maybe, just maybe, we should consider whether we need to harmonise some aspects of our tax systems a little first?
Consider the arguments advanced on this property investment website:
In this context, the demand for property in Auckland does not really qualify as “speculation”, inasmuch as it’s a quite rational response to tax levels, even if prices are in my view inflated.
This is why I am so frustrated with John Key’s somewhat circular logical when it comes to house prices. He’s basically saying that housing is not over-valued because people are prepared to pay the current prices, while simultaneously we need to address supply-side issues, while indirectly stacking the deck of our taxation Titanic in favour of property investment. Too much demand? Naaaaaaaaaaaahhhhhhhhhhhh …. yeah.
For this reason, I am simply proposing that New Zealand increase our taxes on property to a level that is commensurate to that of our major trading partners, lest we expose our property market to large influxes of mobile capital looking for a home. This is especially true in the current international climate, where central banks around the world are busy handing out cheap money.
Higher property taxes are not just a practical response to the globalised world in which we inhabit, but they are also theoretically appealing (insofar as land is immobile) and progressive in the sense that they tend to fall most heavily on high wealth households. I’ll consider these points in more detail in my next post.
How might we go about increasing property taxes? Well, there’s a number of potential mechanisms including:
- Capital gains tax, which is levied when properties change hands; and/or
- Stamp duties, which are levied on either the buyer or the seller when a property changed hands; and/or
- Land value tax, which are periodically levied to the property owner.
Let me know if I’ve missed any important ones. In the next post I’ll expand on the merits of these mechanisms a little more as best I can, hopefully with some help from y’all.
One final point is worth noting: Increasing property taxes does not necessarily lead to increased tax revenues, i.e. they could be designed to be fiscally neutral. More specifically, the revenue generated from property taxes could be used to reduce taxes elsewhere, e.g. GST, income taxes, and corporate taxes. This is actually very similar to what the Government did when they reduced income taxes and increased GST. Hence, please don’t view this discussion as advocating for “increased tax”; I’m more interested in the methods through which taxes are raised, rather than the quantity that is generated.
It’s worth considering what a fiscally neutral property tax might do: First, it would directly reduce the demand for houses, especially from investors seeking returns. Second, this direct effect might have an additional impact by way of interest rates: Less demand for houses would, all other factors being equal, allow interest rates to be lower than they would be otherwise. Third, by enabling us to reduce taxes elsewhere, people would benefit from higher incomes. In this way even fiscally neutral property taxes might tilt the playing field quite strongly back in favour of home owners.
At least in theory! Heh heh heh …
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Regarding tax mechanisms, as mentioned in a comment on your previous post, disallowing the inflation component of interest costs to be tax deductible is one important one. The other, even more important one (but which has less less likelihood of being implemented) is taxing imputed rents on owner occupied property. This is a major tax advantage for housing investment. It would also be progressive as owner occupiers are typically wealthier than renters. Renters face the tax incidence on investment property, at least in the long run.
“Higher property taxes are not just a practical response to the globalised world in which we inhabit, but they are also theoretically appealing (insofar as land is immobile) and progressive in the sense that they tend to fall most heavily on high wealth households. I’ll consider these points in more detail in my next post.”
As long as you don’t exempt owner occupiers!
Very good suggestions. Ill add deductability of inflation and taxing imputed rents to the list. In terms of these two do you think theres an argument for applying them to assets generally rather than just houses?
For deductibility of inflation, I would say yes this can easily be applied to all tax deductible debt. It would still likely mean tax on property is increased relative to other asset classes as property is generally more highly leveraged (I think, I could be wrong).
Regarding taxing imputed rent, there really isnt any other asset class it would make sense to apply this to. The tax is only relevant for individuals that own an asset that they consume the production of. So you could apply it to cars or to someones vegetable garden, but that would be a bit pointless. All businesses that own their own assets are still effectively taxed as the imputed rent will show up as profit (i.e if a business owns their own building, they dont pay rent and hence their profit is high than it would otherwise have been). I guess there is the question of how it would apply to holiday homes – not sure about that detail.
I’ve often thought this should apply to savings as well- RWT tax on the inflation component of interest received is unfair.
Yes, agreed. The tax could be symmetrical in that respect – interest earners shouldn’t have to pay tax on the inflation component.
good point.
P.s. yes all mechanisms would apply to owner-occupiers.
