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Have your say: LAQC owner who lived in her own ‘rental’ guilty of avoidance
November 26th, 2009
The Dominion Post’s James Weir is reporting that the Inland Revenue Department has won its first case against the owner of a Loss Attributing Qualifying Company (LAQC) owner who lived in her own rental and claimed tax losses to reduce her personal income tax. The Taxation Review Authority has found the owner, named only as Mrs B, guilty of tax avoidance.
The IRD has just won a case involving a “Mrs B”, who bought a home with a $292,000 loan through an LAQC which “rented” it back to Mrs B. She claimed losses over four years totalling almost $71,000 and as the LAQC’s shareholder Mrs B set this off against her income tax.
Inland Revenue said the case was a tax avoidance arrangement, but the LAQC challenged that. Taxation Review Authority Judge Barber agreed the effect of the arrangement was tax avoidance.
If Mrs B was on a 39 per cent tax rate that avoidance would have amounted to more than $25,000, which must now be repaid, plus interest. There was no penalty imposed in this case.
IRD’s assurance manager, investigations, Richard Philp, said the case clearly showed a taxpayer could not use a LAQC in order to claim deductions for expenditure that would otherwise be of a “private or domestic nature”.
The case was the first “own-home LAQC” to be tested in the courts, he said.
My view
There are 130,000 LAQCs in New Zealand that claimed tax losses of NZ$2.3 billion in 2008, which is triple the losses claimed in 2003 when the housing boom was started.
The Inland Revenue Department estimates that rental property investors own NZ$200 billion worth of rentals that generate losses of NZ$500 million, which are then used to reduce tax payments by around NZ$150 million. That’s just the tip of the iceberg. Let’s not even start to think about those people claiming Working for Families by reducing their taxable income using investment property losses. Or those farmers who deliberately gear up with debt to ensure they never make profits and have to pay tax, relying instead on capital gains to make money.
Is this the best New Zealand can do? We go out of our way to lose money on investments so we can reduce our personal income taxes and make tax-free capital gains. We believe this is better than investing in companies or even our own ideas and businesses. We believe a two bedroom brick and tile rental is more exciting than an entrepreneur with a good idea or a growing company that wants to take it to the next level with a stock market float.
We have become a nation that aspires to become landlords. How inspiring.
Our tax system has evolved to encourage this behaviour and we have a Prime Minister who seems relaxed about this carrying on. Fair enough. He too will one day be a grandparent who watches his grandkids grow up on facebook. He will live in New Zealand with a lot other elderly people pining for their children and wondering what went wrong.
What went wrong was they failed to have the foresight or courage to challenge their own political bases to restructure the New Zealand economy when they had the chance. Maybe John Key will surprise us early next year after the 2025 Taskforce and the Tax Working Group recommend the structural changes we need in the next couple of weeks. They include a flatter, broader tax system that includes property, either in the form of a land tax or capital gains tax.
So far Key has appeared timid, poll-driven and lacking in courage to do the right thing for his children and mine. He has a perfect opportunity while New Zealand still has some flexibility to make this change as matter of choice, rather than at the point of an IMF gun. Key had a crisis to use to generate the political will to make change. He appears to have wasted it for the sake of popularity.
No one will remember his poll results now when they look back on 2009 from their vantage points in 2040 when we have a hollowed out economy living off remittances from those living overseas.
Your view? I welcome your comments and insights below.
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November 26th, 2009 at 9:46 am
What is ironic about working for families, is that one can engineer a rental to make a loss on paper and offset it against the ‘family income’ – but if one partner is self employed and makes a loss (maybe trying to start a new business or something) then this cannot be off set against the family income as it would be “seen as using the WFF scheme to subsidise business”. Righto.
They should just ditch WFF altogether, and bring in income splitting for families, so that there is incentive for the working partner to pick up more work to support the family rather than providing monetary incentive for both parents to work. At the moment, if I pick up extra work on a second job, it is at 38% in the dollar or more. If my wife works, she only pays minimal tax as she has no income currently, so the monetary incentive is for her to work the extra job – not me. But if I buy an inefficient unproductive rental, I get a huge tax subsidy discounting my loss. How on earth is that Working For Families? Should be called WFTA – Working for Tax Avoidance.
November 26th, 2009 at 9:52 am
I’m amazed she wasnt charged penalties as this was clearly not allowed and she would have known it.
November 26th, 2009 at 9:54 am
not really much different than MPs who rent the properties they own and live in to the taxpayer through sham companies and trusts.all the taskforce talk is just more BS from JK.we all want positive reform to tax and the economy and it looked good for a while but the cushy life has slowed them all down.
November 26th, 2009 at 9:56 am
“We believe a two bedroom brick and tile rental is more exciting than an entrepreneur with a good idea or a growing company that wants to take it to the next level with a stock market float.”
Eerrr what companies do you recommend ?? Hanover? That carpet company (whose name I forgot?)
Which entrepreneur do you recommend ?? Mr Watson ? Mr Hotchin ?
Hell, at least if I am a lone landlord of a shack I get to decide my own destiny and not some faceless commission who sleeps on his job….win or loose it’s my fault…instead of being wrapped up in legal jargon trying to get my money back !!
BTW so far I have been winning…..at least for years…tell that to Hanover’s investors.
November 26th, 2009 at 9:57 am
Perhaps that’s why Linsey Tisch moved out of his own rental in Wellington recently!
November 26th, 2009 at 9:58 am
the Listener had an article the other week, called “Catching up with Australia”. They discussed the issues of property-related tax avoidance & how to rebalance our taxation.
Then at the end of the article, they got some opinion from John Key on a land tax, but the point is the same for this current discussion. Key said “I’m not hugely in favour of those, either. If they were large enough they would substantially depress land prices … and you’ve got a lot of New Zealand houses with high levels of gearing. If we were to substantially undermine their primary asset, put them in a negative equity position, I’m not sure they’d thank us for that.”
Removing the LAQC and/or WFF rorts would do the same thing, so I guess they are out of court. They would remove the basis for NZers’ love affair with property, & belief in the inevitability of ever-growing housing values, subsidised by the long-suffing taxpayer.
Bernard says “So far Key has appeared timid, poll-driven and lacking in courage to do the right thing for his children and mine.” Appears to be spot-on, judging from Key’s comment.
November 26th, 2009 at 10:02 am
Who knows, maybe change is at hand:
http://www.stuff.co.nz/the-press/news/3097678/Unfair-tax-system-due-for-change
Will believe it when I see it…
November 26th, 2009 at 10:04 am
To tell you the truth I fail to see how so few can pay so much in taxes to support so many on what amounts to a pork handout from govts keen on buying their way into endless power to secure a place at the pig trough and have the option to ride the property ponzi bubble to ever greater wealth by holding open the immigration gate to pork the market demand for property. This economy is a massive heap of effluent and the Beehive is a giant pile of dung.
November 26th, 2009 at 10:10 am
“…If they were large enough they would substantially depress land prices … and you’ve got a lot of New Zealand houses with high levels of gearing…”(Key)…see..stupidity from Key.
November 26th, 2009 at 10:10 am
Well that quote from Key is an absolute rort in its own right.
