sign uplog in
Want to go ad-free? Find out how, here.

Economist Brian Easton says the government’s recent housing package may work; will it do enough?

Economist Brian Easton says the government’s recent housing package may work; will it do enough?

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.


Trick Question: Does New Zealand have a capital gains tax on housing?

If you ask the Prime Minister she will say not. It is true that her government is increasing the scope of the ‘bright-line test’ on non-family homes to 10 years. That means that any financial gain made on the sale of the property within the specified period is treated as income and can be taxed.  The Prime Minister promised her Labour government would not introduce a capital gains tax so this change cannot be one, can it?

The Leader of the Opposition would have to agree. A bright-line test was first introduced by a National Government of which she was a member. National would never introduce a capital gains tax would it?

Harder Question: Should the Government subsidise investing in capital gains when there is not a capital gains tax?

You may not see the logic of such a subsidy, even though there was/is one. Purchase a house for tax-free capital gains, borrow to maximise the leverage, let it out to cover the cost of holding it, and you were allowed to deduct the costs of interest against your net income from the rent. The government is changing that.

Is that not going to put up rents to tenants? If it does then the deduction is really a subsidy to those leasing. If so, it is a funny subsidy because it only applies where the landlord has borrowed. Someone in a house whose landlord has not borrowed gets no such ‘subsidy’ from the government.

There are a group of landlords who say this argument does not apply to them. They are not there for the capital gain – that will be reaped after they die. They have invested in housing to get a better return than putting money in the bank; the new tax regime will cut back their return. True, if they have supplemented their purchase with borrowing, which would happen if they do not have enough to buy the dwelling they want to rent without borrowing. Is that fair? Perhaps if they agreed instead to pay a capital gains tax out of their estate, that would be even fairer. Ooops.

(Leverage investing – borrowing to supplement the capital – is risky. It was central in the destruction caused by the 1929, 1987 and 2008 finance crashes and the 2008 US housing crash.)

In effect, the new tax range is a hike in borrower’s interest rates on second houses. The difference is the additional costs go to the government (which may or may not use the funds to build more houses or subsidise renters and first home purchasers). If the hike came from higher market interest rates, then investors would get more from their bank. Hmmm.

Will the withdrawal of the subsidy result in higher rents and by how much? Who knows? But better to deal with this by increasing the rental subsidy for housing rather than the erratic impact of allowing interest to be taxed as a cost against income. (The government is threatening rent controls; at best they work temporarily.)

Actually it looks as though it would be more rational to have a capital gains tax on non-family housing. Wash your mouth out, Easton! There are lots of accountants and lawyers beaming at their fees for advice under this new regime.

The background is that there are two processes driving rising housing prices. One is the shortage of housing; the other is a speculative (Minsky) boom. The government package included measures to increase the supply of housing, but that will take time.

However, the main thrust of the package is to make the speculation less attractive, which will dampen the house prices for a while. We don’t know for how long; they may stagnate or fall briefly. But under current circumstances, assuming there are not massive increases in the stock of housing, the boom is likely to return some time in the future.

That is because householders have funds to invest. New Zealanders have a penchant for investing in housing, Where else are they going to invest?

No doubt many will get into collectables and cryptocurrencies. You do not make a capital gain out of bitcoin and the like until you sell – in effect your capital gain is the purchaser’s capital loss. Collectables are similar but if they are tangible you may enjoy the pleasure of possessing them. (There will also be some very risky schemes and even scams.)

The other big opportunity might be in shares. At least the company being invested in makes  profits (one hopes) higher than the return on bonds or bank deposits. Most New Zealanders do not have much experience investing in shares. Recall how quickly they gave up their shares during the Rogernomic privatisations; the intention was to get people into the habit of share market investment. Perhaps this time more will learn.

There is an interesting possibility here. Allow me to speculate (with ideas rather than money). The Reserve Bank is requiring the trading banks to increase their capital in order to make them more robust to financial shocks. (Some argue that is not necessary, but the decision has been made and relitigation is unlikely to change the decision markedly.)

Where are the additional capital reserves to come from? Ultimately it is the public. For example, suppose the (usually) Australian owner was to set up a separate New Zealand bank which it listed on the sharemarket while holding the majority of the shares. The minority would be sold to the public and, presumably, (most of) the funds would be used to add to the bank’s capital – thereby meeting the RBNZ requirement. (There have been suggestions that Westpac – our third biggest trading bank – may do something like this.) 

Would enough New Zealanders stump up the cash? Again one says ‘who knows?’, but investing in a bank is likely to be more profitable than a fixed interest deposit in it, although the shares will be riskier. It is probably not as profitable as investing in a housing bubble before it pops. (Mind you, given the recent changes to the bright-line tax and income tax rules, investing in housing will not be as attractive as it has been recently.) The advantage of the share investment is that management is not nearly as troublesome as being a landlord.

In summary then, the recent package will increase the stock of housing, but probably not by as much as needed – in the short term anyway. It will reduce the return of investing in housing, but we cannot be sure by how much, nor of all the consequences. However, the overinvestment in speculative housing is unlikely to go away in the long-run until new investment opportunities are taken up.  One possibility would be investing in trading bank shares where they use the cash to increase their capital reserves,

If you are more certain about the future course of the investment market, you have not been following closely enough, Yet, if you have funds to invest, or already have them invested in the housing market, you are going to have to make decisions. Best of luck.


Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

145 Comments

16
up

Interesting to see Brian Easton label New Zealand housing a "Minsky" boom.

Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.

I wonder what point we are now at.

11
up

"The background is that there are two processes driving rising housing prices. One is the shortage of housing; the other is a speculative (Minsky) boom. The government package included measures to increase the supply of housing, but that will take time."

Brian Easton, you agree and so do everyone now, even people with biased vested interest are not able to deny, the need to control speculative demand and please let us know your thought on : in current situation, Is Stopping Or Puting restriction On Interest Only Loan, the way forward being used by most ( if not all) speculators as they have no interest in paying of the loan but instead looking to flip for fast and Big money.

