BNZ's Andrew Thorburn hits out at 'fundamental anomalies' of tax system that favour residential property and says lack of leadership is main problem in housing affordability 'crisis'

BNZ's Andrew Thorburn hits out at 'fundamental anomalies' of tax system that favour residential property and says lack of leadership is main problem in housing affordability 'crisis'

By Gareth Vaughan

Stopping just short of calling for the introduction of a capital gains tax, BNZ CEO Andrew Thorburn says Kiwis need to face up to the "fundamental anomalies" at the heart of their tax system in order to both encourage investment away from residential property and into job creating, productive businesses, and lift savings levels. Boosting savings would help tackle our "perennial" current account deficit and making KiwiSaver compulsory would be a step in the right direction.

In a speech to the Trans-Tasman Business Circle at a lunch in Auckland, Thorburn also noted New Zealanders "cling to a belief" the value of their homes can only ever go up, when homeowners in other countries have seen this belief  "shattered."

And answering questions after the speech Thorburn said the solving of the Auckland housing affordability "crisis" was being delayed by a lack of leadership. He also noted the only person he knew who believed the retirement age was sustainable at 65 was Prime Minister John Key, and urged the business leaders in the audience to "step up and be heard."

'Perverse tax signals'

Thorburn said more could and should be done to tackle the "perverse signals" current taxation settings send to New Zealanders on savings and investment choices.

"For example, New Zealand is one of the few developed countries in the world without a capital gains tax applying to investment in residential housing. We also support negative gearing and have no stamp duty on property purchases," said Thorburn.

"As a consequence, we have seen in this country a massive long‐term bias towards investment in residential property - a non‐productive asset in investment terms, albeit a critical life requirement for people and families."

He noted media reports on mortgage interest rate movements and house prices were almost as ubiquitous as weather reports, suggesting this says a lot about the position the country is in.

"As a result of this bias, New Zealanders have a lot at stake and at times we cling to a belief that the value of our homes can only ever go one way ‐ up. Homeowners in other nations have seen this belief shattered."

Thorburn referred to a recent New Zealand Herald column from fund manager and media commentator Brian Gaynor that suggested if house prices fell by 10% this would lead to greater wealth destruction than that inflicted by the 1987 sharemarket crash.

"Gaynor’s estimate is that such a fall would wipe out some NZ$60 billion of our wealth, compared with NZ$15 billion in the aftermath of the biggest stockmarket crash since the Great Depression," said Thorburn. There are many reasons for this state of affairs, and the longstanding signal sent by our tax system is undoubtedly one of them."

'I'm concerned overall lending is weighted towards residential lending and away from the productive sector'

Thorburn acknowledged the imbalance in favour of investment in residential property over productive businesses was "writ large" in New Zealand banks' balance sheets.

"Almost 50% of BNZ’s lending book, for example, is supported by residential housing, and it’s pretty much a rock‐solid asset for us, as it is for our competitors."

The expression "safe as houses" had deep resonance for bankers, he added.

"I can’t speak for the other banks, but it has long concerned me that overall lending is weighted towards residential lending and away from the productive sector, at a very time when New Zealand is slipping down the OECD ladder of GDP per capita, at a time when so many young New Zealanders are unemployed or think they can make a better living in Australia and other places, and during a period in which we’ve essentially maintained our standard of living as a nation by borrowing from the savings of people in other countries. Long‐term, this is unsustainable," Thorburn said.

The weighting towards residential property was a "neat inversion" of the situation prevailing in many other developed countries.

"Under current settings, dividends and savings are taxed at a much higher rate than the effective taxation rate on housing. If New Zealand and New Zealanders are to be good with money I do think we need to take a different path and face up to these fundamental anomalies at the heart of our current taxation system. Let’s keep debating this, please."

He noted New Zealanders total borrowings amount to about NZ$300 billion and our total savings about NZ$210 billion.

"It’s OK if these figures aren’t balanced. After all we’re a small economy, but in an unstable world a NZ$90 billion gap is too big - we need to reduce our dependency on external debt."

'We're risking a major economic disruption that's likely to leave practically all New Zealanders worse off'

Thorburn also said the Government's Savings Working Group had made an important contribution to the debate about tax settings and incentives, noting it had concluded both people in general and the government, weren't saving enough.

"Unless we make some rapid changes, we are risking a major economic disruption likely to leave practically all New Zealanders worse off. It’s as if we are standing on top of a cliff that may collapse dramatically or crumble slowly. Either way, it would be a bad fall. We need to move back from the brink - and fast," said Thorburn.