For folks with high mortgages in their primary asset, or their own home, negative equity doesn’t matter one iota as long as they can afford to pay the mortage and they don’t plan on moving anytime soon. Sure, they’ll feel “less wealthy” but neither is that a bad thing for NZ – as restraint in deciding to take on further debt (say in credit card spending) is not a bad thing.
To talk about “gearing” as opposed to a “high mortage” with respect to a primary residence frames the housing issue as if all NZers are real estate speculators, even those who simply want to buy their own home to raise a family in.
John Key is the epitome of the property speculator mindset.
I again apologise to everyone for having cast my vote in his direction last election!
November 26th, 2009 at 10:11 am
Philly,
Correct. The LAQC system has artificially increased prices which is wrong. To say we can’t change something because it might impact negatively is not an argument at all. What JK is saying is that he is happy with the high level of gearing. Well I’d say there are many people who are not thanking politicians for high property prices which for many are not affordable.
When property yields come back to appropriate levels (5 year mortgage rate at least) then prices will be at the right level. This has to happen sooner or later and is probably preferable to a CGT.
November 26th, 2009 at 10:11 am
Kin
You ask what companies and entrepreneurs are worth investing in. Good question.
I have chosen to invest in my own ideas and entrepreneurship by investing my time in interest.co.nz. It means I won’t be repaying my mortgage so fast, but I feel like I’m helping to build something valuable for myself and my community.
We’re also employing extra people. We’re currently looking for a Finance Editor and a junior journalist.
How many extra people have you employed by investing in rental properties?
cheers
Bernard
November 26th, 2009 at 10:17 am
Totally agree Bernard –you’ve said it all. If all Key’s worried about is the leverage , potential neg. equity etc ( ie. he’s worried about his bank mates losing a bundle ) then the LAQC’s can be phased out over say 3 yrs. Give them abit of time to adjust themselves — but it won’t happen.
November 26th, 2009 at 10:18 am
Hey Bernard! Are you having Annual Awards for the Best Blog Contributions pre-Xmas? My vote for Best Pithy Analogies and Aphorisms goes to Wally.
November 26th, 2009 at 10:21 am
Bernard, please check your understanding of how people use a rental property loss to increase WFF allowance.
Losses from LAQC’s are not included when calculating family income for WFF purposes.
November 26th, 2009 at 10:22 am
Philly,
Yep. We’ll be having awards again that we announce in the week before Christmas.
Loving your suggestions. Always loving Wally’s comments. Helps brighten our day every day.
Here’s last year’s awards for fun.
http://www.interest.co.nz/ratesblog/index.php/2008/12/19/the-interesties-our-awards-for-the-best-and-worst-of-2008/
cheers
Bernard
November 26th, 2009 at 10:24 am
Bernard, reading “your view” I could almost hear the Chopin nocturne wallowing in the background. Really tears at the heartstrings those nasty investors preventing hardworking entrepreneurs getting off the ground!
What a load of baloney. Most entrepreneurs get their first leg up from property, and they will do this even in a flat market. Why is producing stuff that goes inside houses so much more an angelic vocation than producing the houses themselves anyway?
November 26th, 2009 at 10:25 am
My LAQC tax return gets spent each year on the property maintenance, new roof one year, insulation and kent fire another. I employ an accountant, property manager, numerous tradesman off and on, green acres lawn mowing etc. I also provide a service in that now the government isnt providing the housing for my tenants. The LAQC also allows my rent levels to be low which stops high turnover and allows more income left for the tenant to spend each week in the community.
Then there is the positive externalities to society associated with my tenants having an affordable, warm and healthy stable living environment.
November 26th, 2009 at 10:26 am
And Bernhard, presumably if you make a profit you will pay taxes – or at least your employees will.
I hear the tired old cliche constantly from that the share market is too difficult to understand, too risky, returns aren’t high enough etc
This is a cop out and actually lazy. If people put in as much time into understanding other forms of investment as they do to property the returns can be just as good if not better. However, the current tax regime favours the latter and it is now so ingrained into the NZ psyche that people don’t want to make this change.
November 26th, 2009 at 10:29 am
Kate, but what other choice did you (we) have with your vote? Both of the ‘major’ parties are substantially similar IMO.
November 26th, 2009 at 10:30 am
That’s a bit unfair Bernard.
Kin employs his accountant, solicitor, bank manager and bank staff, valuer, mortgage broker, local council and regional council, residential tenancy services staff, property manager, lawn contractor, handyman, painter, local mitre 10, local property investors association and trademe.
November 26th, 2009 at 10:31 am
LAQC owner
All of the employment that you list (except for the accountant who you employ so you can get your losses back off the taxpayer) are all things that would happen regardless of whether you owned the property or a home owner did so don’t make out that is benefitting the economy in some way.
And your last line is comical. Affordable housing. Hah.
November 26th, 2009 at 10:31 am
Hey Bernard, investing in properties is a business too, maybe i am not as smart as you, but I do “employ” some people…plumbers, electricians etc etc…THERE IS a net addition in GDP by my activities too.
All I am saying is I trust myself with my money more than i would trust any of those companies and entrepreneurs….even you have invested your money in your own business and not some “companies and entrepreneurs”…
BTW just got this from IHT…seems like the next financial quake may starts from the Middle East instead of East Europe or elsewhere
http://www.nytimes.com/2009/11/26/business/global/26dubai.html?_r=1&ref=global-home
November 26th, 2009 at 10:37 am
BH, re your comments to kin above.
Excluding materials at a guesstimate I reckon that I’ve spent something north of $500,000 on professional fees and direct labour costs in the past 2 and a half years alone – and that’s excluding any labour component of materials.
That’s between maintaining and developing my portfolio. Property owners/developer/investors create a hell of a lot of work and all we do is get lambasted as scoundrels by the likes of you for actually improving the standard of accommodation for a good many people.
BTW, haven’t you filled those to roles yet? Are you not paying enough or does no one want the job?
November 26th, 2009 at 10:38 am
Also appalled at the lack of penalty, is that setting a precedent?
November 26th, 2009 at 10:38 am
LAQC owner, Mike in Welly, We are stuffed, ChrisJ: & how much export & productive output does this create for NZ Inc in a year?
Look at Stats NZ, the answer is very simple. $0. That is smaller than the sale of guinea pig dung (presuming that at least 1 cent’s worth is exported). A great way to build wealth for the country. [dripping with sarcasm, for those who are slow on the uptake]
Rental properties in NZ: About $200 billion
NZ share market: About $50 billion
Is there any other country that can match that incredible statistic? I hope not, for their sake & future wealth.
November 26th, 2009 at 10:39 am
Yeah, me too Wally. I find it really depressing, to be honest.
I work for a major bank and see first-hand just how large WFF benefits are and then exactly where those funds are being spent.
Let’s just say McDonalds Corp and Yum Foods shareholders are very happy. Maybe the Cullen Fund should invest in these to complete the circle…
$40K-$50K (in the hand) seems to be the average annual ‘pay’ for a WFF beneficiary. They even have the cheek to talk about as a SALARY!!!!
Unbelievable.
To borrow $253 million a week to fund this reward for “not realising that having children is expensive, can someone else pay for them”…….. JK is screwing us.