15
up

The use of interest-only and top-up loans to fund additional properties must stop. Banks are shovelling fuel for a runaway train.

Interest-only loans reduce the amount you can borrow, they are not the problem. Most investors saw their interest-only periods expire long, long ago.

11
up

Rubbish...40% of new loans to investors are interest only

We have had a interest only loan of $258,000 since 2001 when we had a 100% loan on a house and 5 acres of land that was next door to us. It took 5 years for the rent to cover the mortgage but in the end it did. We had that house until 2009 and added all but 3000m2 to our own property, we did not want to sell but I was sick at the time and needed to cut back. Once sold we transferred the mortgage to another rental house we owned with a income from avocados as well. We sold that in 2016 and bought another house in Wellington that we wanted to live in as soon as we sold up. This took a while and we ended up renting it out for 3 years. Once we moved to Wellington we bought a new build using the same interest only mortgage. The current rental with that mortgage that is now only 25% of the houses value will outlive us and will be passed on to our kids who are now trustees of our family trust and they can decide what to do with the mortgage. So as you can see the loan was not taken to flick it off but a deliberate way to keep a house and also to give a better income for us as we retired in 1998 when I was 49.

Would you do it all again if you started tomorrow based on the current economic environment, if you were 51 again?

Hi,
We came to NZ to retire in December 1998. We decided to invest all our money in shares though a managed fund. What a disaster that was with the crash of 2001 ~ 2003 losing 25% of our assets, the problem was it was not recovering so see went back to property with the 100% mortgage. Our other investments barely made any money until we cashed out in 2016, I think it was annualised at 2% over the17 years and it was a moderate risk portfolio. Investing in shares was the worst decision we had ever taken, so much for investing in the productive sector. If I had come here and bought a few houses in 1998 we would be far better off now. So yes I would do it again. By the way we bought our first house 50 years ago this month, we paid 4,950 pounds with a 500 pound deposit.

So just to be clear you decided to invest all of your money in one asset class in speculate bubble and it didn't work out well and it was a terrible idea.

But let me guess, your advice to young NZ is to put all of their money in one asset class in a speculative bubble?

I didn’t have all my money in housing, I had more in investments when I came here.
I can only advice on experience having being married for 50 years and owning property for that long. I have learnt many things on the best things to do to improve your lot.

When we bought our first house in 1971 we paid 4,950 pounds for it. When I told my friends that they said I was mad taking on a huge mortgage!!
To pay for the house I worked my normal 40 hours but did 1 hour overtime Monday to Thursday, 4.5 hours overtime on a Saturday and 8 hours overtime on a Sunday. I played soccer on Saturday afternoon.

As soon as we bough we started to improve the house making the kitchen twice as big, the big difference is that I did all the work myself, I had to do this work in the evenings as that was the only time I had.

We sold that house 1 year later for 10,750 pounds ( yes house prices doubled in one year back then) and bought a bigger house that we could do more to.
At the age of 22 I started major projects again doing all the work myself and the projects never really stopped I.e. adding a third floor with 2 bedrooms and a bathroom, kitchen extension, taking out all chimneys and making a large lounge out of two rooms. How did we pay for this? Well I continued with overtime but not Sundays and my wife who had our 2 children during this time took in students to pay for the materials. During this period I made the decision I would retire in my forties. We sold that house in 1983 for 47,500 pounds.

Our next project was to buy a old Victorian house for 60,000 pounds owned by the Duke of Marlborough that had never had any work done on it. It was in the most expensive part of Oxford, UK (the house next door belonged to Robert Maxwell) The plan was to renovate quickly and my wife was going to take in 6 students to pay for it as well as covering the cost of private schools for our two children. At this time I was having to travel overseas a lot so my wife was really busy.

In 1988 we moved to Tokyo and had to rent out the house, we sold it in 1994 for 225,000 pounds. We moved to NZ in December 1998 to retire. I was 49. We bought a little Cottage on 13 acres of orchard for $275,000 and set about transforming the house and the land, on the way we bought the houses either side of us, one for $257,000 (in 2001)and the other for $435,000 (in 2003) to take land off of them to develop our own park grounds, planting hundreds of trees.
I got diagnosed with a lung disease in 2003 and COPD in 2008 and started to think about downsizing. My Doctor did say use it or lose it so I just kept on with my projects but at a slower pace. We gradually sold off everything, the two house for $425,000 in 2009 and $650,000 in 2017 and our home in 2019 for $1,150,000. Because of my health we sold of 2 sections in 2016 for $175,000 each.

We bought the house we live in in Wellington in 2017 for $800,000, it was cheap because it needed a lot of work done on it, it was such a bargain I was surprised a young couple didn’t buy it. The house is now covered in scaffold and we are doing lots of work on it (cost $150,000 ish) but is now valued at $1,600,000. We also bought a town house last year off the plans for $745,000. It has just now been finished and rented out for $735/week and valued a $870,000.
I tell you all this so you can make up your own minds on what you do with your lives but I have no regrets other than investing money in the stock market once in 1987 and again in 1999. I see no reason why the next 50 years will be any different to the last 50 years and I would not be concerned about what the price of the house is that you pay now as it will look like the cost of a holiday in 50 years. I choked on paying 4,950 pounds on our first hous in1971.

So now you're calling the end of interest tax deductibility a "Subsidy" because the outcome may be that rents could rise. That's nonsense

Yvil...What do you think should happen in regard to interest only loans and why? I think, due to some of your comments, there are a few regular posters (including me) that would be interested in your thoughts.

Hi Karl, I notice you're concerned with what you think "should" happen in many of your posts. I prefer to deal with what "is" rather than with what one subjectively thinks "should" happen,

I very much doubt that you would like what 'is', if the people who cared about freedom and equality throughout history decided to just deal with what 'is' and never bothered fighting for what they thought 'should' happen. If suddenly you were no longer free to voice your thoughts and confined to a life of servitude, would you still be murmuring to yourself that everyone should just deal with what 'is'? Because after all, it's all subjective right? Your lack of freedom is simply what someone else thinks 'should' happen. Who are you to say that's wrong?.. lol It's complete nonsense and you know it.

