New RBNZ Governor says NZ has a 'very unusual tax situation and it reflects back into the banking sector' when asked about a Capital Gains Tax, sees no need for an NZ Royal Commission on banking

New RBNZ Governor says NZ has a 'very unusual tax situation and it reflects back into the banking sector' when asked about a Capital Gains Tax, sees no need for an NZ Royal Commission on banking
Reserve Bank Governor Adrian Orr has outlined his position on whether or not New Zealand should have a capital gains tax (CGT), saying a more efficient, level playing field around tax is needed.
 
Speaking to TVNZ's Q&A on Sunday morning, Orr said New Zealand has a "very unusual tax situation and it reflects back into the banking sector."
 
"When you see 90% of household wealth being equity in a home and 80% of the loans in banks are to housing and you see relative prices of housing where they are, then you're saying 'hey this is a real issue.'" 
 
He says this is something the Reserve Bank is mindful of, "around the concentration of risk and the potential unravelling if things happen." 
 
"We [the Reserve Bank] have absolute legitimacy talking about what it is, why we see it as a concern, what we are doing about it with our toolset, but also putting sunlight on other areas." 
 
The Tax Working Group will make a series of tax-related recommendations early next year including a potential CGT.
 
Asked if he will be submitting to the group, Orr said he will have to see what the group offers and the Reserve Bank will provide advice based on that.
 
His personal view on this issue is: "I think we need to have a more efficient, level playing field around tax."

Meanwhile, Orr says he is comfortable with the level of inflation.

On Thursday, consumer price index (CPI) data showed inflation was 1.1% in the year to the March quarter, almost at the bottom of the Reserve Bank's 1% to 3% range.
 
"The fact inflation is at 1.1% is great, that's low and stable." 
 
He says the central bank is aiming for 2% and he is confident inflation is heading up to that level.
 
In its projections, the Reserve Bank sees the Official Cash Rate (OCR) moving up in mid to late 2019.
 
This means people with fixed mortgage rates that come off in two or three years will be hit with a larger interest bill.
 
Orr says this is a concern for people but, at the end of the day, borrowing comes down to people's personal positions. 
 
"[For a borrower] it's really thinking about what is my certainty, what is my liquidity needs, what's the horizon over which I can manage this particular payment."
 
No NZ banking inquiry needed 
 
Last week, the Australian Banking Royal Commission revealed a myriad of issues within the sector.
 
The review led to the resignation of AMP CEO Craig Meller, who apologised "unreservedly" after the company admitted to charging customers for advice they never received and repeatedly lying to the corporate regulator.
 
Orr says this is "not a happy situation" and the Reserve Bank is keeping an eye on the events as they unfold.
 
Many of the issues identified in the Commission's report came down to the culture of the Australian banking system.
 
He says the culture of the New Zealand banks is "infinitely better than some of the activity in Australia." 
 
Does New Zealand need a similar inquiry into how its banks, the biggest all Australian owned, are operating?
 
Orr says no.
 
"I don't see any lack of confidence in banks in NZ, they are highly capitalised and highly efficient."
 
He says there are institutions, such as the Financial Markets Authority which is "all day every day thinking harder about consumer and investor behaviour."
 
The central bank's regulatory responsibilities are due to be reviewed in the second phase of the Reserve Bank Act review.
 
The way the Reserve Bank regulates banks has come under fire. Ex-BNZ chairman Kerry McDonald recently said the Reserve Bank's approach to bank regulation is weak, ineffective and leaves banking customers seriously exposed.
 
Banking expert David Tripe and the New Zealand Initiative have also voiced concerns about the Reserve Bank.
 
Orr says he's taking these concerns seriously.
 
"As regulators, we have actively chosen not to do certain types of activities because they are already being done to the banks.
 
He says huge amounts of work in this area are already being done by the Australian Prudent Regulation Authority, as well as work by the FMA here in New Zealand.