Trouble is, I’m starting to think there’s more people cashing in (big time) on the WFF hand-out that they’re gonna keep the status quo for a long time to come.
November 26th, 2009 at 10:43 am
Of course residential LAQC’s are a rort, every 2 bit self employed subby or professional has one set up to push what should be tax owed, into private investment. The IRD should have nailed that woman with penalties- wonder who is in their sights for a residential investment LAQC tax evasion example? That will wipe the smirks off the faces of the plumbers, sparkies, accountants and lawyers currently giving the country the finger, bragging about their “legal” tax evasion.
Ive honestly given up on principled governance in this country however, nothing will change- we will get some bullshit rearrangement of the deck chairs. Both Labour and National are the same- only interested in keeping middle class voters funded (and voting) by living off generational capital- that is the problem.
Oh well, one more year until my Masters degree is complete then its off to Oz with my business, so my young family can have a secure future.
November 26th, 2009 at 10:44 am
Oh thanks Philly…like I really need the SIS hunting me down.
November 26th, 2009 at 10:47 am
It may not be much better over there, Grant.
http://www.scribd.com/doc/22566921/Australian-Property-Bubble
November 26th, 2009 at 10:51 am
Kate, but what other choice did you (we) have with your vote? Both of the ‘major’ parties are substantially similar IMO
Exactly – last election based purely on who had the best composite policies (composite meaning you have to take them all as a bundle) – I’d have voted for NZ First and Maori Party in that order.
Instead I voted as a means to ensure change – and got none!
November 26th, 2009 at 10:51 am
The LAQCers will just be responding by managing their affairs a little more professionally. Mrs B was just a particularly stupid case, there is still truckloads of scope for rorting. According to the Dom article:
“Wellington tax adviser Brent Gilchrist said “Mrs B” was not a great test case because the arrangement was not cleverly executed, with no tenancy agreement or rent payment.
… if the property was one of a few investment properties owned by the LAQC and the family was treated like an arms-length tenant, then there was still room to allow losses from such an arrangement to survive an IRD “attack”, he said.”
I think you will find it will be very much business as usual. Just a little more work for the lawyers.
November 26th, 2009 at 10:52 am
@Mike in Welly,
1914 – 3 bedroom (small) cottage $180 per week – brand new house 3 bedroom $250 per week. Brand new 4bedroom house, fully furnished, $400/week.
The reason that it is possible, bought in 2001 and subdivided and built wisely. (employed builders, electricians etc.etc.etc.)
I take the risk and the debt is mine. My tenants have affordable housing.
November 26th, 2009 at 10:53 am
Wally. Wot? The Seriously Incompetent Spy agency? I think you should be able to sleep fairly soundly if that is the case.
November 26th, 2009 at 10:57 am
LAQC Owner,
Do you claim losses from the LAQC against your personal income?
cheers
Bernard
November 26th, 2009 at 10:59 am
So, LAQC, without the benefits provided to you by using my taxes, are you saying that you would charge more rent? If you could charge more, why aren’t you?
November 26th, 2009 at 10:59 am
Good on you Grant..try and pick a spot on one of the many goldfields and teach the spogs to detect and dig their own pocket money. I’m too old to dig for myself so I have a few hundred people in Laos doing it for me. The truth is there is no future in wasting your life in a country mismanged by morons preoccupied with keeping their snouts in the trough and helping their mates to join them. Key is set to be remembered as a fool who failed to make the right call.
November 26th, 2009 at 11:00 am
yes
November 26th, 2009 at 11:01 am
Chris J
Welcome back. Do you claim losses from your rental property investments against your personal income?
Announcements on these appointments are not far away. We’re the only media organisation in the country at the moment (that I’ve seen) that is employing new staff at the moment.
cheers
Bernard
November 26th, 2009 at 11:02 am
LAQC Owner
Many thanks. How much? What do you say to people who earn a wage and pay 39 cents tax in the dollar to subsidise your income? Do you think it’s fair?
cheers
Bernard
November 26th, 2009 at 11:03 am
Personally I reckon a nice simple land tax is the way to go. Seriously though I doubt that national has the guts to go through with it. Still, I don’t think any political party in NZ would have the guts. Instead we may have to be very patient and wait for crash driven by Mr Market. This will be a far more brutal lesson for us all.
November 26th, 2009 at 11:06 am
I’ll be very interested to see how the government reacts to the upcoming results from the tax working group. If they do (and I think they will) avoid making the big calls, then I’m probably going to join the property/LAQC ponzi bandwagon myself -to some degree at least. Why not?
November 26th, 2009 at 11:08 am
Sam: Forget about Land Tax or CGT. The Feds will never allow it. Don’t even bother discussing them..
Getting back to the original article, there is another rort hiding under a rock that has never been discussed:
“IRD seemed to accept deductions on beach houses, as long as people actively tried to rent them.”
No wonder we had the beach bach boom! You don’t have to rent them, just try to rent them! Ka-ching!!
November 26th, 2009 at 11:12 am
LAQC
Well done. You are the only property investor in NZ who rents out his properties with a conscience and does it as a philanthropic exercise. Could we have our tax losses back instead. We would prefer you charged market rents.
November 26th, 2009 at 11:13 am
The tax working group propose a half percent land tax, that would have only a very minor impact ! The Spiv economy rolls on.
November 26th, 2009 at 11:13 am
Not fair but legal. I would’nt be a landlord otherwise.
November 26th, 2009 at 11:20 am
There must be fifty thousand busy finding worm holes and loop holes in the stupid tax system for ‘clients’ to slip through…..anyone know the number??
November 26th, 2009 at 11:21 am
And that is what I am agreeing with you on, LAQC. It’s not fair, so change the laws – ie: make it illegal.
November 26th, 2009 at 11:23 am
Thank you LAQC OWNER for providing the affordable housing to us.
Expect I could have bought that 4 bedroom house myself for 200k less today if all your speculators didn’t buy these houses;
and my tax bill would be a bit smaller if all you landloard didn’t rort from the WTF and LAQC;
and my salary might have been more than the current level if you were investing into productive sector;
and I might have bought my second-hand Toyota for $2000 less if the exchange rate wasn’t affected by the hot money as a result of your overseas-fund bank loan.
and I could have enjoyed a real affordable housing rather than begging for your mercy.
How kind of you!
November 26th, 2009 at 11:25 am
I had a domino’s pizza on the weekend. So according to chris i ‘employ’ chiefs, cheese makers, meat processors, wheat growers/millers, (i ordered over the internet and paid eftpos) so IT specialists, web designers.
Face facts. Property has in the last decade attracted tons of people wanting SOMETHING FOR NOTHING. They don’t think about adding value to the world in order to create sustainable wealth for themselves, they think about getting an easy dollar using tax breaks and all the BRAINWASHING that they talk about at property investment seminars.
If a company doesn’t make a profit after a couple of years, they go out of business. Yet property investors go for decades negative gearing everything (buying more rentals as there equity grows), making losses EVERY YEAR, while mounting up there capital gains, which get bigger and bigger as more people buy into the scheme.
