The case for mortgage levies

Reader Dean Attewell thinks 'unconventional is often better' and offers some ideas on that theme. Your view?

29th Dec 14, 10:02am by Guest

By Dean Attewell

Unconventional is often better, Warren Buffet says.

I am no Warren Buffet, but my ideas are unconventional.

We have an economy that is seriously out of balance, it may have started on Labour's watch, but has continued under National's.

What I am talking about is housing as I consider this the root of majority of NZ problems, especially poverty

A capital gains tax would have been good in early 2000’s but simply doesn’t fix the current problem.

Nor does National's policy on fixing up land supply, or Auckland Councils view to make building cheaper. These are great long term strategies however.

The saying is inflation is a bad thing for any economy; that’s why we have RBNZ to maintain inflation. To have a major asset allowed to have massive price inflation also cannot be good for the economy.

The RBNZ's OCR is a very blunt tool to manage economy and the LVR restrictions are not stopping house price inflation. LVR restrictions are reducing first new homebuyer opportunities.

The OCR is a simplistic tool - it is akin to putting tax rate at the same level for all salaries/incomes..

What we want is:

- improved Exchange Rate, eg less speculation on our high interest rates.

- lowered interest rates for Rural/Heartland regions eg Northland..

- controlled house prices.

Idea #1: Levy to Council Rates

RBNZ would probably like to raise interest rates around 2% for the 2 thorns in their side - Christchurch and Auckland - so they want like to see an extra $3-9k per annum paid in interest.

An alternative; enable RBNZ to have a Levy (based on house & land values) for houses collected by Councils, which they can use to pay off of long term council debt.

Effectively double/triple the rates payments for Christchurch and Auckland.

While this helps control Christchurch and Auckland it doesn’t stimulate the rest of New Zealand.

So the RBNZ could lower interest rates by 1% and offset the lower rates by increasing a Rates Levy again for Auckland, Christchurch, Wellington, Hamilton and Tauranga.

This would stimulate rural and Heartland-type regions and would see an immediate reduction in the exchange rate.

Also, you could kickstart new homeowners, by allowing councils to reduce the Rates Levy for first 2-3 years.

Idea #2: a Special Levy

What if the RBNZ had an extra tool with the Official Cash Rate, like a new Special Levy, ranging -3% to +3%, applied to all bank loans, collected by banks and given to RBNZ

- The levy could vary regionally to control higher risk regions. For example Auckland and Christchurch could be +2%, while rest of NZ is -1%.

- The levy could be negative for first home buyers e.g. -3%

- The levy is never put into the Government Consolidated Fund. It's aim is to balance the economy.

As the Levy can change it can’t be fixed by mortgage holders..

So the Levy can always be effective in times when people have fixed rate mortgages, so if we are using it as a tool to control inflation it works in any circumstances.

In Northland, where you hear about people living in substandard houses, and lack of development we could set the Special Levy at -3% so a mortgage in Northland could be approx 2%. This could pick up development and aspirations for people to build and own houses in that region.

Idea #3: Tiered Mortgages

In the same way salaries have different rates for levels of income, this structure could also apply to mortgages.

The RBNZ could institute tiered mortgages requiring Banks to split mortgages into $100,000 blocks:

- First $100,000 of mortgage at OCR Rate

- Second $100,000 at OCR Rate + 0.5%

- Third $100,000 at OCR Rate + 1%

- Fourth $100,000 at OCR Rate + 1.5%

- Any further, OCR Rate + 2%

What we need to see if some non-conformist proactive action from RBNZ and/or the Government.

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Dean Attewell is a reader of interest.co.nz

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23 Comments

by cowboy | 29th Dec 14, 10:53am 1419803615

#1 is straight out _illegal_ , and anyway people _already_ pay large and increasing faster than inflation or wages or CPI, rates. obviously this will do nothing except extract funds from people. Those with plenty of discretionary income will be fine, those on tight budgets, lower incomes, paying rent, or needing to do upgrades/repairs will be the only ones material affected.

#2. Theft is wrong. Rorts are doubly wrong. Paying allowance to FHB has been regularly proven that big investors just buy that FHB-rights for a small profit through the disenfranchised and family members - allowing the big money guys to pick up multiples of the incentives, and genuine exposed FHB get pushed from the market because they can only just qualify for 1 incentive package.

Anything that has "pay to the RBNZ or Bank" can be automatically regarded as a failure.

AND this will still occur:

Those with plenty of discretionary income will be fine, those on tight budgets, lower incomes, paying rent, or needing to do upgrades/repairs will be the only ones material affected.

