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Have your say: Westpac forecasts 16.9% house price fall on tax changes
December 17th, 2009Westpac has forecast a 14% fall in the median house price and a 7% rise in the rent on such a house if the government reduces the top income tax rate to 30% from 38%, as is likely to be recommended by the Tax Working Group. A ‘politically plausible’ combination of a 0.5% land tax and drop in the top tax rate could cut property prices 16.9% and raise rents 8.4%, Westpac forecast.
Property investors had bid up prices over the last 10 years to ensure tax losses on properties so as to avoid paying the top 38% tax rate put in place by the last Labour government. Without the differential in tax rates between corporate, trust and income tax rates, prices were likely to fall, Westpac economists Brendan O’Donovan and Dominick Stephens said in a research report titled: ‘Tax and House prices’
High-income landlords can swap their taxable labour income for tax-free capital gain income. Unsurprisingly, many do. Ownership of New Zealand rental properties is skewed towards high income working-age people, and the sector as a whole claims more in tax deductions than it pays in tax.
The price of a property – both owner occupied and rental – partly reflects the tax benefits conferred upon the owner. If the tax benefit changes, so will the price.
Westpac’s economists said it based its forecast on the changes suggested by the Tax Working Group and used a model that assumed one third of the adjustment would come in the form of higher rents and two thirds in the form of lower house prices.
Landlords receive a tax rebate for losses on their rental properties at their marginal rate of income tax. If the marginal rate of income tax changes, so does the size of the rebate. For example, consider a landlord who is taxed at 38% and loses $20,000 per annum from owning a rental property. At present, s/he gets a rebate of $7,200 each year (0.38x$20,000). If the top rate of income tax were 30%, the rebate would be just $6,000 per year (0.3*$20,000). The annual net cost of becoming a leveraged landlord would instantly increase by $1,200, so fewer people would be willing to do it. Less demand would cause house prices to fall.
Fewer willing landlords would mean higher rents. Lower house prices and higher rents would make home ownership both more attractive and more affordable, so home ownership would be higher than if taxes remained unchanged.
Westpac pointed out any change in the top income tax rate to 30% from 38% would encourage savings in bank deposits and investments in businesses.
Leveraged landlords are the “marginal buyer” in most segments of the New Zealand housing market, so they determine the price. However, it is useful to note that a change in income tax would also affect debt-free owner occupiers. Lower income tax means less tax on interest income or dividends. This would increase the incentive to save via bank deposits, shares, or business ownership rather than by owning a bigger/better house. So demand for property would fall.
Westpac also forecast a 4.4% fall in house prices and a 2.2% increase in rents if a 0.5% land tax was put in place. A capital gains tax of 10% would cut property prices 15.7% and lift rents 7.8%, while a ‘Deemed Rate of Return’ tax of 6% on equity in rental property would cut prices by between 26% and 35% and lift rents by between 13 to 17%.
A ‘politically plausible scenario’ of a 0.5% land tax and income tax set at 30% would produce a combined 16.9% fall in house prices and an 8.4% rise in rents, Westpac forecast.
However, it said the positive effects for New Zealand’s economic growth rate was likely to improve the sustainable rate of capital gains on property, partially offsetting the one-off hits from such tax changes, Westpac forecast
If New Zealand’s sustainable rate of economic growth were to rise, it is reasonable to assume that the sustainable rate of capital gain on housing would increase. (A “rule-of-thumb” says that the real capital gain on land should, on average over time, equal real economic growth). Our baseline scenario assumes 2.5% sustainable real capital gain. To completely offset the price-negative impact of the tax changes in the combined land and income tax scenario, the rate of sustainable real capital gain would need to lift to 3.1%, assuming no change in average mortgage rates. We think that’s a bit of a stretch.
My view
This report will kick off a real debate. Now the proverbial is hitting the fan of political reality as the property investors who (largely) backed National will bay for the status quo. I hope John Key doesn’t listen to the outrage too closely. I’m not hopeful.
Your view? We welcome your comments, insights and questions in the comments section below.
The full report is below
Tags: House prices, Property Investors, rental property, Tax Working Group, Westpac economists
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December 17th, 2009 at 8:59 am
Brilliant, well done the boys at Westpac.
I hate the bank but like the work their economists do.
As you say, should stimulate some real debate. To me this is a core issue – high tax rates cause daft behaviour. The problem is not the daft behaviour itself.
December 17th, 2009 at 9:06 am
15.7% or 16.9% ?? – anyway:
http://www.interest.co.nz/ratesblog/index.php/2009/12/16/top-10-at-10-austrian-bank-fears-a-million-xmases-ruined-chimerica-revisited-dilbert/comment-page-1/#comment-52760
December 17th, 2009 at 9:11 am
Les,
That 15.7% is for a capital gains tax. 16.9% is for a combined land tax and 30% top income tax rate.
“Westpac also forecast a 4.4% fall in house prices and a 2.2% increase in rents if a 0.5% land tax was put in place. A capital gains tax of 10% would cut property prices 15.7% and lift rents 7.8%, while a ‘Deemed Rate of Return’ tax of 6% on equity in rental property would cut prices by between 26% and 35% and lift rents by between 13 to 17%.”
cheers
Bernard
December 17th, 2009 at 9:12 am
@Bernard
Property investors had bid up prices over the last 10 years to ensure tax losses on properties so as to avoid paying the top 38% tax rate put in place by the last Labour government
Bernard this would have to be the most comical statement from you yet!!!!
I mean are you actually serious or just plain ……..????
December 17th, 2009 at 9:18 am
Paul,
You don’t think that happened?
As Westpac says, many wealthy New Zealanders chose to use the tax break and sacrifice cash returns for capital gains. Westpac has forecast previously that the 38c tax rate was responsible for a good chunk of the doubling of house prices over the last 10 years.
The IRD told the Tax Working Group property investors owned NZ$200 billion of property and made collective losses of NZ$500 million on that in 2008, reducing tax revenues by over NZ$150 million.
cheers
Bernard
December 17th, 2009 at 9:18 am
I do recall quipping to some sorry property common tater that the tax changes in the pipeline would kick him right in his LAQC’s.
Seems the banks agree. There’s also the deemed return on equity of 6%, causing a 34% drop in prices in this Westpac report, too. You may get your -30% yet, Bernard!
Lot of kites flying overhead, chaps and chapesses, and I would not be at all surprised to find that some or most get legislated in, or are tweaked into effect by Rules under the plethora of SR’s out there giving very wide powers to Ministers.
In which case, they aren’t so much Kites, as Drones. And we all know what Drones can do to unsuspecting ground-dwellers….
December 17th, 2009 at 9:18 am
Yes, Paul’s right. Let’s pull that apart.
Property investors had bid up prices over the last 10 years to ensure tax losses on properties so as to avoid paying the top 38% tax rate put in place by the last Labour government.
Huh?
I would have to be an idiot were I to bid up the price of a house to ‘ensure a tax loss’.
I bid $100 more for a house than I need to buy it (yeah right, you see this rational behaviour at auctions all the time do you?): what is the tax advantage?
Ignoring land and curtilage, I get, say, a 3% depreciation claim per annum, that’s a $3 depreciation charge.
I’m an idiot because I’m a property investor, say, so this $100 was 100% financed (because there was a bank stupid enough to lend on that basis), on 8% interest. That’s a tax deduction of 8$ per annum.
So per year they’ve created a tax shield of $11, saving them tax of $4.29 (at 39%), many of them are actually on the lower rates of tax, despite what this report says – I’d like to see the figures on it – so may have only saved $2.14 (at 19.5%).
So, the property investor, according to you, has deliberately bid up the price of his investment property by $100 year 0, to save tax of between $2 and $4 per year?
Don’t think so. There is just so much BS spoken about tax and property. The only solution we have got to the debt hole the government is enslaving us to for future generations, is to actually reduce the size of the Nanny State (in next years budget English is looking to grow it- http://lindsaymitchell.blogspot.com/2009/12/welfare-spending-only-significant.html ), and then stop, yes stop taxing so much damned stuff at such exorbitant rates.
Although in the meantime, yes, flatten the tax rates out as much as possible. Make sure there is no differential between the top personal rate, the Trustee rate and the Corporate rate. [Think of how moronic and stupid you'd have to be to create a differential in the first place (Papa Cullen).]