"Who are you to say that's wrong?.."
That's precisely my point QD, that's why I deal with what is, rather than what I think should be. I'm not pretentious enough to tell others what is right or wrong or what "should" be

Under your logic, it would be pretentious to tell the slave owner that slavery is wrong. How humble of you.. If your entire family was brutally murdered, would you still hold to this? Because who are you to 'tell others what is right or wrong or should be'... would you seriously have no complaint, no judgement on that? Since you're so unpretentious? This is what happens when that nonsense is brought to it's logical conclusion. It completely breaks down in the face of the most basic examples.

So no more complaining about interest deductions now because it "is" the way it "is". And the way you think it 'should be' doesn't matter.

Yvil....The way things usually change is when enough people voice their opinions about the should. I base all my financial decisions on the "is" rather than the should. But if we want to pull NZ towards a fairer, more inclusive society we need to be vocal about the "should". I can only guess that your refusal to simply state your opinion on what should happen in regard to interest only loans is that what you hope happens (or does not happen) is very difficult to justify from a moral perspective and your true views would come across as completely self-serving.
I respect your reply as I think you had 3 choices. One, refuse to answer. Two, lie about what you think should happen or three, say what you think should happen and come across as only being concerned about yourself and not what is right. So well done, the first choice was probably your best option. But some of us can read between the lines.

Hi Karl, I notice you're concerned with what you think "should" happen in many of your posts. I prefer to deal with what "is" rather than with what one subjectively thinks "should" happen,

So no more complaining about interest deductions now because it "is" the way it "is". And the way you think it 'should be' doesn't matter.

I have never complained about the interest deduction, I welcome them, stop making stuff up

Hi Yvil, I've noticed you repeat this line about focusing on what 'is' the case rather than what 'should be' the case. I prefer not to be such a fatalist. In any case, it clearly 'is' the case that there are plenty of people who find it worthwhile to try and make things better for themselves and others by thinking about what 'should be' the case. Maybe you should accept your own advice and just deal with it.

"there are plenty of people who find it worthwhile to try and make things better for themselves"

I'm very happy you have taken my post of yesterday to heart, al, well done!

by Yvil | 5th Apr 21, 6:41pm 7up
al, you always revert to asking others to make your life better (local councils in your example above), the point we're making is that YOU can make your own life better, instead of always asking others

You missed the 'and others' part, Yvil. How surprising. What you don't seem to understand is that thinking about what should be the case - i.e., what would make life better for you and others - is the first step to making life better for yourself and others. So is asking people for things. So I'm going to attempt to make things better for me and others by asking you to please quit jumping in to every discussion with your repetitive posts about how people should just accept the status quo that happens to work great for you but not so good for others.

Well said.

Al, have some integrity and stop making stuff up like "quit jumping in to every discussion with your repetitive posts about how people should just accept the status quo" I advocate very much the opposite to accepting the status quo as per my post above at 1:42 which you just replied to:

by Yvil | 5th Apr 21, 6:41pm 7up
al, you always revert to asking others to make your life better (local councils in your example above), the point we're making is that YOU can make your own life better, instead of always asking others

It's a bit rich that in your post accusing me of making stuff up, you quote one of your own posts in which you make stuff up about me. But it's good that you think that people should not just accept the status quo. Hopefully now you understand that thinking about what you think should be the case - for example, what would be better for yourself and others - is PART OF not just accepting the status quo. To try and convince people that they should just accept 'what is', as you've been doing, is a mistake. You might be happy to just act as though political decisions are something that are 'done to you' and you should 'just deal with' rather than something you can actively try to change - it is very easy to take that position when political decisions have largely benefited you at the cost of others. But trying to make out that it's some kind of moral or personal failing for others to think about how things could or should be different is not just irritating, but also pretty selfish when it's clear you've made out like a bandit from current policy settings.

Yvil, you keep defending in ridiculous ways the interest of a few who already got a very good time at the cost of the many.
While interest deductibility can be fair in other types of business, in the specific case of real estate this creates two tiers of buyers, those that pay the full interest to the bank who use the house as their own accommodation, and those who pay a fraction of it who happen to be those who don't need a house to live in but as a mean of investment. It gets worse when you add interest only loans to the equation, since the difference becomes even more obvious to the benefit of investors. Can we call it a subsidy? Yes of course, it is helping a segment of the buyers in contrast to the others, actually those that we now need the least.

Except that I stated multiple times that I'm happy with the end of the interest deductibility... so your whole post is... well pointless

Happy to hear you are finally coming to reason.

There's a fundamental logic flaw that everyone is missing - It's actually home owners who've been unfairly advantaged by paying no tax on their imputed rental income. Not allowing interest deductions for landlord investors is just plain wrong. It's an inappropriate knee jerk reaction to a housing crisis. It's out of step with international norms. And it will probably lead to a debt deleveraging, and consequent reduction in aggregate demand ie. a nasty recession / depression. That will shrink the proverbial pie for everyone.

The pie was shrinking for a large part of NZ society already - so should those people care about a nasty depression/recession that might give them better long term prospects? Or is society only here to cater for those who are already wealthy, but continue to get wealthier?

It depends on how bad you imagine things could get. How about a temporary 40% reduction in house prices combined with >30% unemployment. Bank insolvency, and sharp devaluation of the NZD at the same time as an increase in domestic interest rates. Most people cant afford a house and if they could then they're outbid by foreign investors who'd be cleaning up.

14
up

Allowing investors to claim interest costs as an expense is not a subsidy. It's what ever other business in the nation does.

23
up

..conveniently overlooking that home owners cannot deduct interest (or rates or insurance or r&m etc) yet are expected to compete on price!

Yip, so the government should have allowed them the same benefits. That's how it works in the US.

That would obviously have poured more fuel on the fire, though. But doing that, alongside a capital gains tax, back in 1990, may have avoided our current situation.

11
up

But if you raise any of those points over the last 20 years you get called a doom, gloom, merchant by vested interests.

13
up

And they have to pay a cash deposit! Property investors show up to the auction using equity on other properties (hence I think the housing market has ponzi characteristics).