Well couple this argument with the increasing difficulty that all local authorities around the nation have funding their obligations and aims and; ‘Houston, I think we have a solution’; higher Rates! Rates are progressive in that they fall proportionately depending on value, they certainly don’t exempt owner occupiers, and the income stay in the local economy improving city for all.
Just how to implement that exactly….?
Yes i tend to agree that higher rates are a potential solution. Although matthew makes a point that they may fall on renters. Although the latter may benefit more from tax cuts elsewhere e.g. gst.
Who knows when we will have politicians to are up to that….
In terms of practicalities, it needs a clear roadmap of ramping up rates over a 5-10 year term. And a much better explanation of why this is needed – not just a budget “consultation” with a massive presumed shopping list attached.
What rate would the property taxes be set at? Both savings in a bank account and shares attract withholding tax, so presumably the property tax should be set at the same level?
I prefer the approach of collecting the tax at the time of sale. Just baceause someone is asset rich doesnt mean they are cash rich (think pensioners).
My responses to that are:
1. Cgt would presumably apply at time of sale.
2. Taxing at time of sale reduces liquidity as well as value, whereas taxing asset affects only the latter.
3. Tax reduction elsewhere will partly compensate
4. Could have rebate scheme e.g. as with rates.
5. Is it really that disastrous if they have to draw down some of their asset value?
Anyone in this discussion who doesn’t own a house should do more listening than talking. (Just because there is an emotional side to this they may not be giving weight to).
Owning a house, for many, is a key enabler of independence from costs. Once you are free of any mortgage, you then pay your rates…and that’s it. You don’t have to do any maintenance except in extreme circumstances (obvious fire risk, disease, etc). This is a powerful emotional element to home owning.
Anyone trying to impose a tax that requires a pensioner (or someone on low income in the long-held family home) to – effectively – reverse mortgage their home and ‘eat’ their legacy to their children will be shot between the eyes with a cannon. If they are never going to be able to catch up they may eventually be forced out completely as there would be no equity left.
This is not necessary.
We can address house pricing issues by:
1. Capital Gains Tax on investment property sales (not the primary residence).
2. Remove the cost of interest on mortgages from deductible expenses. If someone wants to buy an investment property, they can pay more up front…or eat the interest cost.
3. Increase rates gradually over 10 years, with allowance made for people on low incomes. I know of many families on million-dollar homes today who aren’t earning much at all….but the home has been in the family for many years. It may have been bought for £5,000 in 1954, but the person living in it today does night shifts at Mcdonalds and the rates on the house are 15% of their annual take-home pay. Perhaps rates should be no more than 10% of household income for anyone over 50. But any kind of means-testing will result in fraud losses and enforcement costs.
4…Most importantly in my view….make apartments easier and cheaper to live in. There are much better models around that would make this possible…and desirable.
5. Put a slow choke on the demand by banning sales to non residents.
Drawing down savings during retirement is exactly what people should be doing. That’s the primary reason why people save for their retirement.
Reducing people’s ability to transfer wealth to their future relatives may actually be good for society.
Anyway, I doubt it’ll come to that: A low land tax when supported by other compensating measures, such as tax cuts on GST and rebates for low wealth households is entirely workable.
Own a house. Talking. Disagree with your key premise.
Instead of “powerful emotional element”, you’re talking about “powerful culturally embedded but factually unsupported truism”. A homeless person who wins a Rolls Royce will obviously sell it because they can’t service the running costs. Why should property be any different? Why should we all have to support other people’s paid-for retirements and ringfenced inheritances?
I don’t want my kids to just inherit a bunch of assets, I want to leave the world knowing they have access to a range of self-actualising experiences including acquisition of whatever assets they want. But some environments just aren’t conducive to that. I wouldn’t recommend they start a business in Eritrea where the rule of law has broken down, and the way things are going I wouldn’t recommend they get a mortgage in Auckland either.
But thanks for thoughtful contributions instead of just taking a dump and leaving like some…
P.s. grimes and coleman show that a 1% annual land tax would reduce land values by just under 20%. Id suggest you set tax lower at first and increase slowly over time as needed.
And it’s pretty clear that the LTP Transport funding consultation process showed that most of what is really necessary can be delivered with around a 1% rates increase; plus matching funding from the NLTF.
Also Rates increases are the only avenue Council actually has without the agreement of government, so anything like Stamp Duty, Motorway Tolls, or Sales Tax are no near term solution.
“Draw down the asset value” – meaning increase your mortgage to pay the tax? In the instance that you have a house that you dont want to sell.