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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Can someone please advise us all what to invest in apart from housing that you personally have some sort of control over?
No one has on here has ever been able to!

For you - investment in human capital might be a good start....perhaps? Full control and great ROI.

Although different investment classes will give you different levels of direct control, that's not really the point that this article is making isn't it? Why would monetary policy take into account that specific preference?

LOL, you asked the wrong crowd TM2, most people here do not have a clue about risks and rewards when it comes to investment apart from what they read in 101 economy or putting money in safe saving accounts !!

You wouldn't have had this amount of interest in housing If there were better investment vehicles around.

I will enjoy the silly comments coming up on your post while having a cold one.

LOL, you asked the wrong crowd TM2, most people here do not have a clue about risks and rewards when it comes to investment apart from what they read in 101 economy or putting money in safe saving accounts !!

Well that was a pointless troll. If people don't put money in savings accounts, the apparatus for the banks to lend on investment properties would be diminished and there would be limited opportunities to invest in housing.

LOL, when "80% of the loans in banks are to housing", that means the savers are helping banks to lend money to property investment or ownership ( which is the same) !! ...

i.e. it is all about property and the lending goes around a safe asset class (Brick and Mortar) which Banks can secure loans against and lend you 70-80% of your total investment ( leverage) .... so is that a troll? or is that difficult for you to understand?

Does any bank lend you 80% on your total investment put in a saving account ?

Eco Bird, I am still waiting on an answer from them, as to what and how to invest in something that I have control over and I consider safe.
H
Shares are a gamble that no one has any control over.
Term Deposits are safe enough but returns are pathetic and no capital growth.
Think I will stick to what works for us!

Some people don't want the hassle of owning a rental property - rental ownership comes with an increasing set of rules and regulations. Shares you can buy and sell easily - if you are paranoid about control, which you appear to be, then shares aren't for you. You seem to have been burnt once and are now twice shy. For all the market failures over that past 100 years share are still being traded , people are still making money. Just because your own prejudices cloud you judgement doesn't mean others won't carry on buying and selling shares. The more interesting question is why does it concern you. People are free to do what they want (for the most part) and if they want to buy and sell shares that is up to them. It is not a binary - win / lose game what people invest in.

BadRobot, you are right some people don’t want the hassle with owning property, I appreciate that.
The thing is I have known so many people that don’t realise that if they had borrowed against their property’s equity then they would be semi retired at worst.
There are people in this world that are happy with going to work for 40 hours a week and end up retiring with bugger all to live on.
Their perogative obviously.
Then there are people that want to take it on themselves to have a life so that they can retire early and choose what to do when they want and with more than enough money to do,it with.
Personally prefer the second option and it has been achieved thru property investment!
Could I have done it thru share investing, NO!!!!

How do you know - you are making an assumption based on what exactly.....

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TM2 this is a patent lie, you have asked many times about alternative investments to property and you have been answered many times. I even went to the trouble of giving you a thorough answer myself once. Quite the exercise in futility, as it transpired that you actually aren't intellectually capable of understanding the issues and responding accordingly.

You claim to have made good money via property investment, which I don't doubt , you would have to be a spectacular cretin to have failed to make money in the recent property booms. Up until recently, property investment outplayed other investment classes in NZ, not necessarily owing to yield, but because of preferential tax treatment and phenomenal capital gains. However, if that playing field is levelled, property might not be such an seductive investment choice.

There's also the issue of questionable morality (crowing about your property riches whilst homelessness and poverty increase in NZ). Alas, you've made it rather obvious that this does not trouble your conscience so is unlikely to deter your property boner.

Many have made lots of "paper" profit on property. Whether it makes it to the bank is another story. Business acumen of the novice speculator/Landlord will be their likely undoing.

There’s good opportunities to make paper wealth by purchasing “as is where is” red zone properties in Christchurch and renting them out. Yield looks good if you manage to rent out for market rent due to the low purchase price and the fact you cannot insure them so no premiums.