"That’s dramatic language, but as a summation of the situation facing New Zealand it is accurate. The Savings Working Group tackled the savings issue in both its quantitative and qualitative dimensions. Its broad recommendations are worth recapping here:

"First, as an overall goal, New Zealand needs to increase national saving by some 2% to 3% of GDP from its current gross level of 17% of GDP, by increasing government, household and business saving. We need to improve the quality of savings and investing – through better asset choices, higher returns and so on. This involves changes such as reducing serious tax distortions, much better disclosure on financial products and their fees and performance. We need to boost productivity, particularly in government services. And we should increase exports and production of goods and services that substitute for imports – so that New Zealanders buy less from overseas."

This, Thorburn said, would help tackle the country's perennial current account deficit issues. Some progress had been made over the last two years, Thorburn suggested, with domestic savings now rising after many years of negative savings.

"The KiwiSaver scheme demonstrates an honest, sustainable attempt to grasp the nettle of savings. At latest count there were some 2 million New Zealanders enrolled in the KiwiSaver scheme, and a total of nearly NZ$13 billion under management."

'I favour compulsory KiwiSaver'

He described then Prime Minister Rob Muldoon's decision to scrap Labour's compulsory superannuation scheme in 1975 as "a very fateful decision."

"I favour universal or, if you prefer, compulsory KiwiSaver for a number of reasons. It would help to boost household retirement savings, making New Zealanders more self‐sufficient. It would help to entrench a culture, mentality and track record of regular savings among New Zealanders, especially if our efforts at boosting financial literacy across a broad front were also stepped up."

Although BNZ doesn't currently have its own KiwiSaver scheme it is preparing to launch one.

Thorburn said over time universal, or compulsory, KiwiSaver would provide strong support to New Zealand’s capital markets, through the accumulation of a big savings pool as has occurred in Australia over the last 20 years. Compulsory super was introduced in Australia in 1992 and there's now about A$1.3 trillion invested in Australian superannuation funds. A bigger pool of domestic capital in New Zealand could help New Zealand businesses both grow and raise capital.

"From this would flow jobs and incomes, and therefore the capacity for New Zealanders to save more in the first place, not to mention a tax base that will allow health, education and social security to be sustainably funded at the levels we want," said Thorburn.

Whilst not suggesting compulsory KiwiSaver was a panacea, Thorburn said he was convinced it would help.

A leadership vacuum

Thorburn also tackled the housing affordability "crisis." He said the breadth of what was in effect a coalition that agrees there's a major problem was enlightening.

"It encompasses economic and political commentators both left and right of centre, the minister of finance and his cabinet colleagues, social agencies in housing and other areas, the Productivity Commission, which delivered a weighty report on the subject earlier this year, and last but not least the thousands of ordinary New Zealanders who are fretting about how they can ever afford to clamber onto the first rung of the residential property ladder."

New Zealand wouldn't become a wealthier and more productive country if it couldn't affordably house its own people.

"The Productivity Commission, and the Government in its response to the Commission’s report, have signalled out land supply as an important issue."

Although noting addressing housing affordability would take time, Thorburn said in a question and answer session after his speech that the analysis had been done and the issue was clear.

"Most of the problem, particularly in Auckland, is a land supply issue. There's not enough land being released in a balanced, concerted, sustainable way. The cost of housing is one of the issues, that's a scale issue but we know the problem."

"The problem's leadership," Thorburn said.

"Leadership is when there is no path, there is a risk, and you have to have courage to believe you can take people to the other side and that is by and large, to me, what we're lacking here in our broader leadership. We know the problem. We basically know accurately what the problem is. All we need is leaders who are prepared to stake their own personal reputation and be accountable for saying 'we are going to make changes and this is what we're going to do.' That's the main problem."

He also said the only person he knew who believed a retirement age of 65 was sustainable was Key, and endorsed outgoing Retirement Commissioner Diana Crossan's proposal to gradually raise the age of eligibility for retirement from 65 to 67 over a 20 year period.

'Stand up'

Meanwhile, Thorburn also encouraged business leaders to stand up and be heard in order to help create a vibrant, successful business sector.

"The jobs, activity and income we all rely on are not going to come from anywhere else but the business sector. This sector needs to be one of our leading drivers of change and prosperity into the future. We need more business leaders to step up. Your voices are important. We need more hunger and drive from business leaders."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Quite a courageous speech from a Bank CEO, do you think he is still on John Keys Christmas card list?