And Labour instituted a 39% top tax rate, not 38%.
December 17th, 2009 at 9:20 am
Bernard – thanks. Yep, I recall way back on a thread here (maybe one of Hugh’s) someone (maybe kin, Gibber, Waymad – can’t be sure?) supplying a link to an article in a Nelson newspaper (I think) that was about a Westpac analysis computing that about 17% of property price gain over the bubble, was due to the investment behaviour effects stimulated by the ‘let’s get the rich pricks’ 39% top tax rate introduced by Labour. Initially I found that strange as it has impacted most adversely on X&Y and ‘Joe Average’ and people I thought Labour generally represent, but now I understand more about how parliament works, and who it works for, it makes more sense.
Cheers, Les.
December 17th, 2009 at 9:27 am
Mark, you cannot argue from the particular (one investor’s rational economic behaviour) to the general. Doesn’t scale, y’see. Emergent behaviours, epiphenomena, etc etc. There’s a wide and rich literature.
The onus is on you to show that Westpac et al have it wrong. I followed Dominick Stephens’ pieces on this topic back in the day (2006 or 2007, from memory), and the contribution of the differential tax regime was shown by him to be a significant contributor to the house price rise. Of course there are other influences in play. But tax arbitrage is a major incentive.
And, Incentives Always Matter.
So, let’s see you argue the general case, please.
December 17th, 2009 at 9:31 am
Can anyone help clarify the possible increase in rents issue:
http://www.interest.co.nz/ratesblog/index.php/2009/12/16/top-10-at-10-austrian-bank-fears-a-million-xmases-ruined-chimerica-revisited-dilbert/comment-page-1/#comment-52760
December 17th, 2009 at 9:32 am
This debate will only get hotter and hotter the closer we get to seeing any real changes. A mate of mine with a couple of rental properties flatly refuses to believe there will be any changes to the tax system that might affect his investments, and so didn’t even want to talk about the issue. Once the possibility of changes start looking like a reality his quiet refusal to talk will become a rampant tirade. Personally, I say bring on some change but I still have my doubts there will be any.
December 17th, 2009 at 9:33 am
Bernard if a property investor pays too much for a property he wipes out his chances of a capital gain. To say that he purposely paid too much for a house in the hope of being negatively geared so he could give an extra $10 000 of his annual income to a bank as opposed to 39% of that income to the government is just plain idiotic and you know it!!!!
December 17th, 2009 at 9:34 am
I ran out of time in my above post. I see what you were saying Bernard, but the housing bubble was as much to do with an artificially scarce market for property, artificial because caused by government regulation and compliance cost. And cheap credit, of course. The same reason every other country, including those with capital gain taxes, had housing bubbles also.
But of course, lets try fixing over regulation and the huge cost of a thumping big bureaucracy by adding a further tax into the mix, thereby avoiding the real problem, the nature of which I’ve already stated and which we have no government prepared to tackle.
December 17th, 2009 at 9:35 am
To property investors,
Those who say property investors don’t want to make losses are wrong. They clearly do, according to the hard data from IRD. This factoid is driving the entire debate.
“The IRD told the Tax Working Group property investors owned NZ$200 billion of property and made collective losses of NZ$500 million on that in 2008, reducing tax revenues by over NZ$150 million.”
cheers
Bernard
December 17th, 2009 at 9:39 am
Agree with Bernard. IronBridge in ChCh sell and rent houses. I spoke with one of their advisors a while ago and was given a presentation and long report about their main business, which is selling new properties from developers to landlords and renting them out. The idea from the presentation was that I would lose about $100 per month (after tax rorts, etc), but would make massive gains in the longer term.
I said no, but theye have many clients who follow this example.
December 17th, 2009 at 9:44 am
But the utilisation of losses is only one aspect of the housing bubble we experienced, and not the originating one, nor the major one.
The best way to create an incentive for investors to invest in productive enterprise, is to reduce taxes in that area, that is, income taxes. Not to introduce new taxes in other areas that will not stop future housing bubbles. All of course having to be founded on only needing a much, much smaller tax take overall, and we all know there is only one way to do that, and neither of our major parties is even looking at tackling that, the size of the State, indeed, both are growing it.
December 17th, 2009 at 9:46 am
Paul,
But that was the problem. People believed property prices would keep rising at 10% plus a year (they did from 2002 to 2007) and that’s how they could justify the losses. It was and is irrational behaviour but people will do amazing things to avoid a tax they believe is not fair.
Otherwise, why would property investors colletively lose NZ$500 million in a year?
cheers
Bernard
December 17th, 2009 at 9:48 am
You blokes are looking at the trees…try looking at the forest…will the govt risk causing a 15% drop in property prices knowing the damage it would do to bank balance sheets!…they have one plan..stability for the bubble and hope like hell….
I seriously doubt English will get any major tax changes that would impact bank balance sheets passed the Cabinet..The 10% fall post the 08 market mess scared the you know what out of the banks and the RBNZ slashed the ocr to pork the property bubble. That is what has been going on all year. The rush to boost immigration by wealthy splurgers took centre stage. Why would this govt now do an about face and cause a 15% drop in property prices.?? Perhaps BH could outline how bank balance sheets are impacted when losses mount.
December 17th, 2009 at 9:49 am
Les, here’s the piece you’re after – Appendix 4, Bubble Schmubble is the key must-read.
A teaser:
(Sorry, thread admins, got my html foobarred on the first try. Just biff it.)
And Wally, you’re making the assumption that every property investor has 100% financing, thus throwing any value reduction straight back on the lender’s BS.
But if the average was say 80%, the lenders are not affected.
Just the investor.
Do I smell a political win-win in here? More tax, no adverse bank BS effects?
December 17th, 2009 at 9:49 am
Aren’t property investors actually losing more than $500m per year ,Bernard? Isn’t that figure just the amount of the tax rebate, hence the remainder 62% is borne by the investor against future capital gains?
December 17th, 2009 at 9:54 am
Sam says “refusal to talk will become a rampant tirade”. Looking at Paul’s (in particular) & Mark’s above, the tsunami has started.
You are quite right, systemic change is needed; however a John Key terrified of presiding over a one-term National govt is unlikely to make it.
This will add to a long history of NZ shooting itself in the foot.
A pity.
December 17th, 2009 at 9:55 am
Watch out renters, rents are set to rise…so westpac say
December 17th, 2009 at 9:58 am
Watch out, landlords! Keep hold of your good tenants. Any rent is better than none.
December 17th, 2009 at 10:04 am
Waymad the 15% drop would maybe lead to a spiral down. Look how easy it was for the market to blow the bubble on greed and easy credit. Consider what fear and tight credit could do. Deflation is something Bollard wants to avoid. The banks will be dam sure he continues to get the message..ditto the govt. The unintended consequences may well be to trigger a defaltion event. At the very best, you might see such tax changes dribbled the full length of the un level playing field. Don’t expect this govt to make bold decisions. They don’t have the balls for it.
December 17th, 2009 at 10:05 am
Paul, I don’t think property investors deliberately bid up the price on properties. Instead it is the inevitable result when a large section of the population get told property investment is a sure thing. So Baby boomer mum and dad buy a second house but now they are competing with all the other Baby boomers to get a nest egg. To make matter worse some young families are looking to buy properties in the same market, this obviously creates demand that is greater than supply. This pushes house prices up to the point where the yield on property is to low as a rational investment, but hang on, some mortgage broker then convinces mum and dad that losing money is a good idea! You get a tax break and property will keep going up 10% a year forever …. blah blah blah interest only loan blah blah blah.
So while you are correct in saying it does not make sense to bid up property prices that is exactly what happens. You are making the mistake that people fully understand what they are doing but in a lot of cases they are just following “advice” from someone who wants mum and dad to get another mortgage so they can get paid
December 17th, 2009 at 10:05 am
I can’t find the link to earlier Westpac 39%/17% analysis in the Nelson newspaper I mentioned. It was Roget T who brought it up and someone else supplied the link on another related thread. Roger T’s comment:
http://www.interest.co.nz/ratesblog/index.php/2009/03/24/opinion-5-reasons-why-house-prices-dont-represent-fair-value/#comment-18877
Waymad supplied this about some DPMC work on the subject:
http://www.interest.co.nz/ratesblog/index.php/2009/03/24/opinion-5-reasons-why-house-prices-dont-represent-fair-value/#comment-18927
Plus see comments by Steve Netwriter and Gibber about rent dynamics in London as property supply improved:
http://www.interest.co.nz/ratesblog/index.php/2009/03/24/opinion-5-reasons-why-house-prices-dont-represent-fair-value/#comment-18905
Hmmm…
Waymad – just spotted your 9.49am, thanks. Stuff on that earlier thread is still worth a look.