What about starting a cafe, restaurant, dairy, phone repair shop, yarn store, bakery, book shop, bed and breakfast, backpackers accomodation, vehicular rental company, website development company, data analytics firm, marketing agency, etc? Lots of direct control, I know some people who have become reasonably successful in some of those fields.

Firstly, it is a gamble as so many business’s don’t make money and don’t last long?
Secondly you need to work it for many many hours!
Thirdly, you haven’t got any control over it all, you are solely reliant on clients and customer and are competing with other business.
Fourthly, you are tied to it, that is if you don’t open then you don’t make money.
Fiftly, it is going to be harder to make money in those business’s in the future with the increased labour costs.
No,I will stick to housing investment thanks!

Perhaps your self proclaimed business acumen is not as great as you think it is. All you seem to see is problems but no solutions..

BadRobot, this is what we have come to expect from the Coalition of Wingers - lol!

No you are wrong Bad Robot!
Have worked in business and what I can confirm is that working a business is over rated!
Housing investment done properly provides people with shelter and gives the investor a lifestyle that gives you the time to enjoy life!

This is a waste of time but anyway
1. Life is a gamble
2. Like anything to do it well you need to do the hard yards, but this diminishes as you get the right people and process in place (and personally I hate not being busy)
3.you have as much control over it as your skillset allows you. I know my shortfalls and hire people to fill those gaps.
4. See 2
5. That's why you need to have strategy and business planning sessions so you look forward and make plans for the future taking into account the changing world we live in.
Your undying trust in property will be your undoing.

Why do you keep saying gamble like it's a bad thing? Rewards always go hand in hand with risk, and if you are unaware of the risk in owning rental property that is your own short-sightedness. The best way to reduce risk is through diversifying.

Bitcoin! Buy some, get yourself a nice little mining rig to sit along side and you'll be away!

What a mindset. In chch there would have been bucket loads of business opportunities since tje quake. Construction, roading, demolition and on and on.

Its easy, invest in yourself. Back yourself, start a business work hard and smart and your invested capital will pay. And the biggest benefit? You are your own man/woman. Even in the potential stagflation environment a well managed business will keep paying a dividend. I'd be looking at services business's rather than discretionary spending type business's though.

1) Its not up to the Reserve Bank Governor to comment on tax matters.

2) If the Governor wants to do something useful he should seek to:
a) Have recourse mortgages banned - why should banks be able to chase a person forever to reclaim a mortgage? Making all mortgages non-recourse would level the playing field between business lending and residential lending.
b) Lift the capital requirements for banks to offset the increased risks with the removal of recourse mortgages.

Sorry but I think like everyone else he is entitle to express his own opinion on the Tax issue.
He communicates on money matters and economic very well.
By your comments it sounds like you have had mortgage troubles, i.e. could not pay the Bank back. Sorry you borrowed the money and should pay every dollar of it back. Non-recourse mortgages look what happened in the USA when people could or would not pay back their mortgages, just handed back the keys to the house. Thank goodness we have Adrian Orr as the Governor of the Resrve Bank he will keep the Govt and Financial institutions on their toes

Never had mortgage problems.
Recourse mortgages are simply inherently unfair

Averageman, have done exceedingly well since the earthquake and that is with housing investment!
Prey tell how I could have invested in reading apart from buying into Fulton hogan or sorts?
How could I have invested in demolition apart from buying machinery?
I think that our housing investment has returned us a far better return and without the hassle and it is ongoing and profitable!

If you're looking for a hassle free investment, you'd love shares. Maybe spend a few hours a year reading the reports (although this is optional). Sit back and wait for the dividends to hit your account.

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A New Zealand Property Investors’ Federation study into the cost of providing the average NZ home as a rental shows it currently costs $5,500 a year after all costs are paid, even with recent rental price increases and a cash deposit of over $50,000. If the plan to ring-fence losses is introduced, this cost will increase to $9,000. This is an extra $67 per week.