You have identified a big problem and yet come to the most backward conclusion. People should be allowed to duct the reasonable costs of running themselves as a business. Th overall impact of a capped deduction would be to increase taxes on the rich compared to the poor. Throw a pay as you go cap gains tax at the problem to fund it.

"..conveniently overlooking that home owners cannot deduct interest (or rates or insurance or r&m etc) yet are expected to compete on price!"

The home owners are never in business and don't use the interest (cost for use of someone else's funds) to derive taxable income.

No real investor has been in the market for years - its just FOMO inspired owner occupiers upgrading and FHBs (there's almost 70% of all sales right there) and wanna be speculators (buying their first rental on the back of rises in OO house as they hear its the thing to do).. But they are all a year or 5 late and more than a dollar short.

Real investors have likely been net sellers of residential housing over the past couple of years

10
up

Real businesses also collect and pay GST, take out company loans at a base rate of 8%, often employ people who pay tax and incur leave entitlements and public holiday rates, competing on a day to day basis for each dollar they receive, often while paying leases to commercial landlords.

When you consider what typically goes into making a business operate, and then you look at what goes into residential property "investment", you can see there's a clear distinction between the two and hence a good case can be brought forward around deductibility entitlements.

Well said Nzdan.

29
up

So if I bought a business for a million bucks, how much do you reckon the banks would lend me ? How many businesses could potentially have 100% bank funding on an interest only basis @ 3% . How many businesses would you buy that make a loss from day one and require constant capital injection to stay afloat.

And the answer is ---- NONE !! Because the example above is speculation, pure and simple, betting on future gains, it isnt a business, its a big day out of the races.

1000's of publicly listed companies do exactly that "borrowing" share investors money at 0% i.e zero dividends - as they are considered 'growth' stocks.

Tesla rings a bell or 2.

Banks treat investors with more than 5 houses as a commercial business anyway - lucky to get 50% leverage at this point and higher interest rates, not so much different from certain 'safe' business lending that's backed by hard assets that can be used as security.

Im talking SME's not publicly listed behemoths.

50% leverage is still gigantic for any business that is backed by its assets alone.

10
up

Yes but every other business pay tax on there income. Property investors essentially have had there major income source (capital gains) zero rated by the government.

17
up

Davo...other "businesses" (LOL) do not reduce the number of kiwis who are able to purchase their own home in their own place of birth. Allowing interest only does and is therefore detrimental to society. That is the difference.

A guy who own 5 or 10 properties asking for subsidy to grow it to 50, so that FHB's live on street with there families... Hypocrite

And buying property and renting is a great business indeed..

28
up

"Where else are they going to invest?" Nowhere, because I don't have the income for 'investments' because I'm stuck with a 30 year mortgage on a massively inflated first-home, that mops up 40% of my after-tax income, because generations before us got to bank tax-free gains to finance their own retirement - a luxury I probably won't get before I die. Forgive me for being a little slow to feign concern at where my elders can get the same levels of risk-free return while I try and bring up a family in the mess they've created.

11
up

Well said GV, a tiring place to be, you have my sympathies.

Incidentally the significant drain on our free capital due to servicing mortgages surely must reduce our potential for productivity gains. The investment in new productive investment requires serviceability and this is directly constrained by the existing payments made to our Australian banks. Want to increase productivity, yeah sorry no can do, generations of house inflation has baked in our low productivity. A price crash in housing will help over time but for the next 10-15 not so much.

11
up

It's also a self-inflicted dick-punch from our central-bank. With more and more money committed to repaying debt, changes to things like the OCR to stimulate spending are going to be less effective - people's disposable income after accommodation costs is going to be stretched and it's going to have a hangover effect for at least two decades, likely more. It's going to take some bold governance to get us to a future where people have money to spend, but with lower house prices at the same time. Doing nothing and letting it ride is not an option anymore.

Having too small a difference between the minimum and median wage disincentivizes workers from looking to become more productive. Why take the significantly more stressful job for only a tiny increase in remuneration (which will then get taxed more onerous key anyway) when you can comfortably stay where you are?

Hi Sadr, perhaps you are right, but I think the main issue right now is the penalty rates benefit receivers get when taking a job.

It is the wrong way around, rather than taking any benefit away they should incentivise this activity by allowing a "top-up" to a certain tax-free amount. I think this would halve the issue around getting our fruit picked for a start.

100% Agree - since the pay equity settlement for care workers - the whole sector has seen drops in productivity, motivation and staff morale -- the best staff got the smallest rises - the worst staff got the biggest -- as in the end the ONLY things that counted were longevity and a qualification not performance, ability to do the job, attitude and commitment. No wonder our Older Adult, dementia and mental health services are in even more crisis that they were 4 years ago.

Given that the financial contract increases only covered the bare costs and had nothing for our health professionals, managers, administrators, office staff -- its not possible to further reward our best staff above the settlement levels -- and even if we did -- it would be seen as unfair and discriminatory in our industry despite being an over and above merit award!

I always used to have staff come and talk with me about career paths and how they could move up the ranks etc -- no longer $27 an hour from July1st for care work -- more than a starting nurse in the DHB payscales!

14
up

"The background is that there are two processes driving rising housing prices. One is the shortage of housing.."

Think. For the last 12 months building has continued at a rampant pace and immigration has gone dead. Yet prices have gone through the roof.
The reason is lack of sellers.
Owners are holding as they see no alternative investment.
Houses sit empty.
The answer...increase interest rates.
As the author states, the new rules effectively do that.
This might just work.

Agreed, as per my comment below

11
up

Immigration may have gone dead, but somehow we went from 5 million to 5.1 million over the year (when births minus deaths add around 25,000).

I'd vote for any political party that had a policy of capping population growth.

10
up

sparrow...Last week in his great wisdom Faafoi just extended all 300 000+ temporary visa holders visas until 2023 ensuring very few of them go anywhere. This is what we are fighting against.

In 2023 most of the 300k will be fighting tooth and nail to get permanent residency.