December 17th, 2009 at 10:07 am
I like the sound of a 16.9% fall in house prices it’s a great start for young New Zealanders born in New Zealand to get into home ownership and to build a platform to raise a family.
How-ever,
It would be a major change from the government’s strategy towards encouraging 40+ year old immigrants to live in NZ at the same time boosting house prices, these 40+ year olds will be the downfall of our retirement funds when the time comes and our own young will continue to take their tax free student loans overseas where they don’t have to pay the principal back.
December 17th, 2009 at 10:10 am
Yes Bernard you are correct that those landlords making a loss justify the loss with the anticipation of a capital gain just as a home buyer justifies the huge price they pay on a mortgage as opposed to rent. But this is completely different to your statement that is in question here!
NO landlord WANTS to make a loss! NO landlord would bid up the price on a property in order to pay 2.5 times more money to a bank than they would pay in tax.
Capital gain is possible whether you are negatively or positively geared – agreed?. So that argument aside please explain why I would choose to give $10 000 (for example) to a bank as opposed to $3 900 to the IRD?
Bernard you’ve just stated property investors HAD to bid up prices to ENSURE we were making losses which is plain BS!
December 17th, 2009 at 10:10 am
No doubt many new entrant landlords from 2006 onwards made dumb, financially irrational purchases; paying prices way OTT in comparison to the likely rental returns – all this nonsense being fuelled by the overly willing banks to lend more and more money on unrealised capital gains.
Now that the potential capital gains aren’t there – the banks are more cautious, and there will be a steady exit from these properties regardless of taxation changes. If the tax changes come in – it will be quicker.
I believe many (if not most) of this multiple property owning stupidity came from the yuppie age group, as opposed to the boomer/seniors. How many of these rental properties are now under water? Probably the majority. And if interest rates continue to rise, the first homeowners are unlikely to step in to absorb these properties at 10% discounts off peak. It will take much more than that to bring in first home buyers to the level previously seen.
December 17th, 2009 at 10:11 am
Les, in the above paper Westpac arbitrarily state that they expect the total loss to be split 1/3 to 2/3 between rental and capital values. They don’t attempt to justify it or relate it to the real world. So conclusion probably is – economists make up numbers so they have something to waffle about.
Paul/Mark – Mark’s maths approaches this from the wrong end. The point is that by accruing tax deductions it costs less for an investor to buy a house at a fixed price than it does an owner occupier. Mark’s numbers suggest about 4.5% a year less. This property is held for several years. I’ve no idea what the actual average length of time is – but for illustrative purposes lets say 5 years to be good and sure the IRD don’t pick on us as a “trader”
. as such for a given purchase price, a landlord pays ~22% less than an owner-occupier. As a result landlords can affor to bid up the price until the price reaches 22.5% more than the price the owner-occupier deems the property is worth. At which point the cost of ownership to the landlord is now the same as the actual market value (when unperturbed by tax considerations). Now of course this a zero sum game – but thats the entire point of market equilibrium theory.
You’ll note that I have just used ~200 words to explain an effect that takes Westpac 4 pages, and reached an order of magnitude number thats about as accurate in terms of predictive usefulness….. Are professional economists actually useful for anything?
December 17th, 2009 at 10:11 am
I thought rents were set by the ability of renters to pay. I am surprised at the prediction by Westpac that the tax changes are felt two-thirds in prices and one-third in rents.
I’m also not sure about Les’s point. As prices come down, does that not reduce the rent needed to sustain an investment return?
December 17th, 2009 at 10:13 am
@Bernard – it’s not that property investors want to make a loss … they are making an ongoing investment with the expectation of future capital gain. All this talk of tax loses seems to miss the point that collectively, property investors are pouring 500-150=350 million of their own hard earned cash into their investments each year. It is not irrational behaviour at all.
The tax loses are an ‘added bonus’ … but are not the sole reason most property investors own property.
December 17th, 2009 at 10:15 am
But hold on Andrew we feel sorry for the poor white haired folk that were ‘told’ by some evil guy that investing in Hanover was a sure thing but when some evil guy tells the same white haired folk that losing as much money as possible each year will make you rich then they become evil greedy landlords (according to BH).
Hey BH where is your exclusive interview with the poor baby boomer who over extended themselves in property, lost the lot and then couldn’t afford the medical bills??
December 17th, 2009 at 10:16 am
@ Bernard
———————————————————————–
Those who say property investors don’t want to make losses are wrong. They clearly do, according to the hard data from IRD. This factoid is driving the entire debate.
———————————————————————–
I think we need to distinguish between real property investors and the lemming-like lunacy of the many ignorant “investors” who were sucked in by property hype.
The problem isn’t property as an investment, the problem was the amount of easy credit that the banks were willing to lend to under-prepared, ill-informed dreamers.
This is no new phenomenon either. Kiwi’s are easy targets for hype of any kind, whether it’s Amway, Ostrich Eggs, Kiwifruit or Personalised Plates.
If you want to target the source of the problem, target banks’ lending practices.
December 17th, 2009 at 10:21 am
“a model that assumed one third of the adjustment would come in the form of higher rents and two thirds in the form of lower house prices.”
I dont think thats a very good model for that kind of prediction. I’m amazed that Westpac would publish such a model.
December 17th, 2009 at 10:22 am
well i’m not excited by this release, as it just causes more shit flow, more noise for the BH’s of this world to fluff up pour praise on. It is all noise to a long term property investor, and i intend to hold onto my existing property portfolio, expanding it when i can.
for the knowledgeable, they know they are floating or sinking
for the doers, they know if they should or should do
for the easily disillusioned, there are the westpac rumourers
for the desparate, i dunno, for that you will have to ask Bernard….
December 17th, 2009 at 10:26 am
“A ‘politically plausible scenario’ of a 0.5% land tax and income tax set at 30% would produce a combined 16.9% fall in house prices and an 8.4% rise in rents, Westpac forecast.”….get out of here…..this is flying pig stuff…it is a “politically impossible scenario”
December 17th, 2009 at 10:28 am
President of Property, always the confidence man. A bit like Eric Watson and Co. I imagine.
December 17th, 2009 at 10:29 am
A reduction in cost of asset (-16%) and a rise in return (+7%) has got to be good news for genuine and intending property investors – as opposed to existing speculators. There is little sympathy out there for the relatively small pool of speculators and house flippers and I don’t think such a scenario would be political suicide as some have suggested.
A big rise in rents seems unlikely, the overall stock of housing hasn’t reduced and rent increases would be constrained by weak wage growth.
The pressure is mounting on the govt. from the Reserve bank, NZX and manufacturers to sort out our lopsided economy. Watch for the speculators to be painted as tax dodgers and ultimately become collateral damage in this battle.
December 17th, 2009 at 10:29 am
Well POP, you are half right – all those knowledgeable landlords know they are sinking – the IRD tax losses recorded prove that!
But like you – most claim they intend to “hold ‘em”. But when “hold” means for the next 10-15 years before any significant capital gains might be realised – the level of losses to be incurred between now and then (especially if those losses cannot continue to be written off against something) don’t look so attractive.
December 17th, 2009 at 10:33 am
@ Kate – ringfencing would certainly make property investing less attractive but as to how they do it…? Targetting LAQC’s would just mean PI’s shift property into their own names. They would have to apply it to rental properties, which sounds like an administrative nightmare to me… not to mention the loopholes.
December 17th, 2009 at 10:35 am
House prices to fall, is this a tui ad? Guess I wont be buying any more banana smoothies, westpac your classic
December 17th, 2009 at 10:38 am
Yeah Right!
There is no way that this government will adopt any of the Tax working group recommendations.
It’s not worth getting RSI over responding to this Westpac report.
Have a Merry Christmas and face the reality that property prices are on the rise.
http://www.realestate.co.nz/blog/wp-content/uploads/2009/12/strat-vs-median.jpg
December 17th, 2009 at 10:40 am
Dave – Ring fencing is pretty straightforward.