#3 Those with plenty of discretionary income will be fine, those on tight budgets, lower incomes, paying rent, or needing to do upgrades/repairs will be the only ones material affected.

You have just proposed a system that would encourage large holders to split into multiple smaller vehicles and purchase all the lower end stock.... killing the entry level market.

- -

Here's a tip from a guy working a small property portfolio while on a sickness benefit and for most years on less than $30k p.a. .....

The system is broken, you need to understand the structure of the market and the problem, just putting fresh paint over it and trying to sell it to the first fool who comes along won't actually fix the problem.

Doing this repeatedly is how the existing system and the big money got to be so bad.

go right back to the architecture stage. What facing is good, what properties need to be seen in the structure, what are the forces and exposures. Otherwise you wtill have an old house....

by sadr001 | 29th Dec 14, 1:34pm 1419813246

Your suggested system would also encourage "multi-level property trading" where a primary buyer buys the property for market value. This buyer then sells the property to a trust of which he is a beneficiary at purchase price - down payment, allowing the bank to lend to the trust as though the "value" of the house was purchase price - down payment.

Increasing rates across the board in Auckland at the rate that you have suggested would simply drive rents up. Standard practice is not to raise rents until tenants change, such a massive increase in cost to landlords will undoubtedly see rents rise across the board (probably by more than the rise in rates) or a whole new type of tenancy contract that passes rates directly through to tenants.

by hemihua | 30th Dec 14, 12:00am 1419850818

These ideas all target demand when the problem is supply. I don't think they're going to help...

by cowboy | 30th Dec 14, 8:53am 1419882800

worse they all target financial ideas, which can only affect those at the tight end of the market ( disinfranchise the poor ) thus if any reduction does happen it's because the market players and thus the economy and overall wealth have been shrunk - these are Bad Things..

by Henry_Tull | 30th Dec 14, 11:24am 1419891870

price of money is the lesser, its more that its there.

given its a credit boom meeting speculators with their ears pinned back.

until something changes punter expectations that the house I am going to buy will be worth more once I have bought it - this is what happens

with the weight of industry thats happy to see ever upward, any policy that alters current here and now would be remarkable - the mortgage is the last link in the chain.

unfortunately for the well meaning it not something that someone fixes - and certainly not at the last link.

by Andrewj | 30th Dec 14, 11:33am 1419892398

Why Commodity Prices Are Cliff Diving: The Iron Ore Collapse Reflects The End Of The Monetary Super-Cycle http://davidstockmanscontracorner.com/why-commodity-prices-are-cliff-di…

by Colin Riden | 30th Dec 14, 8:17pm 1419923855

After digesting David Stockman's article, and providing a quote from it:

So the cliff-diving price action here is not just another commodity cycle, but instead is a proxy for the fracturing global credit bubble, led by China department.

It may now be time to consider how smart our government, Treasury and Fonterra have been in understanding the context of N.Z. within that fracturing global credit bubble:

http://www.infrastructure.govt.nz/plan/mar2010/nip-mar10.pdf

http://www.pwc.co.nz/nz-budget-2014/china-continues-to-be-critical-for-…

I doubt anyone will be held accountable. No one could possibly have seen it coming.

by cowboy | 31st Dec 14, 12:43pm 1419982992

"Why Commodity Prices Are Cliff Diving: The Iron Ore Collapse Reflects The End Of The Monetary Super-Cycle"

I'm sitting here in my underwear about to have a shower...because I was shifting the effluent spreader and the certified engineers didn't design any sort of pressure relief system for the hose system....

for sod all renumeration and a ton of risk, I just got sprayed head to toe in month old effluent that has been sitting, rotting, in the sun and anaerobic conditions.... It stunk so much that this dairyman had to strip off right there on the spot....

and the think behind that headline claim stinks worse than I do.

So the fake Iron bubble burst, in the famous Asia pump technique. It is a small commodity spot in a very mature market. We still have coinage and economies even if Chicago and Sheffield are still poor economies....it is hardly THE end of this monetary super-cycle. Just as the current end of white gold might spell disaster for hamilton and hawera, and bad news for NZ, the Money Super Cycle is doing just fine.

by BigDaddy | 30th Dec 14, 12:53pm 1419897234

Another bunch of loopy ideas.

Tell me one thing Dean.

If Auckland and Christchurch were to have different interest rates from the rest of the country who will set the boundries?

Where will "Auckland" stop and start and who will decide on the appropriate limit?