Basically NZ needs (and by the looks is going to be getting) a shake up where those who want to learn skills, become educated, work hard and add real value to others (Businesses like interest.co.nz, professionals earning 60k here when they could be getting 90k over the ditch) get the rewards they deserve, and greedy people wanting to make an easy buck using (literally) every trick in the book get the rewards reflective of a low risk, low productive investment.
November 26th, 2009 at 11:28 am
@LAQC OWNER, some have tried to make exterminating the future of other people legal, ie. genocide. Some of us are against that happening to Generation X&Y in NZ. Hopefully legislation will soon be enacted to makes things, legal, but fair. As for providing good accommodation, good on you, but the tax rorts at your disposal mean that more people are unable to afford their own, and then have no choice but use what you provide – which is great for you, but crap for many of them – and NZ as a whole.
I would say keep up the good work, but what real good are you doing? And for whom?
November 26th, 2009 at 11:29 am
Hi Guys, does anyone know why LAQC’s were started in the first place? Pressumably there must have been some reason.
Also for Bernard… If a family has there owns there house in a trust and the trust is also earning money from other sources, can’t cost for the house be deducted against this income? Are you against that? Cheers
November 26th, 2009 at 11:35 am
hey everybody, (esp Bernard)
we are only playing with the cards we are delt with…We did not make the rules…somebody in the place they call the “Beehive” did. So until and unless they change the rules (ask John Key when) we are only trying to make a living and protect our little amount of savings.
Better alternatives ?? 1. Have it stolen by “entrepreneurs” like Watson, Hotkins, Rod et el?
2. Pay the goverment more in form of taxes so that they can subsidise MPs more rental or employ more people in the Beehive to write even more nonsensical laws?
3. Invest in companies that fail overnight without notice after glowing prospectus issued just a few months before?
YEAH RIGHT !!
November 26th, 2009 at 11:42 am
So is this right? Use an LAQC and transfer the ownership structure at a later date and you mitigate theclawback of deprectation costs? This gets worse with each investigation…..
http://www.youtube.com/watch?v=Wyu85QzALbw
November 26th, 2009 at 11:57 am
I really would not worry about the LACs and other Rentals and even affordable housing. There is a solution on the way it appears.
Nobody will be able to pay their rent and mortgages soon.
We will all be in the same boat, bailing like mad again soon. Taxpayers beware.
http://www.dailyfinance.com/2009/11/25/house-of-cards-after-artificial-rise-home-prices-may-be-headed/
And here is the same country that has more unemployed and unemployable than we do, but has 300million plus to keep them.
http://www.dailyfinance.com/2009/11/25/more-good-news-in-employment-initial-jobless-claims-plunge-to-4/
Here we have 1.8 million employed to keep the other half on make work schemes.
Good customers are hard to find for our and their goods and will be even harder to keep in future.
Those costs of borrowing heavily will escalate, as will debt.
Around and around she goes, where it stops, nobody knows.
Junket while ye may.
November 26th, 2009 at 11:57 am
“$25,000 free gift from the taxpayers, and no one would get caught!*
The loopholes, the loopholes, where everyone gets a bargain~~
(small print: * there won’t be any penalty even if you were unlucky.)
November 26th, 2009 at 12:01 pm
Brien of Hamilton and George – you are both BANG ON!!! I totally agree with both of your sentiments.
November 26th, 2009 at 12:04 pm
Guys like kin and Chris-J appear to be large property owners and presumably run them like any other business. Thats fine. What most of us are against is the salaried/wage earner buying an investment property and using a stupid system to reduce their tax and there by being subsidised by the rest. If Chris-J is also a salary earner and has these houses “on the side” thats OK , BUT don’t connect the two — pay your tax on your salary like anyone else.
I can remember Muldoon saying something like ” if there is a tax loop hole being used , thats OK but do not moan when I close the loop hole” LAQC may not be a loop hole but the same thing applies and Key and co have show some backbone.
November 26th, 2009 at 12:11 pm
Chris_J,
“Property owners/developer/investors create a hell of a lot of work and all we do is get lambasted as scoundrels by the likes of you for actually improving the standard of accommodation for a good many people.”
All bubbles create work in the short term. But its based on stealing from tomorrow, with the result of less work in the future as we pay off the debt. There are plenty of prospective buyers out there who would much rather improve the house themselves if there were not so many grubby landlords outbidding them spurred on by govt rebates.
November 26th, 2009 at 12:11 pm
Ross, agree entirely.
If someone chooses to invest in houses, so be it. Just don’t expect the rest of the country to cover their losses in tax rorts.
The idea is not persuading them to invest in something else as much as having an open field to choose from, where each investment route is treated the same.
How many house owners would invest in houses (those with more than just a family house) if they didn’t get the tax advantages? Take them away and find out.
My opinion is that house prices coming down may be an effect of removing rorts, but shouldn’t be the aim of it.
November 26th, 2009 at 12:22 pm
Bernard. I agree with you re Key – he has been a major disappointment.
This case is a classic example of the need to enforce the current legislation before mucking around with the goalposts…there is a mountain of tax that could be collected if the IRD was resourced sufficuiently to do its job. People have been living in their own LAQCs for years and this is the first one to go to Court ? Staggering.
However you need to ease up on the landlord bashing….most are playing within the rules…those who are not should suffer the full force of the law. Why are you not having a crack at the speculators who flipped properties and paid no tax, why are you not doing a “Crafer style” investigation into Hotchin and co, or the toothless and quite frankly hopeless Securities Commission that seem to do nothing about a tilted playing field and thereby discourage investment in asset classes other than property????
I am also interested in your comments to LAQC Owner re losses…are you advocating the abolition of loss offset and/or loss carry forward ?
November 26th, 2009 at 12:27 pm
Jacko Says:
November 26th, 2009 at 11:28 am
@LAQC OWNER, some have tried to make exterminating the future of other people legal, ie. genocide. Some of us are against that happening to Generation X&Y in NZ.
Jako you have hit the nail on the head. LAQC you must know you are doing serious damage to our society through your self interest.
There is no excuse for doing what’s wrong for the society in which you live. Bill English was acting within the law (just), Rodney was and so was Roger Douglas but how do we feel about their actions as a society.
LAQC behavior and desires makes them all look like saints (IMHO)
November 26th, 2009 at 12:28 pm
Andrew,
I’m saying abolish the ability to offset property losses against personal income through whatever vehicle, including LAQCs and family trusts.
A simpler way would be to have a single tax rate with a high threshold that discourages this game of minimising income to avoid the highest rate. Property also needs to be taxed, preferably with a 0.5% or 1% land tax.
That would trigger a one-off drop in prices and force property owners to at least pay some tax so they think twice before jumping onto the tax free property bandwagon.
cheers
Bernard
November 26th, 2009 at 12:43 pm
Fair enough – get em!
As usual the govt has it all wrong getting us to save.
Housing (no cap gains tax/tax relief) is safer than dodgy investment companies.
Put your money in the bank for low return and yr taxed yet again.
Don’t even bother about starting a new company – too hard! If you do by chance make a success then you’ll sell it to an offshore company (there will be plenty wanting to buy with the new immigration rules – hey they’ll drive property prices too)
Don’t know how the youngsters will ever afford a home.
And now the govt wants to bring in “bright young people” – so where to our graduates go ?? That will drive more offshore.