Yes this is a real issue. Immigration at 100k per annum baked in right here. They will almost certainly all roll over into permanent residency.

KK..exactly right. And by 2030 those 300K people will have helped another million migrants to move here on long term visas.

In the calendar year 2020. Increase was 65,700 approx.

Net migration 44,000,
Births 57,753.
Death 32,613.

But net migration is going down sharply by the month. The year Jan to Jan it has decreased from 44,000 to 33,200.

Usual net migration has been just a tick under 50k per annum in the previous few years.

Btw. Building consents in the calendar year 2020 were 40,590.

(in the previous year consents were 37,700)

38k of that 44k net migration occurred in the first 3 months prior to lockdown last year.

Also, in the 2020 Calendar year, there were 1,703,315 Arrivals and 1,740,082 Departures which = negative 36,767 arrivals according to Customs. This also factors in Jan and Feb were +42,107 and +44,007 in the Arrivals.

https://www.customs.govt.nz/globalassets/documents/covid-19/air-pax-move...

So, extrapolating to a 12 month period from closing borders and first lockdown - assuming roughly same natural increase of 25k + net migration of 6k = 31k increase.

There will have been more consents, and probably more completed builds, than people added to the population in the last year.

The 2020 boom is an LVR, interest rate and FOMO phenomenon.

A bite (or nibble) into the housing shortage.

Going by this article reporting on NZ iInitiative report.
https://www.goodreturns.co.nz/article/976513264/housing-crisis-needs-bui...

"The New Zealand Initiative’s latest report - The Need to Build: The demographic drivers of housing demand - shows since 1992, the country has added only 21,445 private dwellings annually to the housing stock. There is now a shortage of 40,000 houses across the country.

From 2019 to 2038, the annual average additional houses needed will increase from 26,246, with low migration and fertility rates to 34,556, with medium migration and high fertility rates. From 2019 to 2060, the country will need 15,319 additional homes annually with low migration and fertility rates and 29,052, with medium migration and high fertility rates.

Hong says these figures do not take into account the annual demolition and replacement rate of dwellings and the existing undersupply of 40,000 houses."

So, back of the envelope maths.
40k shortage.
Need currently 26,246 homes per year (but rising), with low migration and fertility rates. (which we just had).
Theoretically, 14,000 homes have been reduced from the 40,000 deficit. Deficit reduced by 35%?

Yes, I know you can't live in a consent ....

Except the 12 month period from March 2020 to Feb 2021 was negative 124,000 across the borders. Most likely tourists returning home, who knows???

Penfold....fewer migrants are arriving because of border restrictions but it is disturbing to see that almost none of them are leaving either.

(Leverage investing – borrowing to supplement the capital – is risky. It was central in the destruction caused by the 1929, 1987 and 2008 finance crashes and the 2008 US housing crash.)

Is this not happening now ????

Only difference is that as are in zero or very low interest rate scenario, possible that leverage investing be much more and bigger the risk and as interest rate are so low may delay the inevitable ( as government and RBNZ are more concern than individual borrowing so going all out to support and promote the risk).

DOES INTEREST ONLY LOAN HELP LEVERAGE INVESTING OR NOT ?

Everything points towards ........but government and RBNZ are unable to see or do not want to see....Why ?

The brightline test = CGT should of course apply to all real estate including the personal home. The reason it is not, is simply because of the "tax them, not me" mentality which would lose too many votes to the government

26
up

The reason is because people actually need a house to live in. People do not need five investment properties leveraged off each other in a cross-debt orgy underwritten by the taxpayer.

If you sell you need to buy. So if I want to move houses and buy same property you want me to pay a tax and potentially have to re- mortgage to get back into he same property. No thanks.

12
up

Tax the hell out of property investors who buy existing dwellings I say. Labour are onto it by providing incentives for property investors to solve the 'housing crisis' by adding supply via new builds.

GV, Rastus, IO, as I said above "tax them not me" is your true reason

I find myself agreeing with Yvil far more often than I do with Rastus - but he is right on this.
Applying CGT to main residence is a tax on moving house as well as a tax on inflation - unfair , bad for labor mobility , bad for the economy.

I can speak for myself, thanks.

But property investors haven't been paying any tax at all! (at least that is what they tell me). So even if it is 'my true reason' (or whatever that means), then great - tax the shit out of property investors as they haven't been paying any tax at all (apparently).

No Yvil. I'd prefer an asset tax on all assets as per TOP party. Deemed rate of return. Don't increase the tax take, just re-allocate it.
I'd get hit with the asset side, but gain on the personal tax side. Neutral or close I suspect.

Ahmen. Think of the productivity this would drive vs lazy debt speculation on land we currently worship.

That's pretty funny coming from the guy who boasted about making a million in tax free capital gains last year isn't it.

Totally agree. And the more houses a residential housing speculator owns as a result of buying existing dwellings, the higher the tax should be.

Yvil...No. The family home is almost always bought mainly to provide security and shelter for the purchaser. However, irrespective of how you or anyone else wants to spin it, investment properties are bought with at least one eye on capital gain. And most importantly, ensuring capital gain is paid will help to allow more kiwis to purchase their own homes by reducing the number of "housing scalpers" in the market. It is difficult for me to see a downside.

If that were really true, then why do we worry about FHB negative equity?

Brutus...emotion and false logic. And for Aucklanders, losing bragging rights at the next BBQ.

I thought you weren't "pretentious enough to tell others what is right or wrong or what "should" be." Does that not apply to taxes or housing?

I should say I must agree with you in this one, a CGT should exist on all properties since exceptions lead to people buying in behalf of their relatives or even foreign investors. At the end of the day is free money that grows under your feet which would not do so if the whole country would be doing bad, so it is part of your citizen's responsibility to return part of it when your house is sold at a higher price you bought it.

Economist Brian Easton :

Your thought on Interest Only Loan particularly it's role in supporting speculative demand.

13
up

Agree 100% : Housing crisis is for lack of Supply and excessive speculative demand.

Also agree that solving supply will take decades but speculative demand can be addressed immediately.