The burning question is why would someone with $50,000 buy a $550,000 house with a $500,000 mortgage, at say five percent, producing an interest cost of $25,000, that with rates and other costs make a $5,500 loss? It makes no sense without an expectation of capital gain.

But don’t hold your breath for a sensible capital gains tax. Even if one could be designed, it will be years coming in and then only capture capital gains from the date of its introduction. In the example of the ‘poor’ landlord above, the tax-free capital gain over the next few years may be very lucrative indeed.

The Tax Working Group should look carefully at the 2001Tax Review and explore a tax on net equity approach. Based on the principle that all income-earning assets should be treated equally, the $50,000 net equity could be treated the same as if the investor had placed that money on deposit at the bank. At five percent this creates a taxable annual income of $2,500, a rather modest sum. But with a non-deductible $25,000 interest bill to pay and with other costs, the investment is clearly not worth it at current rents.

And it won’t get better, because net equity increases each year as the value of the property goes up. Suppose in five years the value has doubled to $1,100,000 so that net equity becomes $1,050,000. Taxable income should be $52,500 regardless of rental income and regardless of other costs.

Unwisely Labour has taken the owner-occupied home off the Tax Working Group’s table. The danger of that decision is that elaborate owner-occupied housing becomes even more attractive. It would be better to allow a generous exemption for a home, say up to say $1 million net equity per person. That way the $20 million owner-occupied mansions will be included, but modest homes fall outside the net.

Under the net equity approach, landlords won’t be subsidised to speculate, and some may withdraw from this market. There would be no more fancy tax accountants needed to manufacture losses. No more fiddling the repairs and maintenance costs, crossing the fuzzy line between capital enhancement and write-offs for depreciation and replacements. Moreover, as past capital gains are captured in the net equity approach, the wealth gap may narrow at last rather than continue to grow exponentially.

A net equity approach could leave more houses for genuine first home buyers. But if we want to contain the biggest housing bubble in the western world, a price correction is also required. The best we can hope for is gradual adjustment, not a precipitous fall such as experienced in Ireland after their strong bubble 10 years ago. This means a carefully-managed transition to the net equity approach will be required.

Please landlords and home owners – no crocodile tears. If you can’t make at least as much taxable income as you could if you put the money in the bank, then the taxpayer should not be subsidising you.

-- Susan St John, Associate Professor, Department of Economics, University of Auckland Business School

https://www.newsroom.co.nz/2018/04/18/105460/landlords-save-your-crocodi...

Thank you for the above troll J.C.

You have just proved to us all how narrow and shallow your and some others thinking is in line with academia who master spreadsheets ....

When private investors own more than 450,000 rentals and provide accommodation for over a million people, then there must be a good reason for that .

chasing these landlords out of the market will call for a social disaster which simple minded people have an apparent difficulty in understanding.

Someone has to carry this can when you put these tenants back on the street- the Gov cannot do that !!

Set aside the moral crap and emotional blackmail that some try to engage us all in whenever everything else fails .... why do you think Govs have allowed this tax loop to exist for decades ??

Were they all stupid or was there a basic reason to engage private capital in providing housing and accommodation? ..... tax free capital gain appreciation over a long time was allowed to cover and compensate running costs, capital investment, and for interim losses during a long investment period?

Why would any property investor put his own money and take the risk of housing others ( with all the headache that come with it) according to your simple calculus ?

They simply do that because they were allowed a reasonable ROI if they hold the property ( and provide the service) long enough to realise that gain. They were allowed to do that instead of the Govs of the day ... and that became an asset class.

Get your facts right ( and ask what If ?) before repeating what narrow minded economists claim is the way ahead or the moral fairness for society.

Home owners do not provide shelter to anyone else other than their families, Landlords Do !!

You are confusing ownership with accommodation.

Imagine the price of investment properties fell and they were purchased by first home buyers.