Leave now while you can!!!
November 26th, 2009 at 12:46 pm
Bernard
Im not sure thats the answer either – triggering a one off drop in property prices would create a raft of downstream issues.
Do you know if the tax working group looked at either a) reducing the depreciation rate on residential dwellings or b) reintroducing the 10 year clawback on interest ?
November 26th, 2009 at 12:47 pm
Bernard
“I’m saying abolish the ability to offset property losses against personal income through whatever vehicle, including LAQCs and family trusts.”
What about if the trust owns other income producing assets (say bonds, dividend yeilding shares or even another business). Should property losses be able to be offsetted against this income since they are not personal income?
Thanks
November 26th, 2009 at 12:51 pm
Bernard,
Agreed. Remove ambiguity. NO loss claims on ppty – if you cant make a profit you should not be in business, and in any event dont expect the govt to subsidise you. Land tax is the best idea of all. Impossible to avoid and easy to enforce which is crucial for any tax.
As for young heading off overseas?? Unfortunately as I’ve said before, in NZ we dont have much choice. For most, Aus is the only option. And contrary to popular opinion, govt policy over there is WORSE and their house prices are WORSE as a result. The LAST THING we shoudl be doing is looking to Aus for guidance, they are a 1 trick pony who are merely LUCKY to have plentiful resources, and this may yet blow up in their face. Australia has a lot more big industry influence and snouts in the trough than NZ. their media spruiking is also worse than here. Lobbying is big business, and corruption around planning approvals are well documented.
If NZers could easily move to the US or Europe they woudl be a lot better off. But then maybe thats why US/Euro has a more affordable lifestyle – they limit their borders for the benefit of EXISTING citizens. Give me a life in the US anyday – having a slightly higher chance of losing my job in the short term is a small price to pay for a nice house only 2.5 times my income.
Perhaps now with ageing populations across the whole of the first world, “first world skilled” people will become more and more in demand resulting in easier access to the US and Europe. I sure hope so. Then we will be seeing our kids via facebook.
November 26th, 2009 at 1:08 pm
I’d like to see the government only spend 2.3b on 200b of accomadation for NZers!?
Can you imagine the bureaucracy?
Employ property managers, accountants, lawyers, builders, etc on tax payers money!!!
My guess is the government would pay a lot more than individuals who pay for services at their own cost.
It is well known that when someone (from government) doesn’t spend their own money (i.e. taxes), s/he spends much more …
November 26th, 2009 at 1:08 pm
Mark,
If a trust loses money it doesn’t pay tax. That’s fine. Just as long as the losses can’t be offset against personal income.
Andrew
I’m curious about the downstream effects of a one-off drop in property prices. I’m going to the Tax Working Group public day in Wellington Tuesday to get more info on all this stuff.
Should be fun
cheers
Bernard
November 26th, 2009 at 1:17 pm
Mmmm
Seems a little unfair just picking on property developers
Share traders can also claim losses against other income, Business income can be set off against other income.
Perhaps what you are arguieing for is income and costs should be ringfenced so that losses or costs can only be offset against income that was generated by incurring those costs.
This is a simple fix to the tax regime that is used in a lot of other countries
So farming costs can only be offset against farm income
Web development costs can only be offset against web income
Salary costs can only be offset against salary income (ie none)
Property development costs, only against property income
etc
etc
etc
As an accountant – that would be great!!!
BTW I think the main reason that NZders invest in property is NOT the tax – is because they are in general financailly illiterate and do not trust the corrupt regimes in place to allow investment. So they put it into something they can understand and control. A rental wont turn into a porche – so keep control
I think that this corrupt crony driven system is a direct result of us demanding minimal governement intervention and control of the financial system – we beleive in market discipline, but no one is savvy enough to impose that discipline – and so the cowboys come in and rip us off.
If we had strong, highly regulated financial markets, I beleive that investment would slowly move out of property – but also would have to change kiwi psych of “she will be right” ” I can do it myself” and also start to teach people about financial literacy.
The solution is not LESS regulation – but MORE regulation to control and restore confidence
November 26th, 2009 at 1:25 pm
I have no problem with property developers, duggie. Rather the opposite. Developers actually make something that’s useful. I do have a problem with a tax system that is designed to provide ‘free’ money to those who produce nothing, other than work for perpetuators of that system.
Otherwise, I agree with your post. Less, and better thought out and enforced, regulation.
November 26th, 2009 at 1:27 pm
Bernard Thanks for the response.
But wouldn’t that just give an advantage to people who owned a business(or other income producing assets) through a trust, to own negitively geared property in that trust since they could depreciate and offset losses against tax they would have otherwise payed? Wouldn’t eliminating LAQC’s only effect people who were PAYE employed and give an unfair advantage to the self employed, whose own business they in effect didn’t personally own because it was owned by a trust? All they would need is a decent accountant and lawyer.
November 26th, 2009 at 1:38 pm
Jimmy,
If you can’t claim losses on property against personal income, rents will rise. How will that help home buyers?
Land tax is probably the simplest option but I can see major issues with Maori land.
“If NZers could easily move to the US or Europe they woudl be a lot better off.” Don’t know why you think that. Life is harder in Europe. Much more difficult to do business, less personal space, population pressures and pollution, fuel is twice the price of ours too.
November 26th, 2009 at 1:43 pm
Some thoughts on the general arguments regarding LAQC rental properties.
Do LAQC losses change your personal income for Working for Families purposes? IRD says “if one is not in the business of renting property”?????? Can anyone explain that?
Is there a difference in Losses from an LAQC compared to owning rental properties in ones own name? Yes – as losses are split by shareholding percentage.
Why can a rental property provide a cashflow after tax refunds? Because of deprecation.
What is depreciation? Depreciation allows for the wear and tear on a fixed asset.
Do houses really depreciate? I think most houses go up in price rather than down right?
As for the case with Mrs B – this is a different kettle of fish – renting the house one lives in from their company to make a loss certainly sounds like tax avoidance to me, and if Brent Gilchrist’s method of proving otherwise works then we all better jump on the bandwagon.
November 26th, 2009 at 1:48 pm
It would also be interesting to know how much tax property investments paid since 2003? Has this also increased?
When the rent starts returning a profit, tax is paid on this!
November 26th, 2009 at 1:54 pm
Im a little sick of all the running down of financial investments. There’s a lot of companies on the nzx. Select or get someone to select for you a diverse basket of these. You get cash flow from dividends and tax free capital gains when they go up (as brought for cash flow..)
November 26th, 2009 at 1:56 pm
(1) My guess would be to ask you to look at your own case, LAQC. How much tax have you paid on your investments since 2003, and how has that changed. Then multiply that by a factor of ‘X thousand’ other similar property owners. My memeory recalls that in the last 10 years NZ has gone from rentals being a net tax-contributor to a net-taker of some magnitude.
(2) Rents are unlikely to return to a profit basis whilst there is a tax incentive to do otherwise.
November 26th, 2009 at 2:03 pm
Dave: “If you can’t claim losses on property against personal income, rents will rise. How will that help home buyers?”