Not necessarily. I have a floating/revolving mortgage facility that I can drawn down as much as I want up to some equity limit. Almost like a reverse mortage.
Paragraph three should probably read “Moreover the proportion of tax revenues collected from property taxes in New Zealand has been declining fairly rapidly over time.”
Yes! Thanks.
Decreasing attractiveness of investment properties will decrease the supply of rental properties leading to increased rents.
But then the resultant increasing affordability of houses would lead to more renters buying their first home leading to less rental demand and lower rents.
Howd does an economist decide the net effect?
Yes i understand the appeal for politicians to claim that more people owning is better, but what are the economic arguments for the advantages/disadvantages of renters v owner occupiers?
Like I raised in other thread a key one is retirement. Owner occupiers reach retirement with a home so dont need ongoing income for accommodation other than rates etc. With renters you are putting your faith in these people being savvy investors who build up a nest egg by retirement. What if a large chunk just squander their money and expect state assistance come retirement?
Owner occupiers take more pride in their houses – they maintain them, upgrade them, keep the lawns mowed! Renters on the whole don’t.
I suspect that is just a consequence of the lower number of long-term rentals in New Zealand compared with other countries. I think you’ll find that those who are in the same rental for a long period of time will look after it as they are invested in it. The NZ rental market is dominated by short-term rentals where that personal investment isn’t present (you’re more likely to put up with substandard tidiness etc.)
i.e. not all renters 🙂
If you read the BRANZ house conditions survey you’ll find the difference in maintenance is not as great as most people think.
Would be interested to know what licence other countries give their renters. Can you redecorate the inside of the dwelling to your liking? What if you wanted to add another bedroom due to increased family size etc?
I’ve found that if you rent to a family, they tend to look after the place. If you rent to a group of flat mates (gender irrelevant) they tend to not look after the place. In the latter case, there is often constant friction over who does or doesn’t do household chores as well as constant friction between those who are considerate…and those who aren’t. These issues tend to have been resolved in ‘nuclear’ (couple + kids) families – or they aren’t a family for long. But even bad tenants need to live somewhere…..so they get the dross that’s left over. This is where state-provided housing has tended to step in: they house those no one else wants to have anything to do with. The present government seems intent on removing this function from the state. I can only imagine what that will mean for the tenants affected…and landlords suddenly facing applications from people they would be very unwise to rent to.
NZ needs to think this through. “Market forces” are leading us to a train wreck that was entirely avoidable.
It depends on the group. I rented an old villa to some students who looked after the place better than I ever have. I knew I might lose them when the graduated so I asked them to let me have the place back for a month over the summer before last and I put in a new bathroom and kitchen. It doesn’t look like a dive now and they have stayed. My house is worth more and best of all, because the govt got rid of depreciation, the whole cost of the kitchen and bathroom was a full tax deduction on the basis it was replacing like for like. Bill English gave me back 33% ! So long as you keep them a while these places become money machines. Rents keep rising and any capital gain is simply fortuitous. No one has ever bought for capital gain- not in Auckland- honest.
First, I think it should be remembered that while NZ does not have a general capital gains tax we still tax capital gains in certain circumstances. If you invest in a house with the intention of selling it to make a profit from the gain in capital then the gain is taxable. Unfortunately, the IRD does not have the resources to enforce this. I think a better option to taxing capital gains is to have the capital/revenue distinction abolished but that’s another discussion.
Basically we are talking about reducing the money supply-side of things in the housing market. One thing that should go is the Accommodation Supplement paid by the government. I believe this subsidy, over $1b a year, has greatly increased the cost of rents and, therefore, has distorted the market. It would have been better to pay the subsidy to the beneficiary direct and not as a separate funding stream then it would allow him or her to control the funds rather than it effectively going straight to the landlord.
good point and I do agree that we could effectively tax capital gains under existing tax system if we gave IRD the resources. Personally, I would define anyone who buys a house as an investor, and apply capital gains tax accordingly. I think everyone buys a house with the ultimate intention of selling. And indeed if they don’t sell then they don’t pay CGT. But if they do, then they should.
I liked Gareth Morgan’s idea of a tax on all capital(not just houses), no exemptions.
If I have a 100,000 house I live in and a 100,000 in the stock market getting 5% return I would pay a capital tax on both. The government sets a minimum return (lets say 5%) and they apply a 30% tax rate (or whatever they set) to that amount.
Thus I have a total capital of 200,000. The minimum return rate is 5% so my figure is 10,000. 30% of that is 3,000. I have to pay 3,000 in tax to the government for that year.
