Gareth Morgan's view of a frustrated Reserve Bank that has finally spoken out on rocketing house prices

By Gareth Morgan

We’re almost starting to feel sorry for the Reserve Bank.

They are caught between a rock and a hard place, with inflation tamed but house prices out of control.

They have tried out some tools – the loan to value ratio – and are talking about tightening this further for investors.

But that will never be the complete solution, because of a lack of a comprehensive tax on housing.

This week the Deputy Governor Grant Spencer finally spoke up in his speech to the Rotorua Chamber of Commerce.

The speech

The crucial paragraph of the speech was this:

The tax treatment of housing is a major factor with potential to influence the demand/supply imbalance in the housing market. As reflected in our submission to the Productivity Commission’s inquiry on housing affordability, housing is the most tax-preferred form of investment, particularly when it is highly leveraged. Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market. Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation1 of high rates of return based on untaxed capital gains. While there are difficult issues and trade-offs to consider in this area, the Reserve Bank would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially investor related housing.

The media has reported this as a call for a Capital Gains Tax, because Spencer singled out capital gains as a carrot for investors.

But Spencer was deliberately vague in his tax recommendations.

As we have pointed out many times capital gains taxes have their problems. There are better ways to close the loopholes in the way we tax housing, land and businesses.

What needs to happen?

The problem is not primarily a lack of supply.

We have set out what is needed to fix our housing woes in numerous blogs, such as this five point plan.

It is interesting that the RB is now advocating:

  • taxing the capital return component of house ownership
     
  • change in its prudential ratio requirements for at least some mortgages, and
     
  • change in planning restrictions to enable high density housing in the middle of Auckland.

All 3 of these ideas have been advocated by us for a number of years now, as opposed to the Productivity Commission’s desire to see planning restrictions changed to facilitate extending Auckland’s suburbia over the Bombay Hills with existing ratepayers bearing that cost.

The Reserve Bank still needs to get tougher

But while this speech is a major step forward, the RB’s advocacy remains pretty half hearted.

They need to clarify that there are other tax options than a Capital Gains Tax, particularly given all the loopholes that existed in the Greens and Labour Party proposals last election.

Our proposed solution to the problem is a Comprehensive Capital Income Tax.

They also need to give the entire prudential management of mortgages a rethink.

At the moment the approach is to pick off certain groups – they have previously slammed first home buyers and the current target is Auckland investors.

They should keep it simple and acknowledge that housing is an increasingly risky asset class, so all prudential requirements need to shift accordingly.

The Reserve Bank argues owner occupiers might be less inclined to walk away when it all turns to mush leaving the bank with the mess. I wonder whether drawing that restriction is worth all the hassle with boundary problems that will arise from this rule.

Here are some examples:

  1. Can people claim more than one house for their own use (e.g. baches)? If so how many? In a hot market you don’t need to bother with tenants so multiple house owners are common – no way should they get preferable mortgage terms.
     
  2. Could a husband own the family home and a wife own the rental? What about the kids owning their own homes too?
     
  3. How will this deal with complicated company and trust arrangements owning houses? 

We are all investors

The fact is that we are all investors.

We are a nation of tax dodgers, and housing is our favourite instrument.

We just don’t like other people beating us at our own game, so we cry foul and lobby for rules to reign others in.

The fact is that the rich will be able to leverage tax loopholes far more than the average family.

So we should not fear closing loopholes, as ultimately the rich will end up paying far more than the average person.

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This article was first published on his blog, Gareth's World. It is here with permission.

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49 Comments

Are we just trying to limit Kiwi investors and NZD lending, exposure?
Is that why we are not restricting and/or reducing the desire of foreign investors and non resident buyers, who are pushing up the prices?

It would be interesting to know who is selling and what their intentions are.
Also, are the banks lending top-ups to every man and his dog?

The RBNZ is reported to be digging further into the question of mortgage loan purpose. They started making some data available in their C31 series which I think is a good start but we undertand even deeper detail is to be published 'soon'. I am hoping that will shed more light on the "house-as-an-ATM" borrowing.

Most home owners in Auckland now have increased equity in their properties, coupled with low interest rates, it might mean lots of mortgage top-ups are on the cards... That's 'rock star' :)

Don't worry, NZ's "housing crisis" will end itself... With a much worse crisis.