(1) Set depreciation on buildings to zero unless property is held in a Residential property company (RPC).
(2) Only allow mortgage interest rates and council rates to be tax-deductible when incurred on an asset held within an RPC or LLC.
To be fair you would probably need to allow landlords to claim back tax losses in future years from an RPC – say over a 5 year time scale?
Its not the cleanest solution in the world, but it would work.
December 17th, 2009 at 10:41 am
Props (no pun intended) to Westpac, for telling it like it should be. That’s the second time I’ve remembered them for something… Perhaps this honesty might gain them more respect in the banking world by it’s clients and competition. Sustaining property capital gains are better than boom and bust – or jobs go sideways and both company and employee lose out.
December 17th, 2009 at 10:46 am
@ Chris B
That would mean the forced restructuring of all residential property investors portfolios! Can you see that happening???
December 17th, 2009 at 10:51 am
Chris B – I agree – a phase in period is the likely scenario choice for this Government.
Dave S – yes and I think they will do it. They can’t ignore the present tax losses as they can’t afford that (and it is unpalatable in terms of our overseas “owners”. The prescription for countries with debts like us is higher taxes, lower services. The time of tax concessions to support investment strategies is over.
December 17th, 2009 at 10:57 am
Im with Wally…its not going to happen for a whole raft of reasons….its political suicide.
No Govt in their right mind is going to legislate to destroy $ 30 bn odd of wealth…and ultimately force rents up. Thats potentially the entire voting population alienated.
December 17th, 2009 at 10:57 am
John Key has already said no to the proposals – he doesn’t like change
December 17th, 2009 at 11:00 am
Dave – nothing forced about it. Landlords can keep their present portfolio structures if they want – they just won’t be able to make tax-deductible claims if they do. Do you think landlords would prefer the RFRM method being mooted instead? Or how about a big fat juicy asset tax on the building property a la Gareth Morgan?
To be honest I think the concept of tax-deductible depreciation on buildings is totally unsound. If the building is suffering wear and tear landlords should be doing maintenance and claiming for the true cost of the maintenance — not some fantasy number invented by the accountants (depreciation). Any long-lived asset that depreciates close to or below the long-term rate of inflation is as likely to appreciate as not, so depreciation can and should be ignored for taxation reasons. And the “capital gains” theory of property investment suggests buildings don’t actually depreciate at all….
December 17th, 2009 at 11:00 am
Paul
Like this lot?
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10600536
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10612174
December 17th, 2009 at 11:02 am
For some reason, I keep seeing headless chickens when I read this here thread.
Politicians? Property Tycoons (on paper, anyway)?
And don’t forgot,chaps and chapesses, there has been an awful lot of work put in to identifying just What administrative approaches will pluck a few more feathers, and generate the least hissing from the property goose. So there’s no point in reinventing the wheel.
And if anyone thinks the banks haven’t seen this a’coming, at least in general form, and arranged their affairs accordingly…….banks Are somewhat renowned for their intense self-interest and survival skills, wot? There be a ticket to clip somewheres….
And the larger point is simply this.
Property investment to the extent we now have it, is seen as less productive than alternative uses of that capital. Misallocation of resources is the phrase. The Capital Markets crew make the exact same point.
So something’s gonna give…
December 17th, 2009 at 11:02 am
By budget time prices will be up around 12% year on year anyway, so a 16% fall will be easily absorded. Govt books are sound, its the long term productivity thats the worry and thats what these tax changes address.
For mine: The tax changes will happen. They will cause a one off drop in prices. Land tax will start very low and gradually increased to minimise one-off drops.
Pauls posts annoy me and are typical of people who buy property because its the only thing they can understand (as opposed to people who buy for better reasons). To think ‘bidding up prices’ means they deliberately pay in excess of an asking price or what they could get a property for (so they could get tax back on losses) only shows a lack of understanding of 3rd form economics.
When you make higher top tax rate (up to 39%) you introduce an incentive to a large group of people earning good money to invest more in negatively geared houses. When ALL OF THESE PEOPLE are added to the demand side of the equation, and bid against others the price of property is increased. Because these high income earners are the marginal buyers they set the price for all others.
December 17th, 2009 at 11:03 am
Russell – it’s not up to John Key. NZ has offshore masters. Whether they continue to support his borrowing agenda or not will drive policy. They will want to see an increase in the tax take – and that either comes from wage earner and company returns, or from raising taxes on existing capital investments. The former does not look like a likely prospect – hence we will get the latter.
December 17th, 2009 at 11:06 am
@ Kate
As I understand it, tax losses on property are a recent problem caused by excessive lending.
Reducing investor demand for property will ultimately increase rents and impede access to property for first home buyers.
@ Chris B
I don’t get depreciation either but as an investor I’m not complaining. Removing it would probably be the easiest and most effective thing they could do to make property investors more accountable for their investment decisions.
December 17th, 2009 at 11:08 am
I can’t beleive how giddy with joy some people on this site are about the propsect of a new tax!! Don’t you realise that slowly but surely this will grow to apply to owner occupiers to? Do you trust the govt enough not to do this? Really?
December 17th, 2009 at 11:10 am
Dave/Chris – and depreciation claimed is owed on sale of the property – so from a tax take point of view that gives the Government further incentive to rebalance (meaning encourage non-owner occupiers out of the market).
December 17th, 2009 at 11:11 am
Actually…it’s been a bloody cracker of a way for Westpac to dominate the xmas BBQ booze soaked debates and fistfights over the whole break…brilliant bit of PR.
December 17th, 2009 at 11:11 am
mark – as an owner occupier I’d be quite happy to pay a capital tax on property provided that the top income tax bracket was reduced.
December 17th, 2009 at 11:17 am
Kate – ya dreaming mate!
We’ve had stamp duty on property up until about 1986 and it made no difference – top end tax rate was 60 cents back then too!
None of the never to be instigated proposals will alter the appetite that we have for housing.
House prices are going to rise 24% over three years (Infometrics) so a drop caused by these measures will be no big deal.
December 17th, 2009 at 11:17 am
Kate – wouldn’t you just prefer the govt to stop pissing away tax payers money on BS, lower top tax rate and have no new taxes? I know I would! Wasn’t that what National campained on? Stop govt waste and lower taxes. (Insert tui ad ending here)
December 17th, 2009 at 11:18 am
Mark – the recognition is that new taxes are required to lower and flatten income/company/trust tax and to boost total economic growth (a bigger pie for everyone). So you give a little on property/land tax but you make damn sure you see 25% flat income tax coming back the other way.
NZ’s Tax system is totally broken – there are so many loopholes and inconsistencies you could pilot the QE2 through it. It needs dumping and starting again with a cohesive whole of system approach – not ad-hoc bits here and there.
We get the politicians we deserve – “for evil to triumph it is only necessary for good men to stay silent”.
December 17th, 2009 at 11:18 am
“Paul/Mark – Mark’s maths approaches this from the wrong end. The point is that by accruing tax deductions it costs less for an investor to buy a house at a fixed price than it does an owner occupier. Mark’s numbers suggest about 4.5% a year less. This property is held for several years. I’ve no idea what the actual average length of time is – but for illustrative purposes lets say 5 years to be good and sure the IRD don’t pick on us as a “trader” . as such for a given purchase price, a landlord pays ~22% less than an owner-occupier. As a result landlords can affor to bid up the price until the price reaches 22.5% more than the price the owner-occupier deems the property is worth. At which point the cost of ownership to the landlord is now the same as the actual market value (when unperturbed by tax considerations). Now of course this a zero sum game – but thats the entire point of market equilibrium theory. ”
Nicely said.
The problem is a lot of people simply can not understand these sorts of things so they just keep yelling there same ignorant point louder and louder. Or as most just live in denial.
“Denial is a defense mechanism postulated by Sigmund Freud, in which a person is faced with a fact that is too uncomfortable to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence.”
December 17th, 2009 at 11:18 am
@ Kate “and depreciation claimed is owed on sale of the property”
Yes, it’s effectively an interest-free loan that is repaid in devalued dollars.
Mark has a good point. You allow another tax in on the condition that another is reduced but then how long will it be before it is raised again?