The houses remain unchanged - they accommodate exactly as many as they did previously

Unless investors are building new properties they provide no additional accommodation capacity - purchasing an existing investment property is simply a change of ownership.

There are many benefits identified long ago by Adam Smith of home ownership.

If the property investors all sold out tomorrow to owner occupiers the outcome would be a far superior society.

If Henry Homeowner sells his rental house to Billy Buyer who was looking at buying new from Dave Developer then Dave Developer has fewer customers and as such builds fewer new homes if any at all.

Henry Homeowner’s sale of his rental house has this reduced total Humber of houses available in the market, by preventing a new house from being built.

Billy Buyer was the tenant. He was never going to build a house with Dave Developer because Henry Homeowner’s house is perfect for Billy.

Is this because rental houses are cold, damp and mouldy, whilst new builds are warm, dry and lovely?

Strange thing is with your general shtick about unintended consequences, you fail to see your whole business and lifestyle is an unintended consequence, the current housing crisis that this Govt has inherited from the previous 2 is an unintended consequence that the decades old policy enabled.

When half of all houses for sale were being sold to specuvestors, and not providing a solid foundation for generations this was an unintended consequence, now you're out-numbered by renters, which was never the intention of allowing some people to take the strain of accommodation.

Now you're being legislated, because your voting block is dying and the rental vote, incidentally that you've helped create, is significantly larger, you've had it good for 20+ years, if you haven't made money over that period you're frankly an idiot.

Strange thing is with your general shtick about unintended consequences, you fail to see your whole business and lifestyle is an unintended consequence, the current housing crisis that this Govt has inherited from the previous 2 is an unintended consequence that the decades old policy enabled.

Who and what are you referring to about the "general shtick about unintended consequences"? If you're referring to taxation policy, then yes, the unintended consequences have surfaced. If you are referring to the unintended consequences of a property bubble, only time will tell to understand the full extent of those consequences.

It was in reply to EcoBird and their unintended consequence led "property portfolio" JC, and yes on both counts to your take on it.

I see. There are also unintended consequences of engaging a troll under a bridge. Chances are it won't be an illuminating and enlightening experience.

"moral crap"

It occurs to me that the modern world with its innclusiveness and globalism has undermined the foundations of morality. It's quite convenient really, from the perspective of an individual. Not sure what the long term consequences will be.

Totally agree Zach. Morality has always been fluid and a culturally specific phenomenon. With culture now both more global and increasingly individualised, it's anyone's guess what the moral norms will be in 10-20 years.

With some of the revelations coming out of the banking inquiry is Australia I think they have hit rock bottom and are continuing to dig.

"He says the central bank is aiming for 2% and he is confident inflation is heading up to that level."
As their analysts have been forecasting since about 2012. Might want to check the forecasting methodology before repeating that.

The Boy all Goverments can implement laws that affect all types of investing including property. Labour is implementing a number of changes that are affecting New Zealand residential property. You don’t like these changes hence you are very negative and you constantly squeal. You need to accept the fact that Labour will unravel market conditions that National allowed to continue unabated. For the record I retired at 58 based on my equities and commercial property portfolios. I could have retired early just relying on my equities. Just because you do have the ability to be successfully investing in equities does not mean it is impossible to retire early based on a equities portfolio generating a sizeable passive income.

Gordon, I knew many people who retired on equities many many years ago but what happened?
They had to return to the workforce?
Why you say, because we had the sharemarket collapse didn’t we!

If they had inVested in property instead they wouldn’t have needed to go back to work!