If my shares/casino gambling earned a 10% or 20% return I would still pay the same amount for that year in terms of capital tax. I would still have to pay some income tax if some of that return is in dividends. Only the minimum return is taxed until the following year.
If my house doubled in value due to speculation or whatever I would have to pay double the amount the next year regardless of whether it is earning me income or not.
It would probably wipe out the property market and push money into better investments that actually generate wealth. It would force people to make better use of their capital and get all the old asset-rich people out of their houses and free up capital to be better invested elsewhere. The demand for small apartments would explode.
Of course the idea is too radical to ever happen, but it would be interesting to see it in action if the rich take their money overseas or if they invest in businesses in NZ.
Alternatively, like they do in Germany/Switzerland, towns don’t have land rates. Instead they get a slice of national income tax in proportion to how many people live in that town. The towns work their butts off to get more people to move to that town so they get a bigger budget. As a result of this policy housing is a commodity, not an investment vehicle so in Germany they cost the same they do now as they did decades ago (adjusted for inflation). Again it is a radical change to what we have now, but towns would be restricted in how much money they get, they cant just turn up rates. I would think Auckland would be broken up into the old councils to create competition for people to live in their areas and drive efficiency.
A tax on capital would more likely wipe out the stock market than the investment housing market. Shares have been far more volatile than house prices. The German method has much more to commend it, particularly as we have good evidence on how successfully it has worked. It would also help focus council officers minds on “will this proposal make my city more attractive to people to come and live” rather than “will this proposal improve my cv” or “will this proposal increase my staff numbers and so increase my salary”.
I like the idea of the tax working group’s “risk free rate of return” on rental property:
“Under an RFRM tax, rents from land would not be taxed, and other expenses relating to the investment would not be deductible, but a risk-free rate of return would be applied to the net equity in the property, and included in taxable income. There is a spectrum of real property over which the RFRM could be applied. If the base it applies to is broader than rental housing, the tax would be more efficient.”
The big advantage of a land tax is that it doesn’t change the quantity of land used. All of it still gets used for its best purpose. In contrast almost every other tax distorts things. A tax on revenues makes people like me do a bit less work in February and March as I might as well be having fun as earning and giving almost half (approx 42%) to the state. Same for sales taxes, they reduce the level of quantity used which in turn impacts on others. With a land tax it is all still there and used although the price is affected.
No one of the solutions discussed here will reduce the price of housing in a meaningful way. Any sort of “tax reform” should look at the entire package of taxes currently on the books and evaluated as to how it affects the structure of the economy we have or want. Coming from the US I was astonished at how low property taxes are, and equally astonished at how high GST is. But the money’s got to come from somewhere. I think it’s ludicrous to charge GST on food, for instance, especially fresh food. A 15% incentive to buy vegetables and fruit would have a real impact on the health of the nation.
I wonder if the low rates aren’t a vestige of a farming history where people didn’t make all that much money but needed a lot of land to make what they could. Now that the country is so urbanised – 85% – and people are getting richer (not necessarily rich), and immigrants bring a lot of money to invest, raising property rates might be in order. Certainly speculators and owners of second homes – especially the $3 million baches – can afford to pay more. I was talking to a real estate agent who specializes in premium property and he tells stories of individuals buying 10 to 15 properties at a time, diversified by location, price and tenure. He also said that the auction method naturally raises prices which is why more and more sellers are opting for it. He bragged – rightly so – that he made a recent seller $150,000 in 45 minutes. In other words, $150,000 more than they expected to get. Good for his commission, good for the seller, not good for the effect on the market.
I also think there needs to be low cost housing types, perhaps manufactured housing along the lines of Lockwood but cheaper though I know there are economic inefficiencies that come with that approach.
Some intervention in the market is clearly needed for truly “affordable” housing. And a change in the mentality that everyone must own their own home in order to qualify as genuinely human.
GST at 15% is low by OECD standards, and NZ’s lack of exemptions makes GST spectacularly efficient at raising tax. Adding exemptions for food of any kind is confusing, expensive to the tax base, expensive compliance cost and is unlikley to change the price of the food charged anyway (retailers pocket the difference).
“I think it’s ludicrous to charge GST on food, for instance, especially fresh food.”