December 17th, 2009 at 11:19 am
Dave Smyth, “Reducing investor demand for property will ultimately increase rents”, this is incorrect. Time and time again we see that the market will only pay what it can afford. For-instance Australia recently introduced a mortgage payment for first home buyers and by no surprise home values went up by the same value – their government may as well of written home vendor’s a cheque instead of home buyers.
It’s how-much PAYE tax payers earn each week that determines rental returns and their is no increase in wages so rent will remain the status quo.
December 17th, 2009 at 11:25 am
@ Aarron
“It’s how-much PAYE tax payers earn each week that determines rental returns and their is no increase in wages so rent will remain the status quo.”
I don’t think it’s that simple Aarron. It’s about supply and demand and perceived value. If there are fewer rentals available and rent is still considerably cheaper than buying, there is room for movement. Money will just shift from less necessary things to housing. For me, the question isn’t if rents will increase but by how much and what the money will be taken away from.
December 17th, 2009 at 11:26 am
Russell – the biggest influence on house prices in the 10-15 year term will depend on our int’l investors – and it’s not looking good. House prices are going backwards or stagnating whilst inflation catches up. Meantime, interest rates on borrowing will rise (and my guess is faster than deposit rates).
I admit – I’m a bear but I can afford to be – that’s the main difference that determines ones perspective on this.
December 17th, 2009 at 11:31 am
mark and Dave S – on taxation, I agree a complete overhaul is necessary and my preference so far has been for Gareth Morgan’s proposal – as I think it is the only one which attempts to address both tax and welfare at the same time.
That said though, I think we’ll get the more neoliberal defined changes which you see coming in in Ireland, Greece, Iceland etc.
December 17th, 2009 at 11:36 am
Dave Smyth, renting has always appeared cheaper than buying to people who rent probably because they have payed so much rent that they cannot afford to save for a deposit.
As a renter, if asked for a rental increase currently I would simply move.
When one local restaurant increased their prices recently I stopped eating their twice a week.
You’ve got to take a stand on a personal level to make a difference.
December 17th, 2009 at 11:44 am
i’ve just tuned in to this talkback show but when i try to ring in, the disembodied voice keeps saying ” try later as we’re currently overloaded with a celebration of uninformed opinion”….where is the love?
there will be blood;there will be taxes on property…it won’t happen overnight but it will happen…..and rachel hunter said to wish you all a merry christmas..esp you Wally !
December 17th, 2009 at 11:45 am
I still must be missing something. Putting the tax rate change aside, we regularly get large rates rises here in AKL at a level well in excess to the land tax proposed, and house prices dont budge down an inch.
Whats the difference, what am I missing?
December 17th, 2009 at 11:48 am
whatever change they bring in, lets just get it done. I would welcome an additional 10,000 in my pocket from teh tax changes, the small rent rise i can stomach, and would be great buying a house for 20% less. John Key is a complete a— if he lets this opportunity slip.
December 17th, 2009 at 11:49 am
One thing to keep in mind (I may be answering my own question from before). If rents are determined by take-home pay and a new property tax (CGT or LVT, etc) is accompanied by a reduction in income tax, then there you are. People’s take-home pay is increased.
December 17th, 2009 at 11:50 am
@ Ray
You are completely right but have completely missed my point.
Can you use your 3rd form economics degree to explain why a property investor needs to ENSURE that they make a loss? Why would they ENSURE they pay a bank 2.5 times what they would otherwise pay the IRD? Simple question for such an intelligent man as yourself I would have thought?
December 17th, 2009 at 11:50 am
I’m with Jimmy. Get on with it. Just pick one of the proposals at random and do it. Any of them would be better than what we have now!
December 17th, 2009 at 11:57 am
Proganda
By a landlord (member of the Growth Lobby). And by a supplier of the debt that fuels the house price party. That is, another member of the Growth Lobby.
They might rise. The Growth Lobby is always happy when they do. Easier to service the debts of the landlord. More likely the supplier will get their repayments and won’t lose out coz the landlord can’t pay the mortgage.
December 17th, 2009 at 12:02 pm
Wallly is right on this one, there’s just no way the govt will do anything the ongoing housing bubble and tax dodge. Rightly or wrongly the govt (both parties!) are well and truly ensconced in a generational desire to pork property prices any way possible, this won’t change until boomers start retiring.
December 17th, 2009 at 12:20 pm
I think this report is bollocks.
The proposed tax measures will not reduce house prices to that extent, in my view.
Forget their cliams of “independence”, banks like Westpac will suffer if CGT or land tax is introduced, this is a cynical scare tactic.
Surely reducing top taxes will have a countering efect in terms of house prices? If I get thousands more dollars in my hands every year then I will be able to afford a higher priced house, this will push up demand surely, balancing out potential for drops in prices
December 17th, 2009 at 12:31 pm
Those souls who pronounce the Gubmint incapable of moving on levelling up the tax playing field are ignoring the elephant in the room.
The bonds market.
At the minute, we’re borrowing $250M/week, from a market which is staring at a raft of sovereign defaults in the coming years. We may be in the happy position of being able to feed and oil ourselves (yes, oil, it’s our third largest export earner…), but at that rate of borrowing, our creditors are going to have a say one way or another.
This satirical piece imagines what Wen Jiabao and Obama might have a little fireside chat about in the near future.
That same chat could be part of our future, too.
After all, fear of the bond market vigilantes is perfectly rational….
December 17th, 2009 at 12:38 pm
Matt in Auck – what pushed up the recent residential property demand (and hence price) was access to highly leveraged, cheap credit – not after tax wage inflation.
As interest rates increase, any reduction in income tax will be offset by the higher mortgage repayments and/or the higher deposit requirements.
In the past boom phase, alot of folks took on more debt than they would normally have at these higher interest rates because they had a (perhaps false) sense of security with respect to anticipated (unrealised) capital gains.
If the prospect of those gains is less certain, people are simply unlikely to make those 90-95% debt commitments – and similarly banks are unlikely to lend on that basis either.
December 17th, 2009 at 12:49 pm
Paul, they load all there equity over to the family homes mortgage or some other investment that doesn’t benefit from negative gearing. They are not paying any more to the bank due to the increased mortgage as the equity removed from the rental is used to either reduce a family home mortgage (prob most common), or invested elsewhere earning more than they are paying to the bank.
So the tax back is a no brainer. Hold as little equity in rentals as possible and let the PAYE workers cover a third of your paper losses while you use the ever increasing equity from the appreciating rentals to fund a business, shares, family mansion.
As rentals go up in value they re-mortgage further to remain negatively geared taking the money out of the rental and putting it into investments, more rentals that are also negatively gear, or the family home.
December 17th, 2009 at 1:02 pm
@ paul
“Can you use your 3rd form economics degree to explain why a property investor needs to ENSURE that they make a loss? Why would they ENSURE they pay a bank 2.5 times what they would otherwise pay the IRD? Simple question for such an intelligent man as yourself I would have thought?”
You forget things such as WFF. 9700 households get WFF because they claim tax losses related to property. That along with the higher tax rate break is a big incentive.
To reply to a previous question you posed. You could overpay on your property by 20%, but still be in the money, because according to the property hawks house prices double every ten years don’t you know.
December 17th, 2009 at 1:04 pm
“fear of the bond market vigilantes is perfectly rational”…but fear of letting Labour back on the Treasury benches dominates the ‘hive’. Sorry Waymad but the govt is certain of the level of public stupidity..and remains loyal to the banks..they will not mess with the bubble. Indeed, you can expect the fools to pork building activity at the first signs that the recession is far from over. Show me the mass public outrage at property being unaffordable???…where is it??? “The public are stupid”. That’s National’s mantra!
December 17th, 2009 at 1:05 pm
@ Aarron: “When one local restaurant increased their prices recently I stopped eating their twice a week.”
Excellent news! When rents increase, you’ll be able to pay more rent rather than eating out twice a week!
@ george: “As rentals go up in value they re-mortgage further to remain negatively geared taking the money out of the rental and putting it into investments, more rentals that are also negatively gear, or the family home.”
These are probably the same investors that make up 80% of all mortgagee auctions at the moment. At some point, PI’s have to pay down debt. There’s no point owning a mass of highly leveraged property with no income.
December 17th, 2009 at 1:05 pm
Mark, too true. Pork barrel politics at its best.