Government and rbnz for now should look at controlling speculative demand as it cannot be stopped in totality and I too think that controlling Interest only loan is way forward and need DTI to protect many FHB, who under FOMO are borrowing in extreme and any future interest rate change or situatiin may result in forced selling.

Jacinda Arden has an opportunity of a lifetime to reshape better NZ but will she !

19
up

Not sure if anyone else follows the property investor pages on FB....things are getting interesting over there. Property investors are now calling the 'victim' card saying that government is out to get them and are now considering leaving the country (not just one but quite a number of people) and saying that this will be the new brain drain! Not doctors and lawyers leaving - but property investors! I had to check the date but it wasn't an April fools joke!

Some are considering selling, others want to change their permanent place of abode to try and get around the new interest deduction rules.

The policy announcement sure has caused a stir. Just when I was losing hope on Labour it looks like they sent a dagger right to the heart of the property investor.

Givealittle?

The new brain drain! rofl

You will find that many of those property investors are in fact lawyers , doctor etc.

They obviously skipped a few classes during their degrees if that is the case! Most can barely put together a sentence.

10
up

My only answer to this housing speculators' whinging is: cry me a river.

They are certainly buzzing the hive there.
They just don't realize how good they have had it through (unrealized) capital gains, and the prospect of some increased suffering to come their way just doesn't compute.
...Maybe this is because they typical way to tell an investor story is not through the $ of equity gain, but through number of houses "my goal is 5 houses over the next 5 years". Instead of "Over the last 5 years, I took $150K from my OO home, spent in total 200 hours on management/loan/accounting, today my net equity is 1.2MILL... lolz"

When you have massive distortions in your market due to government trying to push through plainly unfair rules whilst passing them off as fair, you divert talent into Finance (The reallocation of resources based on those rules) which does not help society as a whole. Whilst a flat dollar tax rate may be regressive, I believe that a flat percentage tax rate strikes the right balance between fairness and incentivising productivity. There is less incentive to work on setting up complex (multi-national?) structures to minimise your tax burden when ultimately every dollar from any source ends up taxes at the same rate (for the purposes of this exercise treat tax credits / rebates from things like working for families as different tax rates, as they still generate an incentive to move income around to achieve optimisations). The problem is that those who want to spend other people’s money are not interested in fair or incentivising talent to be productive for society as a whole. When talent is incentivised to be productive for only itself, via expanding their efforts in the reallocation of more wealth to themselves, society as a whole losses multiple times over as effort will need to be spent making ever more complex rules to try to halt the wealth divide created by talent spending their efforts optimally.
TL;DR why not simplify tax by having a single rate for everything so that everyone can focus on more productive endeavours?

This is a super complex one! Have you seen Top's view? https://www.top.org.nz/universal_basic_income . I think the balance to be struck is between a society that wants to be cohesive and one that does not deter investment.

So are you arguing for a comprehensive capital gains tax now? Sounds like it.

IO....Isn't it great. They would need to be out of the country for 325 days in the first year and over 183 days a year after that for their tax obligations to change. Most of them would be completely incapable of functioning in a foreign country.
A brain drain? LOL. Swapping an investor for an Uber driver or a cook hand would increase the IQ of the average NZer.

That's hilarious! Yet they'd consider this justified anger - it's everyone else without a portfolio of extra houses that are the ones whinging and moaning lol

Yes they actually believe they are being hard done - despite the fact that government and central bank policies have seen house prices explode the last few decades, or by 20% in the last year. I.e. each house they own went up by $150-200,000 ish in the last year - but then complain that there might be a downside to that gain. Talk about want to have your cake and eat it too.

Oh well, that’s a great way to increase the IQ of both countries.

Haha leave the country? So that they can pay capital gain tax on all or their international assets which would be their obligation in most countries? (assuming they are honest taxpayers of course)

Not true. Singapore, HK, etc., don't pay CGT on international assets. Neither do Aussie-based SCV kiwis for non-Aussie assets.

refa...the average NZ property investor making a life for themselves in Singapore or HK? They would prolly end up back in NZ after a couple of years, with a wife from Orchard Towers. LOL.

Yeah I don't think there's a serious risk of many moving, and I think the change of tax residency would trigger bright-line tax liability on any recent purchases (deemed sale.) However it does hint that Aus and Sg based investors may have the upper hand over local NZ investors as they can probably still deduct their interest as expenses.

Just wait until we start unpicking the 'ex-pats who own rental property' cross-stitch. If you thought there was complaining before about not being able to fly around the world during a global pandemic, then you can't imagine the shitstorm that would come our way.

At risk of repeating myself here. The 'shortage of housing' is worsened by low interest rates and interest-only - it is just too cheap to leave a house completely unoccupied, under-rented, or under-airbnbed. Owner occupiers are less likely to take in a boarder to help with the mortgage when interest rates are so low - partly why students are struggling to find accommodation.
What happens when we build like the boomers and later down the line, all of a sudden interest rates go up, necessitating the underoccupied housing be put to work to cover the interest. Answer - sudden oversupply. Am not suggesting NZ doesn't build but rather make sure this is a genuine undersupply, not a distortion caused by low interest rates/interest-only resulting in ghost-housing, or semi-ghosting of houses

So supply is an issue, which cannot be addressed immediately but what can be addressed (may be partly but will) is speculative demand fuelled by cheap and easy money - interestingly loan.

Another interesting observation that everyone be it politicians, economist, experts, media....all commenting and raising tax change AS it affects them and no one interested in talking about interest only loan - tool, which by controlling can be used to contain future speculative demand.

12
up

Interest only clearly needs to go.

Have pointed out in another article, Chinese money is still pouring into NZ via companies such as Apex One Limited, buying to build high-density housing and driving up the cost of land in Auckland https://www.linz.govt.nz/overseas-investment/decision-summaries-statisti...

Personally I don't think supply is an issue. You could have 10, 100, or 1000 new houses on the market tomorrow things will not change. House and land packages cost X to build, its not going to go down. If the market looks like its slowing, then new builds will slow. Builders are not going to build something and have it sit about and not sell, they simply cannot afford to do that. Supply will always match the requirements of the market. Nobody will commit to a build without a possible buyer, your always just chasing your tail. There is never an oversupply in housing without an almighty crash in the economy.