Exemptions to GST make the system stupidly complex and you end up with absurdities like needing a pizza expert to decide if something is a Pizza, pizza sub, pizza pocket or pizza roll. I’m not exaggerating that is a real example:
http://www.abc.net.au/news/2015-03-30/government-paper-questions-gst-rates-exemptions/6357110
From memory the Australians received advise that exempting foods would cause unnecessary complications and that targeted social assistance (like in the early NZ GST models) would be able to offset it. It just wasn’t worth doing. They used our GST as a case study and praised its simplicity. Then they went ahead and did anyway because politics, I guess.
Land taxes (rates) in Canada and the US tend to be much higher because schools are funded from this tax. For example, in Ontario, Canada, the provincial government levies a rate of tax on all municipalities to fund the provincial education budget. Schools are a provincial – not federal – responsibility. The municipalities, in turn, add a share of that amount to each property – usually tied to assessed capital value.
In NZ, schools are funded from income tax. That means property taxes can be much lower. Schools are a big-ticket item.
Grimes and Coleman suggest an annual land tax of 1% would reduce land values by approximately 20%.
I’d call that a “meaningful reduction”.
Overall a well written piece. John Key is living is fairyland if he thinks there isn’t a problem with housing in NZ and more specifically Auckland.
In terms of increasing rates and being tax neutral by reducing some other tax this would require there to be a NZ govt portion of rates (other than GST) to balance the reduction in tax revenue elsewhere. So for example add 2% to the rates total (would actually result in 2.3% incl extra GST) that would go to central govt. I guess from there the threshold for income taxes could then be raised by say $5000 per bracket. This would mean that people have a bit more income in their take home pay which would be balanced by higher rates.
I really do think that we need to introduce some kind of stamp duty (5%) for foreign purchasers. For existing foreign owners a sellers stamp duty of 5% should exist (only for existing property). If we are going to allow foreign ownership then the country should at least gain something from it (personally I would prefer to see an outright ban on foreign land ownership in NZ with possibly the only exception being apartments). For commercial property like Hotels etc I’m sure some sort of arrangement can be made for the foreign investor to invest in a NZ subsidiary etc.
Thanks Bruce glad you enjoyed it.
For context, in 2014 rates in Auckland were around 0.37% of the value of the average home. That ratio is probably going to decline further if property prices keep going up 10%+ per annum while rates rises are constrained to ~3.5%.
For all the kvetching about the high cost of rates, Auckland home owners pay quite low property taxes both in absolute terms and relative to the value of their assets.
Whenever I hear people complaining about rates, I just can’t agree about them being too high. Not many people think they pay too little tax, but for rates I personally think they really are too low.
Looking at my list of expenses, rates comes well down the list of items. I think rates on my ~1200sqm land/house valued at ~$1.2m work out about $2500/yr or $50 a week. Seems low compared with other things like food, mortgage and transport costs etc. For an apartment I rent out, rates are very low compared with Body Corp fees. From what I understand about property taxes in places like the US, this is unusual
My perception is that rates have been rising very slowly over a long period of time, with most local body politicians claiming they want to keep the rate rises down to (low) inflation like levels. Yet we want more from our councils; I want parks, libraries, access to the waterfront, a world class sewage system, and decent roads, bike paths and public transport. I for one am prepared to pay for those things.
Ok, I am sure plenty of money gets wasted by the council, and even though the council really is a very big business, it should always be working to reduce staff counts and minimise waste. But I want to live in a nice city; and that takes money. So I know not everybody has the income I have, but for me, something like a 10% rates rise, works out very little per week compared with things like the rise in value of my property, and if it could help pay for CRL, trams, Seapath/Skypath etc, then I am sold.
It would be good to get rid of rates all together and replace with stamp duties/capital gains tax/ possibly slightly higher income tax.
Surely when designing taxes the ability to pay should be factored in. In my case of a large mortgage I would hate to think how I would pay rates if they were doubled or tripled in value.
The problem is the capital gain is fictional until you sell. So the payment of the tax should be linked to the sale when the income is actually being recieved.
“The problem is the capital gain is fictional until you sell”
No it’s not. The reason folk take on a huge mortgages is because they know the capital gain will be there. It’s just not something they can spend right now, but nonetheless it is changing their (our) behaviour.
I agree, replace local rates with a countrywide land tax. Fund the councils from there (efficient tax collection via IRD), the remaining benefit can reduce income tax rates to be fiscally neutral.
I’m a little cautious about doing this. Mainly because NZ is a highly centralised country already and I think the ability for LG to set rates independently of central government introduces a nice tension into the power balance between the two. If you allow central government to set land taxes and distribute based on some per capita formula then you remove the ability for distinct local communities to form and express their preferences for higher/lower local taxes.