December 17th, 2009 at 1:16 pm
http://www.theage.com.au/business/markets/gold-rises-most-in-two-weeks-on-us-slide-rates-outlook-20091217-kxw9.html...
Back the future folks..rising commodities falling Dollar..just what the Fed planned..”now who’s a good wee gold bug then…show mummy your stash of yellow coins”
December 17th, 2009 at 1:34 pm
I thought copper was your Thang, Wally?
December 17th, 2009 at 1:44 pm
Can’t imagine rents going up and house prices down at the same time, to good to be true. It’s every property investor dream, costs (of buying property) down, profit (rents) up. Sweat dreams…back to work now.
December 17th, 2009 at 1:45 pm
To all
I too am a little sceptical about the size of the price fall and whether rents will rise. I doubt house prices would fall that much or that rents would rise that much.
As AndyC pointed out local rates rises have done little to dampen house prices. Also, rents have been remarkably stable over the last couple of years despite markedly higher costs for landlords.
I suspect rents are much more closely linked to disposable income than house prices are. That disposable income will not rise that much in the next couple of years. People also forget that more expensive rents are often met with people choosing to live in different and poorer accommodation. That often means living with friends or family, garages etc.
I also think the scale of the loss of confidence in other investment options (particularly finance companies and the stock market) is underestimated. New Zealanders have ‘never’ lost money in the housing market and don’t trust the capital markets anymore.
The banks are also reluctant to ‘force’ prices down through widespread mortgagee sales.
But we’ll see. I agree the pressure down on house prices will be immense if these changes get through. The pressure on Key and English will also be immense. So far Key has not inspired. But he might.
cheers
Bernard
December 17th, 2009 at 2:27 pm
Thank you Bernard. I will use this information when I’m negotiating my next investment property. A load of rot but its amazing what people will believe when they are desperate enough.
However, to make it bit more believable, can we have something about cans of coke falling to 50 cents and a beer in town to $4.00? Otherwise the more astute sellers might not be convinced. And rightly so.
Keep up the good work!
December 17th, 2009 at 2:41 pm
And to that analysis, Bernard, I would add that in the low end of the rental price bracket – government subsidies via accomodation benefits and WFF tax credits have indeed propped up rental prices in the recent past years.
Indeed, many of those people renting private sector properties cannot actually afford their rentals based on actual wages.
Housing is a hornets nest, for sure, and the present Minister either simply doesn’t understand or chooses not to.
December 17th, 2009 at 2:52 pm
Ahh! At last.
Many times on this site I have asked where is the political risk in GCT and I’ve never had a decent answer. Here it is it’s the banks. I don’t understand the mechanism yet but this scare tactic by Westpac sure makes it obvious that they don’t want the status quo changed. They have changed the debate with this article and the number of people resonding indicates they’ve hit a nerve.
Perhaps someone can now explain the mechanism by which they benefit It would help move my understanding of economics along.
December 17th, 2009 at 3:01 pm
Oh Waymad you know me well..to try to explain..the copper ore deposits are often found to contain gold and silver in smaller amounts. The copper concentrate pna sells contains these other metals. So I am copper gold and silver all rolled into one big bug. I seem to recall reading about gold being a waste material found in the geothermal pipes at the power stations up north. That would figure.
December 17th, 2009 at 3:01 pm
@George
If you move equity from your LAQC to your family trust (or whatever owns the family home) its is still considered a loan the LAQC will be taxed on the interest charged for the loan i.e. there is no financial gain or point in doing so.
@Andy M
WFF is still a tax rebate i.e. I have to throw away my money to get a small portion back. Why would I need to bid up the price of property to ensure I make a loss when I could just as easily lower my rents if I wanted to claim WFF?
December 17th, 2009 at 3:02 pm
Gibber, others sceptical about price reductions, rent increase – agreed, just propaganda. Do you really think the banks want the PI gravy train to stop?
As for being politically difficult for Johnny-English, I doubt there will be a serious challenge till election after next:
‘The Labour leadership tease’
http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10615892
Plus Labour have said they’d support discussion on some of these proposed changes. Aside from having their own portfolios sorted within 5 years, they’d probably be pleased Nats dealt with this now, rather than leave it for them – if it don’t come soon, it will have to come later. All up that they’d be unlikely (dumb) to repeal any changes that sees the economy getting re-balanced, and so said changes would meet Bill E’s sustainability requirement. JDI next budget.
December 17th, 2009 at 3:16 pm
Brian you are right on the money – this is scaremongering from the banks. They are trying to paint a picture where few people will benefit from any tax changes. They perfer the status quo.
Bigger mortgages for inflated house prices = more profit for the banks!
December 17th, 2009 at 3:30 pm
@Paul:
Is this the reason that George noted the progressive transfer of LAQC liabilities into a Family Trust as the ‘way to go’? More about depreciation than interest?
http://www.youtube.com/watch?v=Wyu85QzALbw
December 17th, 2009 at 4:09 pm
“Watch out renters, rents are set to rise…so westpac say”
Therefore its better to own your own place than rent, buy your own house now and become a home owner today!!!
hehe…more games and talks from the greedy people with power, lets introduce the new tax now!!
sigh…
December 17th, 2009 at 4:26 pm
It’s worth noting as a grumpy taxpayer, that us Tax Producers are subsidising rents in at least two ways now: the welfare supplements to direct benefits (Tax Consumers), plus the foregone tax on the sheltered investment, which renders otherwise Tax Producer types into Tax Consumers.
And as for scaremongering from the banks: the Four Pillar banks we are blessed with are amongst the best in the world. They don’t have clean hands re profits and where they get them from, perhaps. But equally, they aren’t hiding massive off-BS liabilities, and are certainly not a threat to the Australasian economy.
Whereas, pick a large European bank. Any bank. A lot of rotten peas hiding under Those shells, and as dear AEP over at the Torygraph keeps saying, “Cap’n, she’s gonna blow.” In perfectly modulated Brit tones, of course.
But I digress.
The banks have no interest in yet more dodgy residential or CRE. They’ve had to provision up for the stuff they already hold. In my conversations with Westpac, they have reemphasised the ‘three C’s’ – Character, Capability and Collateral, big-time. Old-timey music. But that’s what’s needed aboot now.
December 17th, 2009 at 4:45 pm
OK Waymad.
That’s all good stuff and very true. Our big four banks are institutions that care greatly about the future economic status of our country – so – if it’s not the banks that want the status quo meaning no real tax changes and no CGT who is it?
Someone has an interest in the status quo that is so big they are prepared to sacrifice the welfare of future generations of New Zealand children and I can’t find out who it is.
December 17th, 2009 at 4:49 pm
@Nicholas
No that clip is alluding to the process of when the LAQC eventually becomes profitable and starts to pay tax on the rental income. Rather than pay the full 38% (assuming the shareholders are still earning elsewhere) one can then transfer the majority of ownership to the family trust via increased shareholding and pay only 33% tax on the dividend. This also avoids depreciation clawback because they are not selling the property.
December 17th, 2009 at 5:13 pm
“The IRD told the Tax Working Group property investors owned NZ$200 billion of property and made collective losses of NZ$500 million on that in 2008, reducing tax revenues by over NZ$150 million.”
There are 1.4 million houses in NZ with an average price of $350,000. Total value of housing is therefore NZ$490 billion. According to stats NZ less than 30% is rented which is less than NZ$150 billion. Rental housing is also generally of lower value, so the NZ$200 billion quoted couldn’t possibly be true.
To say tax revenues are reduced by NZ$150 million is rubbish. All business are taxed on income AFTER expenses deducted. The ‘lost tax revenue’ from NZ companies calculating tax on net profits rather than gross is in the tens of billions – woop de do – so what?
IRD are always looking for ways to get more money and (with Bernard’s help) are trying to demonize landlords hoping it will becomes politically acceptable to treat property investment differently to other businesses. The end result will be higher rents with the difference going to the IRD.
“Leveraged landlords are the “marginal buyer” in most segments of the New Zealand housing market, so they determine the price.”
This is the scariest comment in the report. It is completely unsubstantiated and most likely bollocks. The proportion of investor owned property is not changing according to SNZ. If Westpac had looked outside their own discipline at recent changes to RMA and District Plans they would see other things that determine price.
The greatest capital gains have always been where there are the least “leveraged landlords” so to suggest that they are responsible for the capital gains is nonsensical.