Hard to imagine that, the average tenant spends all their weekly income & doesn’t have any over for rental increases. If increases were to happen, they would either move down a level or double up. Landlords would then have to lower the rents on the empty houses & you would be back to square one.
No, the actual outcome is that house prices would decline to a level where landlording was an inherently profitable activity. & people would be able to buy their 1st homes without being outcompeted by baby boomers boosted by the landlord subsidies.
Key knows this, & as I quoted above has said “If we were to substantially undermine their primary asset, put them in a negative equity position, I’m not sure they’d thank us for that.”
November 26th, 2009 at 2:06 pm
I have three, one makes a profit and two make losses.
The two making loses will return profits within 3- 5 years, as the interest payment reduces and rent goes up.
November 26th, 2009 at 2:06 pm
“When the rent starts returning a profit, tax is paid on this!”
Rent never returns a profit for the property investors using the system. Rents go up, there house value goes up, they up the mortgage to reduce there equity back so its negatively geared again (using the extra money borrowed to buy another 2-3 rentals), and no tax is ever paid; on cash flow, or on capital gains
November 26th, 2009 at 2:21 pm
To yours at 1.48pm, LAQC, from todays papers:
“Net rental losses for 2008 were $580 mio, a major shift from net rental property profits in earlier years”
and,
“Losses by LAQC’s increase from $700mio to nearly $2,300 mio …and the number of LAQC’s from 63,400 to 130,000 in 2008″
How can a country of 4 million people afford a $1.6 billion attrition in taxation recepits on just this one item in just a few years? Apart from borrowoing $250 mio PER WEEK, which we are doing now!
November 26th, 2009 at 2:24 pm
Bernard, I don’t use an LAQC, but all of my income is currently property related so losses from one property are offset against profits from others, and against profits from trading (capital gains). Obviously making profits is the general aim, not losses.
If ring fencing losses is your aim, then this should apply to all cases, including business owner who takes a second job to make ends meet in tough times. Now that’d be really unfair – he’d be paying tax on wages without being able to claim a loss from his business.
Trying to distort the markets with different tax treatments, never works – some unexpected consequence will always occur. Such as less supply of rental accommodation -> [implies] higher rents -> higher government accommodation supplements or more state housing – [final outcome] increased tax revenue replaced with higher government spending – net result – no benefit.
Just like lower prices -> less home building -> higher demand -> higher prices. You see whatever you do you can’t win so I suggest you go out and buy a house! (You would have been better doing that in Nov 08 to Feb 09 though).
November 26th, 2009 at 2:27 pm
Of setting losses against PAYE is the distrortion. Just remove it. Siimple as 1, 2, 3 and consistant with all other tax treatment.
November 26th, 2009 at 2:28 pm
The law of supply and demand, chrisj, dictates that lower prices = more demand= more profit = more supply.
Land supply is the other part to this equation that needs adressing.
November 26th, 2009 at 2:40 pm
Nicholas Arrand, lower prices -> less supply: the past 18months is enough evidence of this. Less supply -> higher demand -> higher prices.
I think you’ve got the statement confused, I’m not denying that less demand -> lower prices, which is self-evident, I’m just stating that the converse isn’t true.
Land supply isn’t the main problem, there are thousands of sections available, the simple problem is that the replacement cost of housing is high and underpins current house prices.
November 26th, 2009 at 2:56 pm
george
One cannot keep buying more and more, everyone has a theshold. Losses are paid for with other income, so the maximum number owned is directly related to ones surplus income. No extra income= no more property.
Nicholas
These numbers are on the ones making losses, I am interested in ones making profits?
One cannot clain to have an LAQC if the business is makign a profit, so what are the numbers on property making a profit?
And what is the 5 – 10 years outlook?
I would predict the LAQC number comes back down, due to saturation or regulation or other … and profitable properties increase.
November 26th, 2009 at 2:56 pm
I won’t debate the supply side/demand side of economic theory with you chrij. Anyone who has that discussion finds they are both right. But if ,as you say, house building/replacement costs are fixed by current material and labour costs, then the unfixed portion of ‘housing’ is the variable land cost. Make landbanking a none economic enterprise ( use it or lose it; tax it etc), and force the release of sections back onto the secondary market. That will lower new house package prices, and thus comparative established houses.
and LAQC: It doesn’t matter about ‘the number’ of profit/loss rental properties to the economy, only the net figure, and that is a drag on our taxation take to the tune of $580mio last year.
November 26th, 2009 at 3:01 pm
Finally someone gets it. The cost of new housing is too high which is the other side of the arguement that most people just don’t get. This pushes the costs up all along the chain,,,and actually diminishes returns. Bumping up the interest rates (higher costs) wont necessarily stem demand becuae it is immigration driven. So prices go up. Our planning, compliance, building, andf material costs are just too high.
The other point I make is that NZ’ers go for housing, not because it is a great return…(over the long term it is not) But the NZ environment has been so business unfriendly to other options which make housing look good.
There has been little protection in the market for investors in other businesses and our treatment of less than scrupulous business leaders makes NZ a haven for snooks and crooks with a scheme and a dream!
November 26th, 2009 at 3:05 pm
NOTE:
One cannot claim to be under an LAQC if the business makes a profit.
So what’s the tax revenue for the government on profitable property?
It is definately not mixed in with the LAQC data … as they are separate kinds of entities: red and black ink!
Also what is the 5 – 10 year outlook?
I predict LAQC numbers come down, due to saturation &/ or regualtion or other … and profitable property numbers increase.
November 26th, 2009 at 3:14 pm
It doesn’t matter how much ‘profitable’ property investment there is , LAQC. If it’s profitable , it’s taxed. That, in my opinion, is how it should be. To sustain an industry, arguably New Zealands biggest, using loss-leading tax distortions makes no long term sense. Chrisj ( I use them as they have recently posted) is using the present system to its fullest, and so may they for as long as that system is in place. But I can only say that the LAQC system has not always been in place, neither will it. We will go broke, or be ‘taken over’ as a country otherwise. So for me, it’s only a matter of timing and uncertainty as to what changes will occurr.
November 26th, 2009 at 3:35 pm
1. Cheers for those who decide to be landlords. They are doing what they can to make a buck using their own abilities. What are often considerable.
2. If one want’s to invest it’s a problem where to do so. It’s quite unattractive to do so in the financial services sector seeing as it is filled with middle men, commission takers, fees chargers and plain thieves. When your money goes there. Who can know what is happening. It’s plain sensible to avoid these creeps and invest in property.
3. It would greatly enhance the wealth of New Zealand if the financial services were cleaned up.
November 26th, 2009 at 3:36 pm
I think the person who fiddled the LAQC should be locked up. the problem is the criminal – not the LAQC system
November 26th, 2009 at 3:54 pm
I’m amazed that Mrs B has name suppression.
Why shouldn’t we know her name.
cheers
Bernard
November 26th, 2009 at 4:04 pm
She must also be a well know musician, Bernard!
November 26th, 2009 at 4:14 pm
Kerry Hand,
“2. If one want’s to invest it’s a problem where to do so. It’s quite unattractive to do so in the financial services sector seeing as it is filled with middle men, commission takers, fees chargers and plain thieves. When your money goes there. Who can know what is happening. It’s plain sensible to avoid these creeps and invest in property.”