I think this guy will get another Farmers' Care Bear from Mr Key..

He's certainly now joined the almost deafening chorus asking for a rethink on how the country is run economically. So good for him, as you say. 

Excellent speech indeed

He is just saying what most of us know and think. Quite refreshing from a bank, considering they make their money from selling housing mortgages.
One way to reduce house pricing could be to introduce a lending ratio, and require borrowers to have a large deposit.

So now a business-person with a business plan can borrow at 5%
And the house buyer can borrow at 14%
Maybe it's the banks policies that has created the house love affair.
Banks love houses and property.  
Banks can sell property. 
Banks don't like lending to businesses -  especially new businesses - they can't sell anything if it goes bust.
So,   banks promote property as investment favourites.

Sounds good.
But there is another way to slow up investment in housing.
That is by way of the good old "walk away" mortgage practiced in most states of USA
You can't afford the mortgage you put the keys in the mailbox and "walk away" to a cheaper rental.
If Banks here had to face that reality then I'm sure there would be a little less in the way of 95 percent mortgages etc and more accountability in lending by the banks themselves.

2 points,
1) Except in NZ mortgages are full recourse, so you are liable for the you end up paying rent and the bankruptcy court, though if a landlord will take you on if you are bankrupt is a wonder.
2) Banks are middlemen its not thier money its either depositors, lenders or the tax payer so there is really a moral hazard.

Forgive me if I am wrong here but as I understand it; banks conjur up money at will.
The amount they can conur up is based on how mch actual "real" money they have on deposit.
Most money is just Debt; which eventually will cause Western Society to collapse... maybe sooner that you think.

Have you listened to Nicole Foss?  "Debt; which eventually will cause Western Society to collapse... maybe sooner that you think." which is what she says....So I tend very much to agree with you/ it may not be sooner than I think unless its uh tomorrow..
What she also says is houses will go back to their valuations for pre-industrial age trend or certianly 10% of today's price...or how much you can save, no one will have or want much credit.
Way worse than BH.
Also if you look at STeve Keen he says they borrow first and go looking for the $s for the leverage afterwards...
Interesting twists.
and this suggests huge changes and all within 1~3 decades...mind boggling...I feel like Im on a roller coaster about to go over teh edge but someone has put a blindfold on me.

Yes Zeebeck, but the result will be, a  extremely serious loss of wealth for those that continue paying their mortgages as they watch their neighbours walk from homes and further devalue what's left, something very evident in the US  - careful what you wish for (unless of course, you ar a "walker type".

only 2 ways for the affordability issue to ultimately resolve grant banker man... either house prices drop or income rises. As a non-walker with a mortgage, I would welcome a drop in an arbitrarily valued house which makes no difference if it means a reset to more realistic ratios. It is only a loss of imaginary wealth after all. Do you really think people losing a few investment properties is a problem when an ever incresaing % are oppressed into probably never owning a home in their lifetime? to never leave a decent inheritance to their kids so a smaller percentage can have "extremely serious" wealth?

And bear in mind a lot of those houses secure the lending to small businesses, so if you're  an employee of one of thise, you will have no debt, but possibly no  job.

Actually thats a good point I hadnt considered the effect / consquence of houses losing value from a small business perspective.  If you have borrowed against the house and its value drops below what you have borrowed.....ouch, not sure if you are significantly worse off than a PAYE then.  I'd also assume there are a lot of one man bands who work from home who cant really claim WINZ/DPB?
So many aspects to make downturns worse.

Ask Wolly about boat prices, I am sure he has been watching. They keep plunging as there is no longer the headroom to tack it on the mortgage. Just another indicator that the current Auckland boom is temporary.

Scarfie, I have always used the 'boat indicator' to evaluate the NZ economy, particularly in the City of Sails... Shoes/sporting gear is another good one... Am starting to see some 'Boxing Day Sales' and it's not even December...
That said prices will continue to rise...

Most speeches Thorburn gives are thought provoking. I work at BNZ and have seen a fair few of them.
He seems to have his eye on a much more diversified investment field for the bank, but is hamstrung by the current tax bias for residential property.  And he understands the risks the bank, and therefore the mortgagee faces in a market downturn.
Let alone the unsustainability of the current retirement age... 
As far as leaders go.... he`s a good one.
I also think the pollies are realising that days are numbered for the issue to be chucked in the too hard basket.... Phil Heatley released the Hobsonville plan this arvo, a  start I guess... but of course more to get 1 up on Shearer`s speech on sunday...
 Lightweight offerings, no doubt... but if the public buys in with correcting the imbalance that property currently distorts the market with, more substantive changes will follow.