Brian Easton doesn't mention one aspect of the housing picture; how many properties are being held empty? Two years ago the figure for Auckland was estimated at just under 40k. How many now? And what is the Government package doing to this picture? And what would housing demand, and rents, look like if all these were available?

11
up

One way of looking at it is that property "investment" should be treated like any other business. The property is a business asset. In other businesses, assets are depreciated by a percentage per year. That cost is tax deductible. Interest costs are also tax deductible. If you sell the asset at above it's depreciated book value then you are liable for the tax on that capital profit. In effect normal businesses have a capital gains tax. If housing investment companies were treated this way then the interest would be tax deductible but the capital gain would be taxed. If you want to see the loophole in the tax treatment of property "investment", I think that is it. I suppose it would have been very simple to say that all business assets will be treated the same as per above and the whole problem would have been solved simply and without any scope for argument.
Another way of looking at it is that property "investment" is at best wealth protection and at worst wealth creation. It adds very little that benefits society and as we have witnessed does enormous harm. How can anybody deny that? Normal businesses invest in plant people and material to create products and employment that is of enormous benefit to society. Property speculation is a very damaging use of capital and investment in business is the opposite. I think that it is totally reasonable for government to distinguish between the two and do everything it can to curb property speculation.
One of the major ways that property speculation works is by what I call farming inflation. That is the speculator borrows money to finance the purchase then claims the interest as a tax deduction. Even in a housing market where house price inflation is not outstripping general inflation the true value of the loan depreciates relative to the value of the house and in effect inflation pays off the loan. This occurs at the expense through inflation to the lenders who make the loan fiance available. The rational way to deal with these issues is for government to change the tax regime so that the inflation portion of interest is tax free in the hands of the lender and taxable in the borrower. A bit fiddly and complicated so the government have opted to simply remove the tax deduct ability to property speculators. This is a bit tougher than a totally even handed approach but given the totally negative impact of the activity and the disaster that we currently face, I think that their changes are totally justified.

Well written.

Ardern could have fixed this imbroglio shortly after her announcement that she would not let property prices fall - by announcing that the facts have changed and she is now willing to let prices fall

10
up

Giving assurance that will not let house price to fall is a crime. She could have said that do not want the house price to fall on long term basis but in short to medium term, they could rise and fall, specially when they rise at such fast pace so buy at own risk but alas.......

Shows her mindset is no different to John Key or Bill English, who said that ha ding a housing crisis is a Good crisis.

Yes a true leader would have done that, but for the kid that led the school debating team and went on to study a degree in spin she is never going to do that. You never know though. the school of hard knocks is a good teacher. Mustn't give up hope.

Yes that was an ill-considered bit of communication from someone so skilled in communications.

Signalling that property prices might fall is something that should be worked through, there are many impacts of such an announcement such as on our credit rating that would need to be considered. However after considering the advice from the many well remunerated policy staff at IR and Treasury she could make that announcement now as the latest policy announcement should see that happen in any regard.

Jacinda Arden did not say she would not
let house prices fall. And she has probably limited ability to do that anyway should there be a correction. From memory she said something like she would not like to see prices fall.

Housing Crisis. All politicians, economist, experts a nd media wants to talk and highlight but no one one wants to talk about measure available to control the most evil part - speculative demand.

Everyday see news and article but nothing on DTI and Interest Only loan ( Is Jacinda successfully in keeping it under lid till may or is it media and experts have allowed her to be successfully as they too want it to be under the lid for biased reason)

https://www.newsroom.co.nz/changing-the-course-of-the-ship-of-housing-mi...

Stu...excellent article, Thx for sharing.

Newsroom

Another million word diatribe about the ills of the property market
We know all that - we've known all about it for 5 years
What would she do to fix it - ie specific details

Tax equity release as income. It will fix the property market in a day. Really simple to do, the banks have all the data. The market will crash.. but it has to, there is no fixing it without a crash.

Real Shame for Jacinda Arden Government as was elected on promise to try and solve housing crisis instead added by promoting and supporting the ponzi.

Thanks Jacinda Arden Government for royally s$&# FHB.

https://e-tangata.co.nz/comment-and-analysis/the-housing-hand-wringing-i...

I would argue that the government has done as little as possible while at the same time ensuring they grab a headline. They have targeted interest payments. Hello.. haven't they just insured in cahoots with the RBNZ that interest payments are at the lowest point they have ever been. The net impact of this action is tiny. The brighline test.. they have just admitted that almost nobody pays it because the ways around it are more numerous than the ways to dodge the foreign buyer ban. Another piece of legislation implemented to grab a headline while ensuring any foreigner who really wanted to buy a house was able to do so. Our problem is our politicians have been bought and paid for by those that want the status quo... no change is coming to the Ponzi because the politicians are and need the Ponzi.

What sort of country do we think we'll have after this hysteria is over if The Government backs down?
Ardern and Robertson have had their hands forced by this reaction.
They can now push on with even more needed reform(s), or retreat.
There is no way of standing still where we are.

There are veiled threats, and then there are just blatant threats.

Property investors 'almost hysterical' over housing policy change
NZPIF, president Andrew King, “Our goal is to protect the rental property industry, including the interests of both landlords and tenants. While these rule changes apply to landlords they will ultimately affect the end user, tenants.”
“There’s a lot of money obviously tied up in property in New Zealand, and the Labour government know that, so they’ve picked a fight with a pretty powerful industry.”

https://www.stuff.co.nz/life-style/homed/housing-affordability/300267745...

Property groups are starting to sound like a rogue cartel and landlords their dodgy henchmen.

As you say, I think the more they threaten, the more ammunition it gives the Labour government to crack down on the industry even further.

I find the use of "industry" to be borderline vomit inducing

Industry? Just like farming, only you're farming people.

"Is that fair? Perhaps if they agreed instead to pay a capital gains tax out of their estate, that would be even fairer. Ooops."