You really show how uneducated and ignorant you are on a regular basis The Boy. The crash was 31 years ago.People who did not sell then and just bought more have done very very well. My uncle who was big in equities just saw the 87 crash as an opportunity to buy good dividend paying shares at a cheaper price than they were before the crash. So many pig ignorant people hark back to the 87 crash and probably no more than in New Zealand. A lot has changed since then including laws all over the world ensuring better protection for equities buyers. I was in the market before the crash but my broker advised me to get out as it was my house money. I bought back in after the crash and have never been out of it. The correction in 2008/2009 is a small blip in the past and those who just carried on buying since then have seen huge gains. The trick is to be diversified and I am with equities, commercial properties and residential subdivision interests. You are a one trick pony in a town that is in a terrible state and that is your problem and why you are so angry theses days. You have let your family down by being too heavily concentrated in one investment area in the wrong part of New Zealand. You should take advice and get into some better returning investments. I have a feeling you will not do that because you cannot get past your incessant arrogance. I know better. I am The Boy.

Very mistaken opinion - I was living and working in AK then, and knew many people who were invested in the share market, and lost lots, but i also knew quite a few who found their property values dropped back to significantly less than what they had borrowed. Especially one chap who had his wife walk out on him, and then try to screw him, but found that if they sold their house then, they would have still owed $30k+ on the mortgage. quite a hole, and most certainly not protected by being invested in property rather than shares.

murray 86. Yep, true. 1987 saw plenty of people who leveraged up and jumped into equities without understanding what they were doing and lost their shirts. I also remember those days very well. But as Gordon correctly reminds us - NZs market was the wild west back then and its was THREE decades ago. Investment conditions today are very different to back then. And you are right, house prices have in the past dropped in real terms and it is very probable they could do so again.

Buffets decades old advice on shares remains as true today as when he first expressed them - identify quality companies using relatively simple metrics and readily available knowledge, buy and hold them through the inevitable downturns and over the long run you will outperform house price appreciation but have spread your risk over a variety of assets classes and countries.

It's my investment approach, although I went against this philosophy by going fully liquid before the GFC and then rebuying the market in March 2009. More than a few sleepless nights followed before the market was confirmed to have turned up.

Surely the ridiculous skew to housing investment is simply explained by the fact that banks can lend four times as much to housing than they can to anything else. All else is secondary and designed to cause us to argue amongst ourselves rather than identify the major cause.

The IMF recently put out a major report on the synchronisation of house price rises in major cities worldwide. Auckland is second most stupid after Shanghai. Perhaps Mr Orr should read it.

https://wordpress.com/post/rogerwitherspoon.wordpress.com/99

http://www.imf.org/en/Publications/GFSR/Issues/2018/04/02/Global-Financi...

Housing debt to GDP 85%
Household debt to income 167%
Median income multiples/housing affordability 6.34% (Auckland a whopping 9.54%)
OCR and mortgage rates at historic lows

Gosh, what could possibly go wrong?

...Australia household debt to income ratio is almost 200%. AU$500 Billion of loans contain overstated income so this figure is likely conservative.

Yes, what could possibly go wrong.....

Many go on about the cost of buying a home is too dear!
Reality is that when housing in Auckland was 100k many still didn’t buy and were renters!
So what is the difference then?
Were houses too expensive back then as well?

What are you even talking about? It's like you've invited every known logical fallacy to an orgy, complete with jelly wrestling?!?! What goes on in that brain of yours TM2???

Every objective measure, every institutional assessment has deemed Auckland as too dear. Home ownership rates have gone down, renters have gone up, the data can provide numerous differences. And no, there were times when Auckland was not too expensive. When DTI's are below x4 they are not too expensive. This is very easy data to find. The issue is that either you simply can't accept the data (because it doesn't fit your narrative) or else you are incapable of understanding.

Try studying this graph and figure our what direction the line is moving. Consider whether this may relate to house prices.

https://tradingeconomics.com/new-zealand/home-ownership-rate

80% of the loans in banks are to housing...
I struggled for years to get money out of a bank for my business, and I know a lot of other small businesses in the same boat, if you own a house then you can use that as collateral, if your worldly possessions are in the business, you need to find an investor to raise capital. It took me 6 years to get anything out of the banks. Personally I see this as a major hurdle to the productive sector.