There is no evidence that these taxes will curb housing process.
Australia has a CGT and from memory I think they have some form of Stamp Duty – hopefully someone will be able to clarify. Their house prices in the cities are worse than Auckland. The argument for these tax types is to provide a broader tax base as they are unlikely to impact on house prices.
As an option to explore I’d like to suggest reducing tax on investment income. Interest, Dividends, PIE Income etc. Provice an incentive for people to invest in other types of investment.
I’ll also suggest that supply, rather than demand, is what you should be focussing on.
Problem with supply type arguments:
– How do you force people to develop rathet than land bank
– Greenfield development in particular carries high infrastructure costs which translates to high house prices
– Nimby’s/ political processes hamper attempts to get more density within existing urban areas
Yes, and add to that list that supply side measures will take 3-5 years to work through system and have an impact, which is too long IMO given the risk of a macroeconomic meltdown.
“Australia has a CGT and from memory I think they have some form of Stamp Duty – hopefully someone will be able to clarify. Their house prices in the cities are worse than Auckland.”
The Australian capital gains tax excludes “the family home”. With such a massive hole in the tax it is unsurprising that it is ineffective.
The Labour/Greens CGT policy was the same as the Australian version so we were never going to get a comprehensive CGT in NZ.
Hopefully someone with international tax knowledge can fill us in on CGT’s in other countries but I’m unaware of any country that has successfully curbed house price rises by implementing a CGT.
But I agree with you that if we implement a CGT is should be on all houses.
“I’m unaware of any country that has successfully curbed house price rises by implementing a CGT.”
Unless the CGT is 100% it unlikely to curb price rises on it’s own in a supply constrained city. But it could be an effective part of a mix of housing policies. And as you said it can be justified as a way of broadening the tax base. It is absurd that savings in a bank have capital gains taxed but houses do not.
As others state, CGT and other taxes don’t necessarily eliminate the problem, but they do reduce the size of the problem. Modelling undertaken by Westpac before the last election showed that Labour/Greens’ CGT would have reduced house prices approximately 15%:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11257816
Key phrase: “so long as other conditions weren’t conducive to rapid house price increases.” Money is cheap, interest rates are low. As long as supply is limited and credit is cheap, the market will tell purchasers to borrow more to preserve what ever margins it loses through a CGT. It’s also the wrong time to bring in a CGT. You bring that in during a lull, not a peak. If you bring it in at a peak then all you’re doing is setting yourself up to let people accrue capital losses. Guess what they’ll invest in to use those up?
If you want to hit investors hard, you get rid of the deductibility of interest on residential rental property. If you can’t write off interest then a major expense you can claim disappears. It’s even more effective as interest rates go up. It would have a dramatic overnight impact that wouldn’t affect low income/marginal households (i.e. the elderly and those who have borrowed to buy a legitimate rental home) in the same way a land tax would.
Marginal households are borrowing to buy a legitimate rental home?
Or is that a typo?
Yup, that should have been ‘non-rental’ home as in an owner-occupied house.
Part of the reason people invest in property is because the risks of other investments in NZ are so high. The share market exists so that insiders can fleece the outsiders. The main purpose of managed funds is to provide a good income to the fund managers and the 1970’s proved that if too many people invest in government bonds then the government has an incentive to run high inflation to reduce the value of your principal. If you buy a house it is still worth 1 house in real terms regardless of what the government does to you.
Why invest in NZ at all? The NZ sharemarket may be too undiversified (e.g. over-weight with electricity companies following politically motivated partial privatisations) and too volatile to be attractive for investors. But that doesn’t mean that there aren’t good opportunities for equity investment elsewhere in the world.
Greg Mankiw has a nice discussion of some of the common pitfalls of investment advice here: http://www.nytimes.com/2013/05/19/business/for-stock-picking-advice-dont-ask-an-economist.html
“One widely documented failure of diversification is what economists call home bias. People tend to invest disproportionately in their home country.
Most economists take a more global perspective. The United States represents a bit under half of the world’s stock portfolio. Because Europe, Japan and the emerging markets don’t move in lock step with the United States, it makes sense to invest abroad as well.
Which brings me back to my mother’s question: If I could pick just one stock for someone to buy, what would it be? I would now suggest something like the Vanguard Total World Stock exchange-traded fund, which started trading in 2008. In one package, you can get low cost and maximal diversification.”