How can people not see this pyramid scheme for what it is and how it's going to end?

Fool's gold, I guess.

Ahh RBNZ _completely_ missing the point again.

There is no "tax preferred" status to property investment.
IRD not properly policing the rules in hope that it will be widen for more targets, yes. But preferred, no. They housing investors get the same status now as business investors. You can write-off depreciation, you can dispose of capital items, you can write off expenses such as interest against your revenue.
No preference.

RBNZ are therefore incompetent.

Investors get the same rules as any other business - putting them at a big advantage over normal owner occupier buyers.

RBNZ certainly present the appearance of incompetence but I smell another agenda, not sure what it really is but I do know that globally governments understand the difficulty of paying off debt created to enrich themselves, their friends and stay in power. 1st Choice increase income (higher taxes - suicidal now that taxation has reached saturation levels) 2nd Choice reduce expenditure, possible and is being tried by many but cannot solve the problem due to size of debt.3rd Choice create inflation which is not happening outside of house prices which mainly don't feature in headline CPI figures and we have deflation if non tradables notably Taxes and Government charges are excluded. This leaves Theft which has already occurred and is being slowly used - The one eyed Scottish Twit - Last UK Labour treasury minister stole about 3 billion pounds from pension assets by using taxes, also now being rolled in Australia - phase 1 was the (Temp???) confiscation of sums in accounts that were dormant and is now likely to be rolled out to Nationalization of funds in exchange for a "Government Guaranteed!!!???) pension the Aussie superannutaion funds total about 2 Trillion$ whihc is why it is so tempting to steal and of course the infamous theft of Euro,s in Cyprus Bank Accounts over 100,000 Euros probably on the basis that much of the money was Russian and of dubious origin so unlikely to create a backlash,So RBNZ may not be incompetent perhsp just devious.

There is no "crisis".
Where are the soaring rents?
Where are the masses of homeless sleeping in the streets and under the bridges?
Where are the riots, burning tyres and broken windows?
There are tens of thousands of homes for sale in Auckland and up and down the country in the affordable bracket right now.
What we have is a full-on media beat up and the great unwashed are stupid enough to believe it.

heck, apart from Auckland where are the "rocketing house prices"?? even Chch has chilled looking forward.

Olly rents are going up 8x faster then wage growth in Auckland. Rather then sleeping under bridges people are living 1 family per bedroom, rents are already at breaking point for the 50% of households making less then the median. Those that don't want to live in overcrowded housing are facing the tough choice of leaving or spending over half their income on rent.

Of course you call anyone with a different opinion one of the 'great unwashed', but when you look at what is happening in Auckland. If you look at any pricing metric, the housing and rents are the most overvalued they have ever been. By a country mile.

So basically you are telling us that you will happily take advantage of the inability of people to house themselves relatively comfortably and the only measure for you that things are not so good will be when people start rioting and burning. I hope you have some inkling of what that says about you.

Why the RBNZ does not restrict the Foreign investors and non residents from investing in residential property?
Did any of the RBNZ Exec team pay a visit to any residential auction happening around Auckland to see who is buying and what offers they are putting in that breaks all common sense calculation for this category?

Because the RBNZ does not have the ability to do that, only the government could do that, by a change in the law. Please do not hold your breath waiting for it to happen

Not Expecting much, in fact I wouldn't be surprised if they give more power to foreign buyers and non residents.
and I think it was only last week that Govt said what Crisis, there is a lot of properties there if you know where to look!!

They will use the foreign buyers to try to prop the market up (well as if they aren't already) and then John Key's new line will be something like "Oh well I don't think people really care about being tenants in their own land and stuff like that"

That's the job of the OIO and government not RBNZ... but OIO and government are already ignoring or twisting the laws in place to make sure these sales can happen - although why??? - so it's not likely change will happen until there's profit to those involved to swing everything back the other way.

And home owners in cities outside of Auckland look forwArd to their tax refunds as their house prices decline

But everyone would prefer their house values to rise. It makes us all feel good. Bugger those about to get onto the ladder.