Imagine a world where a) OCR rates reflected reality and you could get 7% for a TD AND
b) you did not pay tax on the interest
Woudl you be happy to invest in a TD then??? I know I would. The problem is that we are not allowed that choice due to HORRENDOUS policy. Its ppty which is a) not taxed and b) favoured via OCR low rates and rebates on gearing. THIS IS WHAT WE ARE GETTING AT. Govt policy NOT MARKET FUNDAMENTALS makes some investments more attractive than they should be.
November 26th, 2009 at 4:17 pm
There are a few famous names begin with B with an interest in financial affairs.
It would certainly explain a few things.
November 26th, 2009 at 4:56 pm
Kerry Hand Says: Cheers for those who decide to be landlords. They are doing what they can to make a buck using their own abilities. Which are often considerable.
Kerry many talented people speculate on property that is true.
However you don’t have to be talented to do it. Buy a property, run at an operating loss, claim it off your PAYE and sell it. You get the inflation portion and the tax you didn’t pay as profit. Very complicated business….. NOT! Your actually farming other tax payers and generation X&Y.
Try being an exporter for a year and you will see talent put through the ringer and back again because of the above. Clever people surely don’t need the tax breaks and property is a real market so let it sort itself out and remove all the distortions.
November 26th, 2009 at 5:39 pm
How are ‘traders’ of our dollar taxed?
We have this ridiculous debate because governments stuff it up for every body with their over zealous control of our lives by taxing the life blood out of those prepared to work.
Maybe better in Russia?
November 26th, 2009 at 5:45 pm
I doubt whether they are Sally…when I asked Cullen on the matter he wrote back to say such a tax was not a good idea!! go figure.
November 26th, 2009 at 5:48 pm
Why don’t we all rock the boat in the next election. Just dump National and Labour. Vote for the smaller parties such as Maori or ACT. What’s the worst that could happen?
November 26th, 2009 at 6:04 pm
william…I hate to bring this to your attention but the water is up over the scuppers…by Nov 2011 the boat will not be afloat..
November 26th, 2009 at 6:20 pm
The system is rotten to the core – “Muck out the stables”
The country needs more women !!!
November 26th, 2009 at 6:35 pm
Women! – we need Wally
November 26th, 2009 at 10:20 pm
William, how many more trips to Paris and Hawaii we would have to pay then?
November 26th, 2009 at 11:30 pm
Aye William – and how many more racial insults would I have to put up with for things neither I nor any of my ancestors had anything to do with?
It looks to me as though the Maori party is just as bad as the rest – except that the rest are for the benefit of big banks/big business and the Maori party are for the benfit of big iwi. And all of them are for big government and big government handouts.
November 27th, 2009 at 9:31 am
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10611949
How dare they aspire to have a home of habitable quality on 2 incomes. Leave it to the landlords.
November 27th, 2009 at 9:43 am
Philly,
Your argument about house prices coming down doesn’t bear out in the long term.
I agree that house prices would initially decline due to a new tax. However, house prices in the secondary market are related to the cost of new homes and the cost of building a new home will not change simply because of a new tax.
As interest rates rise back to long-term averages, the cost of renting is getting relatively cheaper compared to home ownership. As housing demand pressure gradually grows, people buying new homes must be able to onsell them to either landlords or a new home buyer somewhere in the chain. With less interest from landlords, rents will have to rise.
November 27th, 2009 at 9:57 am
Haaang on a second Hamish… Consider the details in that article (yet another poorly researched and thought-out report from the NZ Herald!)
The first couple have got themselves in financial difficulty by getting short-term, high-interest credit on the car loan and the HP’s. Buy now, think later! Without that self-imposed debt, they would most likely be perfectly able to live without financial stress.
The second couple borrowed money (“huge loans”) to get married! Presumably to impress the Jones’, have a really good party and have the honeymoon they truly deserve… /sigh
Then when interest rates dropped on their mortgage, they used the difference to get into more expensive debt to buy a car! Then more HP’s…
Both these families are complaining about a financial situation they got themselves into by spending money they didn’t have. Why is this even in the news???
November 27th, 2009 at 10:01 am
If it is self inflicted, then who do you have to blame?.
Michael Jacksons..”The Man in the Mirror”. springs to mind.
November 27th, 2009 at 10:03 am
“With less interest from landlords, rents will have to rise.”
People always talk about rents as a price demanded by the home owner.
Rent is highly elastic so is relatively independent of supply-demand changes, people generally pay what they can afford, that’s why rents have not gone up as much as house prices, and are more comparable to rates of increase in wages.
Because rent is the only income derived from the ‘house’ asset, it value of a house is more related to the rent people can pay than anything else, in the long term ignoring artificial bubble scenarios where you get ‘penny auction’ type hype causing emotion to spike and erode rational decision making by property investors and speculators.
“rents increased about 1.7% per year on average from 1996-2006 yet at the same time house prices increased on average by 10.4%.”
November 27th, 2009 at 10:05 am
David,
“I agree that house prices would initially decline due to a new tax. However, house prices in the secondary market are related to the cost of new homes and the cost of building a new home will not change simply because of a new tax. ”
The cost of the land beneath it will certainly drop. Especially given that there is a lot of undeveloped land being land banked and vacant rental uninhabitable property at the moment – negative gearing tax credits mitigates the loss of not getting rent. Remove this, and there is more incentive to “use it or lose it”. This will result in more supply … well you get the picture.
November 27th, 2009 at 10:07 am
David,
“Both these families are complaining about a financial situation they got themselves into by spending money they didn’t have. Why is this even in the news???”
Because it shows how hard it is to get by, even on 2 incomes AND overtime. And the killer in all of this is overpriced housing. If they only had to pay 200,000, how much better would they be???????
November 27th, 2009 at 10:10 am
Sure, it’s quite likely cherry picking of facts presented. But it seems to read to me as a couple, both working, and the only ‘extravagence’ has been the wedding. Everything else seems to have been a necessity. And they basically are only just keeping their heads above water.
I just think it’s sad that a couple, both working are so on the edge, yet others game the system, including as outed recently our own MPs.
Is that the real lesson in life here? Learn enough so that you can game the system to it’s fullest?
November 27th, 2009 at 10:15 am
“The cost of the land beneath it will certainly drop. Especially given that there is a lot of undeveloped land being land banked and vacant rental uninhabitable property at the moment – negative gearing tax credits mitigates the loss of not getting rent. Remove this, and there is more incentive to “use it or lose it”. This will result in more supply … well you get the picture.”
Exactly.
Of the few small business owners I know well enough to comment on, all had rentals and land vacant with no great desire to sell or rent out (although would make it appear to the ird they were trying no doubt).
Reduce the business tax rate, these guys need more support, but don’t give them their support in a way that will unbalance our economy and drive house prices to unrealistic levels.
November 27th, 2009 at 10:59 am
NZ is one of the highest taxed countries in the OECD!
See second to last section in the below link:
http://www.beehive.govt.nz/speech/speech+new+zealand+institute+chartered+accountants+tax+conference
November 27th, 2009 at 11:57 am
At present, psychologically we all in NZ expect to “make money” from the increasing value of our housing property. Even those of us who understand that this expectation or “need” is unhealthy if unbalanced.