One thing that probably puts investors off international shares is the complexity. How do you buy them? What are your protections as a foreigner? And how is your investment taxed?
Fees are much higher and fees are the killer. The other big problem is if you intend spending the money in NZ eventually then investing overseas requires two currency conversions and the risk of loss if the $ falls. For most investors a risk is more negative than positive. An equal chance of loss or gain is an overall negative. With property if all else fails you or your kids can live in it. That is why it is called real estate. It has real value.
If I put money in the bank the government taxes my return, if I buy a house and it goes up they dont tax me. Ergo the Government wants me to buy property- so I did.
“the risk of loss if the $ falls” US $ I mean.
“The main purpose of managed funds is to provide a good income to the fund managers” – Having worked in managed funds, there is some truth to this. But of course managed funds can easily be compared to other funds. If the one you are in isn’t performing then switch to another one.
In the UK all funds were published and indexed on performance so it was very easy to see how the fund I was working for was going. As an investor you could quickly see where the high performing funds were – generally the smaller more agile funds.
It is very easy to invest in overseas equity through managed funds. This also spreads your risk.
Of course, you need to do some research on managed funds and understand what you are buying into. But would you do any less research when buying a house as an investment? I wouldn’t.
People seem happy to speak to “experts” about property investment or invest in property based investment funds that end up being no better than a Ponzi scheme but then think all equity based investment is for suckers. Depends on the quality of the investment, as with any money making venture.
You can also add value to property in a way you never can with a passive investment. I got a consent through in Devonport and cut a section in half in spite of the “rules”. You can’t ever do that with shares. With houses you can buy in an area that is low and sell when it has lifted and make money. With shares a little guy can’t beat the market. Even the professionals don’t over time. And best of all when you own in Auckland the government opens the doors to immigrants to increase demand while local government does its best to reduce supply. With all these well intentioned twits pulling the levers you can’t really lose.
You’d certainly hope the managers of the companies you were buying into were looking for ways to ‘halve the section’ on your behalf.
But it is the principal/agent problem. The managers are not trying to maximise your profit. They are seeking to gain you what they hope is sufficient profit that you will be grateful and beyond that they are seeking to maximise their own returns and minimise their own risk.
OK sure.But in the same way I could invest in an actual business (not just buying shares on the market) and add value.
But what you are saying is that the market is skewed toward property investment which is exactly the point of the post. That needs to change but the government won’t do that as the Baby Boomers (who actually vote) will crucify them at the next election if property values drop because the government changed the rules of the game.
A game that is massively weighted in favour of those who had the benefit of low property prices when they were younger.
That’s exactly the point.
This whole increase in value was not “earned” in any way it was gifted at the expense of the next generation.
Not that you’re allowed to lower the worth of the free money that timing has bestowed on thst’s folk. Neither National or Labour will do it- probably the only chance is some sort of “hung” government that requires (the Greens?) some swing party to get it across.
Until then Generation Rent has no chance…
I can largely agree with this – if things go horribly wrong then you can always move into a rental property. You can’t live in shares and bonds. Some people who were burned in 1987 and 2007/2008 will never consider capital markets as investment options again. I’m not saying it’s a smart way to think or that I agree with it, but I don’t begrudge people who do.
Are shares really that risky? If you own shares in 5 companies the likelihood off all of them going bankrupt is small. And if they did that would indicate a catastrophe in the market in general which would also cause house prices to fall dramatically.
I think housing investment is all being driven by the ridiculous tax free returns currently available. Gearing yourself to the hilt as many are doing to buy property is very high risk and represents a house of cards like the 80s share crash.
Hence RBNZ concern presumably.
My father bought shares based on the dividends they paid. He didn’t give a toss what the share price was after he’d bought it….the dividends were his entire income. each year he would cull those stocks that weren’t paying up to expectations and buy new stocks that has been performing well in terms of dividends.
He lived in Canada, where interest on bank deposits is about 1% (or less)…so earning dividend income of 3% – 5% each year on the nominal value of the sum initially invested represented a BIG improvement on interest-bearing forms of investment.
His portfolio was – inevitably – oil companies, banks and monopoly service providers of all kinds (pipeline operators, etc). The shares would go up or down – he didn’t care. All he cared about was the dividend cheque.
He did well with that.
The same rules apply to shares as do to property- you pay tax on the income and no tax on the capital gains (unless you are a trader).
It’s generally easier to leverage property than shares and as a result you can reduce the income and pay less tax. Though if you already own property it’s reasonably simple to ‘borrow’ to buy shares and do the same with the dividends.