Perhaps if I wasn't giving what is effectively a house my children. Its a house I don't care what value the house is it is still a house, I just want them to have a place to live without a lifetime of debt. Just because society has gone mental with house prices does not mean I should have deduct that value from the price. In fact the higher the house prices go the more I need to be considered just a house. It sucks that the other people can't afford houses, but my children are my primary responsibility. If houses cost $1, it would be great every body would just have 1 less thing to worry about. And if they did should I get 33% of my loss back.

If your shares in any company go up and when you die do you say right tax the shares on capital gain, before you give them away. Companies deduct interest they make capital gain so why shouldn't have the same rules. "Opps" (how condescending)

The real unfairness is private individuals cannot deduct interest, or rent. You need a house to live, go to work, be a productive member of society, earn an income, so why isn't it a valid tax deductible expense. Of course the reason is because if the government did that it would reduce tax take to nearly zero, since a large number of people are just scraping by.

If so called investors are throwing tantrums for one step, wonder what FHB as a group should do for total inaction for ages by all ....seeing investor lobbyist reaction, FHB opt the path of taking to street is justified.

May be earlier we had revolution by peasant and now will be FHB to bring necessary change, otherwise no politicians will act and only way......

https://www.stuff.co.nz/life-style/homed/housing-affordability/300267745... -over-housing-policy-change-economist-says

Anyone demanding that interest be deductible better damned well be arguing for EVERYONE to be able to take advantage of that, not just investors, as it gives them a head start over owner occupiers when buying. If you aren't prepared to demand that then sit down and shut up

How much higher would prices go if everyone could deduct interest. Doesn't sound like a good idea as it might just push prices even higher.

So... high prices are in fact, bad :P

Totally agree, but one way or the other the playing field needs evening

Absolutely - given that investors have been having a complete property orgy the last 30 years and the % of homeowners under 35 has been dropping like a stone, I think any incentive that makes it harder for investors buying EXISTING property and gives FHBs a chance, is a fantastic initiative. The whinging on the property investment FB groups and on here shows that what Labour announced is getting right to the heart of the beast (the dark soul of the property investor).

After banning interest deductibility for investors, they could go one step further and introduce it for all First Home Buyers. Maybe one step further again and back date it for all FHBs who purchased since the average national house price exceeded 3 x the average wage. Nice little lump sum tax refund to put towards the mortgage.

Will also give the tax policy some form of neutrality which is a good thing.

I like the new subsidy concept.

Let me figure out how to tell my employees that their pay cheques are actually a subsidy- that will reign them in.

The difference is a pay cheque succeeds productive work.

'there are two processes driving rising housing prices. One is the shortage of housing; the other is a speculative (Minsky) boom.'

Really. So how can the speculators make money if there is no supply shortage? And just for clarity, a speculator is someone that sits on the property and adds no value to it while they own it. They are not a legitimate long-term landlord.

There is only one process igniting the housing fuel, and that is lack of supply relative to demand, Everything else is an accelerant or multiplier to this, but without the ignition, accelerants don't work.

And the interest rate deductibility removal is only the straw that broke the housing camels back (maybe). This is because there were many earlier straws, like depreciation, that is actually more important.

Depreciation was a true and legitimate reduction that you could claim to replace items that had worn out, so as to keep the asset 'as new.' And yes you had to repay it on the selling of asset as the price you were meant to get reflected an 'extra' $ value because you had kept it as new.

The trouble was, as soon as they allowed supply to be less than demand, then even without spending any of depreciation on the building, you almost got the same price regardless just by rentier monopoly holding. So what did everyone do? Still got the depreciation and spent it on everything but asset replacement, boats, holidays, paying down the mortgage quicker. That is why it was taken away, but the Govt. set up this to happen.

The increase in capital gains made up for more than any loss in depreciation, and you still had interest rate deductibility, IO, and low LVR's in your toolbox.

Now the toolbox is almost empty, everyone with half a financial brain knows renters are tapped out, and it's spread into the middle class.

Prices will have to fall at least 30%, up to 50%, to give you the same cash on cash yield in lieu of not getting capital gain, and losing what I see as actual legitimate property expense deductions, like depreciation and interest rate deductions.

Dale...are you really trying to say that claiming depreciation was to replace items that had worn out. The amount claimable was massive and related to the value of your house, not the chattels. And if it was how you describe it then surely it would have been set up so that you could claim what you actually spent on replacing chattels. As a landlord I claimed huge amounts of "depreciation" every year and do not thing I renewed any chattels over a 25 year period.
I do agree with you about the demand and supply equation being the most important thing. Personally I would reduce demand by slashing immigration to a few thousand a year. Once we have a surplus of housing for 12 months we could review the settings. Any negatives stemming from this pale into insignificance compared to the monster we are creating by continuously ramping up the demand through mass immigration. In summary, build more and reduce the number of residents who need somewhere to live.

Against all other standard accounting practices, it is in the 4th year here in the UK. It so far has lead to Landlords profits reducing to zero or losses. Results are small landlords sell up and housing corps buy up, resulting in rent increases for tenents. This will not solve the housing shortage in New Zealand.

I'll be more sympathetic to this argument when someone explains how having more and more houses concentrated in a smaller group of investor's hands is better for home ownership rates. Until then, like any other business, you work within the frameworks your business operates in. Tax is no different.

'As a landlord, I claimed huge amounts of "depreciation" every year and do not think I renewed any chattels over a 25 year period.'

That's my point, Karl. You were claiming say carpet complete depreciation over 8 years, and didn't replace the carpet once over 25 years? So your tenants are paying an increase in rent yet are getting a house that is getting less livable over time. Think of it as a commercial airplane, imagine if they took depreciation and did not reinvest it back into the maintenance of the plane.

And you have to pay back the depreciation on the sale for the reasons I have previously stated.

And if you didn't spend it on your property, what did you spend it on?

Also to get proper chattels depreciation you need a separate chattels valuation.

Depreciation should be allowed but only on proof of the money being spent on the property. if that happened, then our housing stock would be in far better condition. Plus for energy efficiency needs, most NZ housing stock needs upgrading.