Let alone the unsustainability of the current retirement age...
Tell me where this dosh went to other than roads instead of servers and then tell me we cannot afford the current retirement age.

 The thing is, I see retirees with 3 or 4 HUNDRED thousand dollars in term deposits earning 4%pa...... and they still get $700 a fortnight .
Some have more money than they know what to do with! And I talk to them every day.
It`s ridiculous.

That maybe true, but not what I asked.
The recipients of taxpayer's dollars are not just retirees - what about big legal firms where it is well known the partners servicing the IRD are the highest paid - the list is endless by the way - the elderly are not the most undeserving recipients of government handouts.

Try living on the maximum superannuation a fortnight if you haven't got $300K or $400K on term deposit. And even if you have, you don't know how long you have to live - you need every penny of that believe me.  And that is just living frugally - not going on overseas cruises, not dining out, just ordinary living. If you are nowhere near retirement The_Duke, think of a number you need for your retirement and then double it.  Start saving very, very hard is all I can say. 

The old age isnt un-sustainable as you can increase taxes and means test (ie if still working you dont get pension).  Raising the retirement age is actually highly regressive ie the poor %s still die the same number of years after retirement as they did a decade ago. Also their average age at death after retirement is dependant on retirement age.  So at 65 its say 8 years, retire are 60 and you could live 20 years.  So its quite possible that retiring at 67 means you are dead inside 3.

Fine,  means testing asap please.

Lack of leadership, we are being run by idiots, wow  who have thunk it. You would never know by looking around the place, would you? 
Thorburn for primeminister, now which party, the Nats will hate him now and most MP's are on the property gravey train, that leaves the Maori party, dont think Graig at Conservative would vote for him as he's up to his neck in the property scam, so it has to be Maori. Good luck with that. More incompetent leadership coming to a town near you.

Thorburn for primeminister
My thoughts exactly. Brave adn excellent speech. Agree with every word. 
And good to see him take a potshot at our moron of a PM

Be careful what you wish for there Andrewj.
BNZ is I believe the bank behind much of the intensification of dairying through irrigation. And very deeply involved in the Ruataniwha Water Storage scheme.
Yes, we are being run by idiots and the BNZ is a leader of one part of that.

Sounds far more like what NZ First have been on about than the Maori party.

"Most of the problem, particularly in Auckland, is a land supply issue. There's not enough land being released in a balanced, concerted, sustainable way."
Considering the supply of land as finite, which it is, would give us a clear indication of the senseless notion of continuos development, which the 'status quo' advocates. It as sensless as the notion of the consumer society as a basis for GDP growth, and the lack of consumption as the cause of a recession. Completely unsustainable!
Interest rate at these low levels only encourages consumption and defers saving. 

All they need to do in old Auckland City is change the Res 5 and Res 6 zone as follows:
Only 200m2 to 250m2 per lot required for a home to be built
Only one car park per dwelling required or when close to transport links zero parks required
Height restriction increased to 10 metres thereby allowing 3 level homes
These changes could be made in a matter of weeks, however it will never happen as vested interests including councillors and MP's will continue to constrain land supply so that their own property portfoio values skyrocket.

100% agree
and get rid of reserve contributions - Auckland has more than enough parks and reserves
but as you say chance of widespread change - zero. We'll get a few specific areas of Res 5 and 6 upzoned, but not enough

So, Auckland is short of space, so is Wellington.
Thats leaves Christchrch (and suburbs), that after the aftershocks finally finish can grow and grow and grow and is unlikely to have a massive EQ for a few thousand years.
If the goverment was smart it would be piggy backing the rise of Christchurch and when the employment opportunities are there then the pressure on AKL for housing will deminish as the people sell in AKL and move to Christchurch to find the ever scarcer jobs.
But, sadly, this assumnes the government was smart when in fact it's both myopic and broke (so unable to do anything anyhow).