The Herald said we would have had deflation last quarter if it wasn’t for the fact tax increased on tobacco. (Hands up anyone who thinks a tax increase stops deflation?). If deflation takes hold then the Reserve Bank will have no choice but to cut interest rates. Expect a short run increase in house prices.
Interesting – although not necessarily true. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11426614
Apparently we increase interest rates to counter imported inflation but we don’t need to decrease interest rates to counter imported deflation. Shows what a load of BS macroeconomics really is. The simple truth is that the Reserve Bank intervenes to protect the banking system and their profits. They dont really care about the the Policy Targets Agreement of inflation at 1 to 3%.
Just in case anyone here doesn’t understand the basic principles of economics I have linked a short video by Yoram Bauman that explains Mankiws 10 basic ideas. https://www.youtube.com/watch?v=VVp8UGjECt4&index=4&list=PL233AFF4AAFA2F9BF
Don’t know if it has been mentioned in the comments. But there are now radio ads playing in Singapore and Malaysia asking investors to buy property in NZ because of the low taxes.
Yes I’ve also heard this….along with the comment: in NZ we don’t have an economy, we have a property market.
Yes just read that in herald.
Not to mention the giant billboards crowing about 2 million investors looking to by NZ property.
If only we could free up those 22.000 unoccupied homes somehow? From memory that a year’s worth of NZ s growth or three years of Aucklands…
What billboards? Can you post a photo or link?
Really? You never saw one, there were at least 3- Pons Rd, Airport and somewhere Eastside.
http://www.hougarden.com
I’ve emailed you the pic as only Admins are allowed to post photos here…
‘I’ve emailed you the pic as only Admins are allowed to post photos here…’
Not a rule I’ve heard of? Or is there no way to do it without admin access?
It’s the way it’s set up. Currently if you try to post a photo it asks you to sign in as an admin.
There’ll be a setting somewhere allowing all posters to add pics…
don’t forget that I live in Brisbane nowadays … 😉
Ponsonby Rd has been replaced with Paddington.
> Or is there no way to do it without admin access?
You can post the image to somewhere like Imgur and post a link here.
House prices aren’t the only problem, incomes are too. Here in worker’s land life is shit. Even over the median wage in Auckland you struggle if you have a family instead of a dog. The govt has done everything it can to keep wages down, rents are stagnant or falling (no matter what the property manager says, market rents are going down) because ppl don’t have money to pay more.
Rates are low and council worker’s wages are a joke, while the private sector uses this to keep their wages down.
In my job I have seen business confidence diminish the last quarter, but with customers strapped for cash, it’s not a surprise.
Pretty disgusting really……
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11436779
And here in Swanson the first 60 sections of the new Penihana subdivision have been brought – by ONE buyer. Yes, all 60 sections by one buyer.
That sounds promising. One developer can build sixty houses in one place much faster and cheaper than sixty different groups can.
For affordable housing we need much more of that.
The point of selling sections is for people to build their home on. Nobody had the chance, when one buyer swooped in and brought the lot, and will no doubt sell whatever they build at a premium price, or rent them at the usual outrageously expensive prices.
Winston has the right idea. Make it a requirement for house buyers to be NZ residents, and limit immigration to fit the available housing supply. I would go one further and make it mandatory for house buyers to have to live in the house they buy for at least 12 months before being allowed to rent it out.
How might that work with an apartment block?
Hopefully those 60 could all be rented out as it increases supply in the rental market. If they were left vacant, I’d be pretty pissed off
Stu – what are your thoughts on a financial transaction tax? Back years ago when Bruce Beetham suggested it, it was derided as impossible to administer, but now, with computerization, it’d be a doddle. I think they were talking about something like half a percent per transaction. That way it would take an equal share off everything, big and small. With small, you’d not even notice it. With big transactions, again, proportionally you’d not notice it, but actually, a large amount of money would be finding its way into government hands. Seems perfect to cover things like property, shares, and even mfwic’s property renovation. Thoughts?
Stu, raising property taxes reduces the demand for investment property. However, would it mean that fewer investment properties equates to fewer homes on the rental market? if so, could this increase rents for renters?
Also, if property taxes went up, could it not have any effect, and be a waste of time and effort?
Personally, a progressively decreasing stamp duty at the point of sale could work. E.g. you pay 15% stamp duty if you buy a home and sell it within a year.
10% after two years, 5% three years etc. I believe that Singapore does that. Correct me if I’m wrong.