December 17th, 2009 at 5:24 pm
As noted earlier I am skeptical about this report.
And why listen to bank economists anyway?
Didn’t this mob (Westpac) predict prices would keep dropping this year to a total fall of 15%??? They were way off there, prices rose for most of the year
Waste of Space
December 17th, 2009 at 5:27 pm
Bernard Hickey Says:
That 15.7% is for a capital gains tax. 16.9% is for a combined land tax and 30% top income tax rate.
“Westpac also forecast a 4.4% fall in house prices and a 2.2% increase in rents if a 0.5% land tax was put in place. A capital gains tax of 10% would cut property prices 15.7% and lift rents 7.8%, while a ‘Deemed Rate of Return’ tax of 6% on equity in rental property would cut prices by between 26% and 35% and lift rents by between 13 to 17%.”
cheers
Bernard
If one wants to dig into houses that sold multiple times over 3 or 4 yrs during the boom, see who sold who brought, who owns the companies….BH is right on the mark…
I know of 3 definite, and several others that on the surface are also a good posibilty.
Now I dont know if BH did his homework before making that satement..would be a silly thing to do….even so there is a pile of evidence to back it up.
I know this happened in the lower rental bracket, where prices are currently in the 220 to 280K range…and in late 2006/2007 where in the the 340 to 38K range.
Like I have said many times, dig down behind the stats….ands suprised BH hasnt done so…it certainly exonerates his 25/30% prediction in a good part of the market bracket during the boom.
December 17th, 2009 at 5:57 pm
Brian W – “Someone has an interest in the status quo that is so big they are prepared to sacrifice the welfare of future generations of New Zealand children and I can’t find out who it is.”
http://www.interest.co.nz/ratesblog/index.php/2009/12/16/top-10-at-10-austrian-bank-fears-a-million-xmases-ruined-chimerica-revisited-dilbert/comment-page-1/#comment-52760
Drill thro’.
Conflicted interests?
December 17th, 2009 at 7:04 pm
“Leveraged landlords are the “marginal buyer” in most segments of the New Zealand housing market, so they determine the price.”
“This is the scariest comment in the report. It is completely unsubstantiated and most likely bollocks. The proportion of investor owned property is not changing according to SNZ. If Westpac had looked outside their own discipline at recent changes to RMA and District Plans they would see other things that determine price.”
Marginal buyers relates to them (property investors) being the ones who will stretch the furtherest and buy properties at prices most others have given up long before on. Has nothing to do with the fact that the proportion of them (property investors) has not changed.
December 17th, 2009 at 7:16 pm
Sorry Les it all still doesn’t add up for me.
The price of most things is set by supply/demand and I think housing is mainly in that category. I don’t think the tax situation is much influencing actual prices. For example the price of land is a masive problem here. Forty years ago a section represented 7% to 20% of the cost of building a home. Now it’s often 50%. Sure tax does influence people’s behaviour and our silly tax laws have influenced people’s investments and means that PAYE people pay far too much of their share in total government revenue, but that’s a direct result of government action. The price of housing argument is much more complicated than that. I thinlk the tax effects only influence house prices at the margin.
For me CGT is simply about having an equitable system and it mustn’t be implemented to influence pricing because I really don’t think it will over time.
So I still can’t see who benefits so clearly from the present inequity AND also has enough clout to influence the final vote when we go to the polls. What else matters to a politician? How many people really screw NZ PAYE people over by taking advantage of the tax inequity? I would have thought not enough to swing an election. So who benefits from it and has enough of some other sort of power that can scare a politician into behaviours that are in NZ’s long term worst interests?
Am I really too simple to work it out or are there really no clothes on the Emperor? Is it all just smoke and mirrors?
December 17th, 2009 at 7:49 pm
@Paul: Yours 4.49pm: Tell me how that situation ‘adds value’ to New Zealand. In the final analysis, taxation minimisation will not support this country. Only real work, jobs and production will.
December 17th, 2009 at 9:46 pm
so if property dropped 16% and rents went up 8% that would be well into positive cashflow!!!????????
December 17th, 2009 at 10:14 pm
Westpac scare tactics to maintain the staus quo. A 15% drop and they’d be screwed. The big banks are so tied to housing they have to keep lending big time or go down with the ship.
December 17th, 2009 at 10:28 pm
Anyone asked what would happen if all those happy landlords lemming-rushed into the stock-market?
Seems to me we’ve been there, and that was in a time of plentiful commodities.
December 17th, 2009 at 10:46 pm
There were many causes of the recent price boom, but the actions of some overpaid people trying to minimise tax played a relatively small role.
Did all the other countries that had booms also change their tax rates??
December 17th, 2009 at 10:56 pm
Interesting how they come with specific figure, 16.9%, not for instance 15%, so people might think there is some serious-minded calculation behind it
December 18th, 2009 at 1:00 am
Dave Smyth 1:05 pm.
I don’t choose to eat out 2 nights a week out, I eat out 24/7 for every meal and just got home after a great night out. It is also cheaper than eating in ~ as a single person.
When rents increase global warming will be swamping our low lands and petrol will be $5 a litre.
In the mean while as with beer I can choose to pay $1:50 a bottle at a wholesaler, $3:00 at the RSA, $5:00 at my local or $7:50 at a bar. Rental property is not much different to beer ~ you pay for the company you drink with and there are many options.
Dave, look at the reality of property – NZ has 25 people per square Klm and England has 350 people per square klm yet when the exchange rate is added there is not much change in our favor of owning a house.
Unlike Australia, we have little discovered natural resources, and we’re half the world away from every where.
There is no golden fleece for property investors exchanging capital gain and LAQC”s for rental return the market wont beer it.
December 18th, 2009 at 6:54 am
All great analysis and predictions, logical and well argued. However, I have never seen any predictions on the New Zealand market come true….
I will stay sceptical…
Steve
December 18th, 2009 at 7:01 am
>When rents increase global warming will be swamping our low lands and petrol will be $5 a litre.
That’s assuming the bird flu doesn’t get us first…
December 18th, 2009 at 7:07 am
Chris – don’t laugh, exponential growth impacts that way. Medico friends of mine indeed think that an overpopulated, resource-starved species will be a breeding ground.
Good read is: ‘The Coming Pandemic’…..
The problem is that the glass is upside down
December 18th, 2009 at 7:35 am
High or higher immigration levels will support house prices. Interest rates of 12% plus within 2 years will force highly geared landlords to sell. There will be less credit available for housing as deleveraging continues. Unemployment levels rising due to a strong NZ$ as a result of mining and oil exports.
December 18th, 2009 at 8:46 am
@Nicholas
You are getting a little off topic here.
Are you saying the government in the last decade has spent your money far more wisely than you could? Are you saying you believe you are paying the right amount of tax? Are you saying in New Zealand you get more bang for your buck?
December 18th, 2009 at 9:04 am
Im just glad they are finally doing something about the huge bias favouring property investors.
Maybe our incomes will come up a bit and more professionals will decide to stay and work in NZ as these are the people that bring the true value to the country, not the people who spend all there time finding the next loop-hole so they can make easy money in property.
December 18th, 2009 at 9:10 am
Sarah…nothings been done yet and the politicians don’t like to make election losing decisions. Of concern on TV3 last night was the Whanau Ora funding-seperate health/social funding for Maori……this is a bigger issue then housing. More money down the drain.
December 18th, 2009 at 9:19 am
Looking at the pole on here 70% of people are for it, so the change would not be election losing at all.
What might be election losing is doing nothing and seeing NZ’ers keep borrowing $ to load up into housing causing the need for sky high OCR’s again with associated NZ$ leading to certain death for exporters, and anyone wanting a job or a pay rise.
December 18th, 2009 at 9:27 am
Yes lets all wait for the government to do something. They will make us all rich one day!!
Oh and should anyone try work with the current flawed system in a way that benefits themselves and their family, lets pursecute them because we are all too lazy to take matters into our own hands!!
December 18th, 2009 at 9:37 am
@ Aarron “Dave, look at the reality of property – NZ has 25 people per square Klm and England has 350 people per square klm yet when the exchange rate is added there is not much change in our favor of owning a house.”
That argument has been used many times before but again is far too simplistic. For instance, population pressures are affected as much by availability and development cost of land as the actual amount of it. House sizes and construction are very different. House prices vary massively. I used to live in a small village in Yorkshire where a 2 bed house there is now over NZ$400k – 3 brds around NZ$600k. Houses are often much smaller than here too.