I recently returned to Christchurch and believe it has a good future if we get some good leadership. Allowing new and cheaper housing to develop is an essential part of the equation. New Zealand's second city and the capital of the South Island (the biggest Island) could be a major driver of New Zealand's future if we get it right.

agree. Chrstchurch could replace Auckland as nz's economic powerhouse if only the right leadership and governance and policy was in place

Historically Canterbury grew the fastest under provincialism, we created two universities, built the longest at its time railway tunnel through volcanic rock to connect Lyttleton with Christchurch, built the city plan, pyschiatric and general hospitals. Since the provinces were abolished the only new infrastructure improvements have been the Lyttleton road tunnel built in response to 1950 general strike and the airport. Canterbury university was moved to the suburbs to save costs but has reduced the regions growth potential by disconnecting the university from the business community.
I believe our best chance for improved leadership is if we abolished the city council and replaced it with a more powerful democractic regional council. We would need a ward based political system and also something like Hugh's Texas Municipal Utility districts to provide affordable housing. The regional coucil should dramatically reform the zoning system and the fee and time factors of the Resource Management Act.
The council should have more taxation power to provide the environmentally friendly infrastructure system that the public clearly want. This should replace the green belts and other zoning restrictions which was meant to provide the denser and more environmentally friendly city but has failed.

Housing isnt an essentail part in this context....lots more important things IMHO.

Banks can create money by issuing debt, but there is some limits (Basel bank regs etc), so the 'at will part' is a little exagerated.
Money growth or credit growth, whatever you want to call it is essential if you have a growing economy. That was the problem of the gold standard in that money growth reflected gold discoveries not population growth, new technology, better trading relationships etc, that make up economic growth. 
But the finance industry do seem to create more credit than is necessary for economic growth, this can create general inflation or asset bubbles. With regard to housing if cities or countries have restrictions on new home building then the response is a price bubble, if not then there is a construction bubble too.  New Zealand has had a house price bubble but not a construction bubble so we have restrictions on new home building.
For Banks bubbles are temporarily (this could last decades) profitable as they get to issue more debt and therefor make more profits but eventually the illusionary nature of the growth will assert itself and a crash wil result. This crash might cause the bankruptcy of some banks. So it is understandable banks want some sort of collective regulation to prevent this happening. We need to remember though the banks are most interested in thier long term survival and profitability not the wider good of society.  

Good article this one and good to hear a CEO speaking out on the important economic issues. Relative to other countries in the developed world NZ has almost zero government tax incentive to save, there was some tax benefits in Kiwisaver contributions initially but these were mostly removed.
When I talk to my Australian friends about the fact that the NZ government cap their tax credits at $1040 per annum on superannuation and there are no other tax benefits to save they laugh out loud. 
New Zealanders salaries are fully taxed and then the earnings on any savings are fully taxed also. 
This coupled with the fact that people are reading about housing shortages in Auckland and prices rising leads people to the logical (although not very sensible) conclusion that they should 'invest' in property.

Interest - it always comes back to financial education doesn't it. For myself and many other NZers, we don't need Govt incentives to save, we just rightly worry about starving in the streets unless we can take some control over our own destiny (i.e. saving"). Personally I'd be just as happy to see money spent educating children from primary school up in the basics of financial management, rather than Govt incentives to save.

how dare this man speak the truth,he is obviously not a politician.

Bank CEO criticises housing ponzi scheme, which makes up 50% of his lending book?
Man the lifeboats! Pollies and PIs first!

No just need a flat earth and infinite energy....problem solved then......

How do you expect any policies change when most MP have substantial investment (as in $ milllions) in residential properties.
Yet, when an MP has a small investment (say $20K) in a company and he happens to be involve in any policy remotely connect to that investment (eg. vineyards and alcohol policy) all these moronic media has a field day and cry conflict of interest.
MPs have million dollar portfolio in residentail property investment we no one cry conflict of interest when they are making decision of residential investment rules.  I bet those media reporters are the ones who invest in property themselves so they are not going to stir up anything.
As a country we get what we deserve.  We get skewed investment towards residential property because a country as a whole are into that game so we deserve to be in this hole.

Yup, an economy based on rent seeking. Whilst those actually trying to do something are mired in regulation, petty rules and an uncompetitive tax and labour environment.

Waiting on the sidelines... or is it lurking in the dark...?

Great to see Thorburn taking a stand on this issue. -We have some leaders afterall. Other than that we seem to have pedantic, no action middle managers running the country into the ground. There's just no vision. Maybe our current hacks should stick to doing office stationary audits and let people like Thorburn and Kim Dot Com have a go? Fast internet and affordable housing would a signal that we're ready for action.