Which street, and indeed which side of that street in Auckland or Christchurch will enjoy the lower interest rates and which side will not?.

If you think we have distortions now, just wait until some pen pusher draws a line deciding who's in zone and who isn't.

by Basel Brush III | 30th Dec 14, 8:44pm 1419925449

So BD , have you got an alternative?

It really does not matter anyway because when the correction comes there is nothing more certain than the faster the speed the bigger the mess - a bit like a drunk in charge of a Ferrari.

Our wonderful Finance Minister deserves the drivers seat with JK riding pillion without his crash helmet.

by Colin Riden | 30th Dec 14, 9:51pm 1419929476

I would allow JK his crash helmet.

It won't change the outcome but could make it easier on those picking up the pieces.

by Basel Brush III | 31st Dec 14, 3:53pm 1419994438

LOL.

by ki | 31st Dec 14, 10:08am 1419973693

http://www.rbnz.govt.nz/monetary_policy/about_monetary_policy/2950448.h…

I think you'll find BD that Akl and Chc already have boundaries! As defined by the local/territorial authority.

And it appears that the RB have mooted this in the past... so perhaps it's not so loopy.

An incremetal mortgage levy could have a regional bias and may also capture the 'leaveraged' property investors (disclosure, I own multiple investment properties), that are apparently outbidding FHB's.

Higher levies in Akl for example, may encourage immigrants to consider elsewhere...

The subtleties would have to be worked out, but it's not the worst idea ever (as you insinuate)

by cowboy | 31st Dec 14, 1:00pm 1419984001

just use those levies to improve things elsewhere.... like education of provincial councils not to build white elephants they can't afford, and government that we don't actually need gold-plated water supply to survive. (eg making really high and expensive water quality standards and flouridation.... in places where only the smallest amount of water is drunk, and even then half of it is from bottles.... I'm sure glad such platinum quality water and fluoride is good for my garden, mr car, my toilet and to shower in. There's OPMoney well splurged....

by Roger Witherspoon | 30th Dec 14, 1:05pm 1419897956

Great stuff Dean. The bureaucrats and academics live in a very small world that does not seem to attract creative thinking. The very best creative ideas often start out as rough diamonds, it is easy to see why they won't work in their unfinished form, much harder to improve and polish them into something brilliant.

by steven | 31st Dec 14, 8:05am 1419966356

Bureacrats are not there to do that much creative thinking but enable policy (creative thinking of the politicains and hence the voters.

Academics do do creative thinking but they also do critical thinking, so they throw out the rubbish. They can usually see a lump of coal will never be a diamond, unlike some.

by cowboy | 31st Dec 14, 1:04pm 1419984292

They not even there to enable policy, but to serve it. The daft thing is that some many people give them power and think the bureaucrats should be running the system ! According to what procedures? And with what experience? at whose risk?

Academics have very strong pecking order, which is heavily invested in keep new entrants down and reputations up. That was the issue with some of the Greengate controversy...what does a well known academic whose reputation is built of climate change proof and the role of agriculture in making it worse, supposed to do when many of her experiment results disprove her published papers? In an academic world built on brand and reputation, does she kiss her funding and sponsors good bye?

by steven | 1st Jan 15, 1:33pm 1420072416

uh, no.

For one thing, reputation is made by destroying others. So if an academic could dis-prove say climate change, a) they's have no issues getting funding privately and b) they would be world famous c) they "hate each other so some wouldnt hesitate to destroy someone elses career in an eye blink.

I looked up greengate on google and see nothing that makes sense.

by cowboy | 31st Dec 14, 1:00pm 1419984046

rough diamonds are quickly becoming illegal, as they not approved, safe, certified or have experts already approving them.

by Roger Witherspoon | 31st Dec 14, 2:09pm 1419988145

Yes, it's easier to make them from coal anyway, if they are small.

by cowboy | 31st Dec 14, 2:46pm 1419990417

at least you can burn coal to keep warm or create an industrial revolution. many centuries have past and most polished diamonds are just decorative burdens.

by steven | 1st Jan 15, 1:14pm 1420071264

agree, though industrial diamonds and gold for CPUs (still do?) etc so the materisl do have some useful applications.

by steven | 1st Jan 15, 9:57am 1420059468

Actually it isnt.

It takes considerable effort, energy and pressure to do so and is only worthwhile because "real" diamonds are monopolised and rentier $s extracted from us consumers. If we were paying the true cost of a diamond, synthetic manufacture would not be viable (even if it is now BTW).

Research is a great thing before opening mouth for those that do it.