We should ask the question, why do house prices increase?
Either it is driven by the fundamental wealth of the nation combined with natural demand, or it is some form of unbalanced long running ponzi scheme.
As an investment for rental , you would expect there to be some link between rental rates and property values. So as indicated about the difference in rental and property value increases would seem to indicate a change in investment expectations.
November 27th, 2009 at 12:25 pm
Come on guys… the people “only just keeping their heads above water” are in that position because they spent instead of saved.
It’s like cutting your wrists, jumping in the sea and then complaining about sharks!
The whole issue with negative gearing is a temporary issue. It happened because of too much easy credit. Investors are 80% of the mortgagee sales right now, so it’s already working itself out.
Jimmy, the “If they had to pay $200,000″ comment… I guess you’re suggesting that a drop in house prices will solve everything? How many builders and developers are going to the wall? For prices to drop, the cost of materials will need to drop. The cost of land development needs to drop. Builders aren’t rolling in cash like they were a few years ago.
We are awash with land here in Northland. We have 10 years supply of sections! Yes, I think that section prices will continue to drop but a $200k house will still be a cheap box. You can already get one here in Whangarei if you want one!
I really don’t think that property prices are the main problem. I think financial stupidity is. How many times do you see a TV report about someone on the poverty line and look over their shoulder to see a 50″ plasma TV and their kids playing Playstation? Our priorities are all wrong.
November 27th, 2009 at 1:59 pm
@ Dave Smyth – that is certainly the case a lot of the time. People spend way more than they should on crap they don’t need, and worse, put a lot of it on credit. But what about people like me, who owe nothing, 2 x decent incomes, $100k deposit in the bank, and facing a $400 mortgage to buy an average house in an average area of Wellington. My choice is to not buy, and I’m happy with that. My point is it’s not always unaffordable because of financial stupidity. It’s unaffordable because the prices are stupid.
November 27th, 2009 at 2:16 pm
veedub – nice to see you in this thread. You are not alone. Just feel comfortable and you will be happier. To add to your posting, perhaps it is unaffordable because of greed and not wanting to lose out on any “paper” gains. You would be hearing more of the usual monthly property news in the next 1-2 weeks time. Don’t be surprised but take it as normal as it could be. Are you influenced by any of those monthly property news?
November 27th, 2009 at 2:31 pm
Veedub – I’m sure you can get something for less than $500k but even if you couldn’t a 400k mortgage at 8% works out to repayments of about $710 a week. Steep but do-able if you wanted to spend that much. http://www.realestate.co.nz has 113 listing for houses up to around 400k in Wellington city at the moment. Hell, my first place was a 90m2 1960’s ex-state house in a very average street. Not flash but it got me on the ladder.
November 27th, 2009 at 2:33 pm
@ Grandy – I read them, for sure. But I tell myself they’re all (Banks, RE Agents etc) just appealing to my FOMO (Fear Of Missing Out) and I refuse to let them. There are things in this life that I would truly feel FOMO over – my health, general happiness etc. A house is a house. Doesn’t really make that much difference whether I own it or rent it, except one costs twice as much as the other, because I still only live in it right?
People are paying more than CV again, what does that tell you? FOMO is alive and well in property. Why on earth else would they do that?
November 27th, 2009 at 2:38 pm
@ Dave Smyth. Yes, you’re right, I could get a place under $400k somewhere in Wellington. But why would I even want to part with that sort of $ to live in a tiny, basic box and have to spend yet more $ doing it up, rates and insurance. Already we’re talking more than double what I pay in rent for a very nice house in a nice area. I’ve owned 3 houses in my life so far, and never has it been this unaffordable. I’ve had a marital split along the way which resulted in starting again, which is cool – it happens, and ‘m happy with where I’m at now. I simply don’t want to pay that sort of $ for a substandard house. It’s not that I can’t. I just refuse to. No FOMO here!
November 27th, 2009 at 2:52 pm
@ veedub – True it is bad. I just hope that the banks are made to pull their heads in and tighten up their lending practices. I’m surprised every time I see an article (or a post) blaming investors for the price rises. They’re just responding to the bank’s easy lending criteria, the same as everyone else is. In general, an investor will pay less than a home buyer, so it’s not the investors leading the charge.
November 27th, 2009 at 3:30 pm
Dave Smyth,
“I really don’t think that property prices are the main problem. I think financial stupidity is. How many times do you see a TV report about someone on the poverty line and look over their shoulder to see a 50″ plasma TV and their kids playing Playstation? ”
You are right that financial stupidity is the problem. It is financial stupidity that created the bubble. The whole plasma tv argument has squat to do with it. WHY?? People spend less on TVs now than they did 20 years ago relative to inflation (and yes this includes plasmas). They spend 3 * as much on houses though. Hmm wonder where the stupid money is being plowed into????
November 27th, 2009 at 3:32 pm
“In general, an investor will pay less than a home buyer, so it’s not the investors leading the charge.
”
you forget the home buyer had to outbid the investor.
November 27th, 2009 at 7:20 pm
Bernard Hickey Says:
“LAQC Owner
Many thanks. How much? What do you say to people who earn a wage and pay 39 cents tax in the dollar to subsidise your income? Do you think it’s fair?
cheers
Bernard”
LAQC OWNER Says:
“Not fair but legal. I would’nt be a landlord otherwise.”
And that answer sums up everything …….
In effect LAQC OWNER has justified everything BH has said!!!
I know who I wouldnt have on my debating team.
Case closed
BH
“So far Key has appeared timid, poll-driven and lacking in courage to do the right thing for his children and mine. He has a perfect opportunity while New Zealand still has some flexibility to make this change as matter of choice,…..”
Key has one last chance to put his name in th history books along side our other great PMs who had the backbone to do what had to be done, popular or not…….
The Budget.
And English, a little here a little there is hinting at some big changes, lets hope he doesnt disappoint.
November 28th, 2009 at 11:24 am
@ Jimmy
“People spend less on TVs now than they did 20 years ago relative to inflation ”
Agreed, but that’s only half the story. There are lots of things that people now buy that when I was a kid in the 70’s either didn’t exist or were considered expensive luxuries. Back then most people saved up to buy them. Now people spend money they haven’t earnt yet to buy something they don’t really need and pay double for the privilege of having it now.
- gaming machines, home theatre, home computers, a second tv, 2 cars, microwaves, ipods, etc etc etc.
Even then, it’s not what they’re buying that is the problem, it’s how they’re buying it.
@ Steptoe – that argument could equally be used regarding LAQC’s. There’s nothing wrong with LAQC’s as such. They are no different to any other owner operated business and the situation now with LAQC’s is no different to how it would have been before them when people simply owned property in their own name. What has changed is access to finance.
Fix the problem, not the symptoms.
November 28th, 2009 at 11:33 am
@ Jimmy “you forget the home buyer had to outbid the investor.”
That doesn’t make sense. Homebuyers would still be bidding against each other long after serious investors have given up.
If any investor is foolish enough to compete with homebuyers, they are probably the “losing money to save on tax” idiots that are currently going to mortgagee sales.
December 1st, 2009 at 12:33 am
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