My sister lives in Bristol, which is a relatively small city (for the UK) of about 400k pop. If you compared it to a provincial town in NZ, her 2 bed terraced house (like on Coronation street) worth around $320k would just about buy her a new 3 bedroom brick and tile house on a decent section in Whangarei where I live. However, if she moved to London, it probably wouldn’t get her much at all. On the other hand, if she came from Northern Scotland and wanted to move to Mission Bay in Auckland, NZ house prices would seem very high. So it’s all relative to where you start and where you finish.
NZ has no natural resources? How about food and water? Anyone who believes that global warming is a major issue affecting world food resources, knows we’re in a good situation!
December 18th, 2009 at 9:45 am
“Yes lets all wait for the government to do something. They will make us all rich one day!!
Oh and should anyone try work with the current flawed system in a way that benefits themselves and their family, lets pursecute them because we are all too lazy to take matters into our own hands!!”
Or lets be sarcastic and obnoxious and let everyone know we have a very small………portfolio
December 18th, 2009 at 9:50 am
Sarah Says: “Looking at the pole on here 70% of people are for it, so the change would not be election losing at all”
except that these blogs & polls are heavily weighted by property hating pessimists! Run the same poll (not pole!) with the general public and you’ll get different results. Many folks here voted unemployment would be 20% by now!!…………
December 18th, 2009 at 9:55 am
Sarah, Labour did nothing for 3 terms/nine years what makes you think the Nats are going to do anything especially with them all owning rentals and renting them to fellow MPs. Hasn’t John Key already ruled out a CGT? And isn’t the exchange rate/high kiwi dollar primarily killing the exporters.
December 18th, 2009 at 10:08 am
Yea we have a high kiwi dollar because we are a high yielding currency with OCR still much higher than most other countries, a lot of the pressure for higher OCR is due to house price inflation. I suspect much of the reasoning behind Bollard not wanting to hike the rate until mid next year is because hes hoping (or has inside word) that tax reform will help contain house price inflation so a lower OCR from here on would be possible, helping local businesses and exporters.
John Key has stated he will not impose CGT on the family home that is all.
He also stated and made it very clear that he wants to create a world class tax system citing many flaws in the current one. A lower top tax would suit him and everyone in parliament just fine, the effect on property is fair, its a win win. A land tax would help with government revenue also.
December 18th, 2009 at 10:10 am
Dave Smyth, “but again is far too simplistic”.
I guess I must be highly intelligent because it seams simple to me and I have read all the information and can express in simple terms what other people view as complicated.
For instance your comment ” NZ has no natural resources? How about food and water? Anyone who believes that global warming is a major issue affecting world food resources, knows we’re in a good situation”
I would restate – NZ has no confirmed natural resources, we may for instance have great water quality yet the world doesn’t drink it.
And as for global warming – I think the bible documented such catastrophe many centuries ago – and the animals marched in two’s into the ark. You know the story.
December 18th, 2009 at 10:27 am
Sara, 70% people here voted house prices will drop 20%, and landing rates would be 10% by now. Less then third was correct OCR will stay unchanged. Also, some 20% voted for ACT
December 18th, 2009 at 10:27 am
Unsustainably high property prices and the high debt that drives them have been the ruin not only of NZ but all the Anglo Saxon nations. Problem is it can’t now be corrected without causing massive financial and social pain on the over indebted middle class. No politician wants to be the one who pulled the rug out on so many voters and exposed the banks to insolvency. No house owner, even if he agrees the housing market is a drag on the economy, wants their own personal net worth to decline. Hence the status quo by Key and co. Hold your nose, kick the can down the road and hope for the best.
It will be “easier” for everyone when the whole house of cards finally collapses Ireland/Iceland style because no one can be singled out – “it just happened and there was nothing we could do” or “who could have forseen such a crisis”.
Keynes – “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
December 18th, 2009 at 10:33 am
Reminds me of a song i like ‘wondeful days belong to the past..’ that window between recognition by a few of a loop-hole and the closing of that loop-hole. How sweet it has been
December 18th, 2009 at 10:35 am
stevek, agree to a point. Except that “who could have forseen” cannot be an excuse as it is so widely talked about.
I do think you are (unfortunately) right about kick the can/same old, same old attitude and people hoping they are not the ones holding the asset when the ball drops, leaving more debt than value.
It needs fixing, but will it happen…
December 18th, 2009 at 10:42 am
Unfortunately Novo human nature dictates an optimistic/ostrich response of hoping for the best and if it does go bad, we all suffer together. Better to be part of the pack than to go out on a limb.
December 18th, 2009 at 10:49 am
Still can’t get my head around the idea that property prices cannot keep rising at the same level for ever, but will probably do so anyway.
There has to be a correction at the point where they are too expensive to buy (if 7 x avg wage isn’t there already), but there will be a way found around that ‘problem’.
December 18th, 2009 at 11:03 am
Banks don’t seem to use that formula for lending. They use household income, which is now generally 2 incomes. Maybe when houses reach 7 x household income we’ll see some reality. The level of debt then doesn’t bare thinking about. Banks will be happy though. Most of NZ’s annual income will be disappearing to Australia in interest.
December 18th, 2009 at 11:49 am
Brian W – good points and I too see it as multi-causal after at least one Y. That is, tax system makes PI favourable, the symbiotic relationship with banks, relatively loose credit issuance, constrained land supply, sparse to nil other investment opportunities of comparable/better risk, to name a few. As for proposed changes having a reducing effect on prices, in comparison to other economies I can believe it because of the very few dimensions and depth in our investment landscape. Plus the TWG were reasonably convincing on this aspect, whether there’d be the degree as some predict (approx 17%) as you highlight that isn’t the point. As recognised by the TWG, in one regard it’s about fairness/equity, and in others it’s around stimulating productivity by being able to reducing PAYE and corp tax – simple stuff really. Who wouldn’t want that?
Then going to another Y, see this by stevek/Wally:
http://www.interest.co.nz/ratesblog/index.php/2009/12/17/top-10-at-10-taskforce-tax-reform-bernanke-times-man-of-the-year/#comment-52961
and think about the central question Bernard asks in this article and running through this thread:
http://www.interest.co.nz/ratesblog/index.php/2009/08/05/have-your-say-housing-minister-others-benefit-from-rents-paid-by-government/#comment-41342
I do find it interesting that PI’s apparently make up a relatively small proportion of the population, around 4 to 6% I’m sure I’ve seen John W quote, but less than 10% does seem a reasonable estimate, however between 50 to 60% of parliamentarians have, declared, PI interests. Funny that.
In the absence of better reasoning I’m inclined to agree with many others frequenting this site, eg. stevek’s point, 10.27am.
No one likes paying tax, and if you’ve be getting away with ‘legitimized’ avoidance for so long, it’s even harder to take – there’s bound to be some howling – and scaremongering….
Now look at the associated poll to this article, if the wider public were better informed about the issues raised and benefits of TWG’s proposed changes there’d probably be a similar result across the nation.
Y are the wider public not better informed?
Two more Y’s to go.
February 6th, 2010 at 3:48 pm
On Westpac economist Dominick Stephen’s “prediction” that rents will rise by 2.2% in response to the proposed land tax, please see this article from the Property Investors Federation of NZ:
http://www.nzpif.org.nz/news/view/54281
The money quote:
“We have assumed that one-third of the adjustment to a tax change would come about via higher rents and two thirds of the adjustment would come via lower house prices.”
(This isn’t explicit in Westpac’s paper, but is obvious from comparing the 4.4 and 2.2 percent figures).
This can only be described as a “hilarious” assumption, that would see these “economists” fail first year microeconomics at any decent university.
Economic theory is quite explicit that because land is fixed in supply, a land tax will be borne completely by landowners and not passed through into rents. Only if demand for accommodation rose could we see rents rise. Since any package of tax changes is expected to be revenue-neutral (or revenue-positive), there is no reason to expect greater private willingness-to-pay for accommodation.
So these guys should have used a -6.6% figure (for house price fall) with a 0% rent price increase. Assuming the rest of their analysis is okay, the overall effect of a tax change package on rent rises is overstated and the house price fall is understated.
It’s pretty sloppy stuff.