A land value tax (to replace capital value taxes i.e. Rates) would be a simpler tax and more effective in promoting economic players focus to on productivity rather than capital gains. As Waymad and others demonstrated in the comment section of David Hargreaves article on the "Reserve Bank's decision to press the Government for action on the overheating Auckland house market is an admission of its own powerlessness."

A comprehensive capital gains tax to me sounds like a legal nightmare to write and a tax accountants dream for drumming up new business.

Agree Brendon, just so long as the land tax is on unimproved value. When bare land rises in value, it is because of changes external to the land's owner, and that rise in value arguably belongs to society as a whole. A land tax is a strong incentive for land to be used productively, and works against land-bankers. It is also an extremely easy tax to administer, and the valuation system is already in place, with an established objection process. Not much in there for accountants and lawyers to feast on

In the past two years my wife and I have bought three residential rentals (not in Auckland), this forms part of our retirement planning. They are all positively geared and were acquired for long term income, NOT capital gain. So we are not afraid of a CGT, but do not consider it to be an efficient solution to the problems in Auckland.

Gareth Morgan's capital tax, from what I have read, looks like an administrative nightmare and totally impracticable. Its intentions could be much more easily achieved by other measures such as land tax.

But the big block to any positive change is POLITICAL. No political party in NZ, not even the Greens, has the courage (i.e. honesty and integrity) to market the solutions to the voters. Their personal interests would be in jeopardy, and they would have to confront the wealthy establishment, including the mainstream media. I would love to live long enough to see that happen, but am not holding my breath.

the changes in rates has already proven that not only will it not be on unimproved value, it will be on the full capital value.

Rates can be on land value only, so not include any improvements. There is nothing to stop that happening. All it would take is either individual councils choosing to do it, which is unlikely because retired folk in general do not like it and they are a big group of voters in the LG system. Or for the government to make it a national policy objective as Waymad demonstrated in the recent interest.co.nz article by David that I referred to above.

Crooked thumb do you think there are many landlords out there that are negatively geared, in that their rent doesn't cover their interest + principle charges because they are chasing capital gain? Do you think if the Reserve Bank limited the banking system lending for those chasing capital gain rather than rental return this would help bring down housing inflation?

I'm not sure precisely how positive/negativel gearing is defined, but for me it is positive if the rental returns exceed the sum of rates, insurance, and loan interest. If any of your own money is contributed, so long as the residual return on this capital is greater than what the bank is getting you are making on the deal.This is a simplification as it ignores other, more variable outgoings, e.g.repairs and maintenance.
I don't know what proportion of landlords are negatively geared, but there would be some. Note principal repayments don't come in to my gearing calcs.
Your second question I cannot answer. How they would do this, and what effects it would have if they could find a way, are beyond me.

Great idea Brendon.
But lets do it like English did with the GST rise, leave rates in place and add a new Rate-able Valuation tax of 2% of RV that goes to the IRD and make it tax neutral by lowering income tax. People will no longer live in property’s they cant afford, land bankers will stop and it wont be worth having an empty property or low yield property.

I Like a Land Tax combined with lowering Income Tax and lowering GST, Both stupidly high. A Land Tax means that the IRD will not care who owns the land , A Company, Trust, offshore etc. Only that the tax will be paid. Pensioners can defer for their lifetime. To means it covers fairness and simplicity , ease of collection.

You say that you've bought 3 rental properties as part of your retirement planning. Fair enough, my parents did the same thing. Bought a rental "investment" in 2000 and sold up last year when they retired. Made rental losses for the first decade and their tax refunds helped fund it. Do you intend to sell when you retire?

No. Owned through a company which will live longer than us. The idea is, while working, to fund an annuity in retirement.

Crooked Thumb I think landlords who provide a genuine service and ask for a decent return in rent are doing the right thing. I wish our 'system' encouraged that but not the chasing of capital gains which it seems to do currently.

So a thumbs up to the Crooked Thumb.

How do you know landlords provide a genuine service? How many rental property investors do you know invest in property to provide a service? As Crooked Thumb stated his intention is to provide for his retirement.

Tax Preferred

Examine that a little more closely and it exposes the very essence of what is happening, and the elephant in the woodpile that both Deputy Governor Spencer and ex-RBNZ agent-provocateur Gareth Morgan remain silent about

They are talking about Un-Taxed money coming out

They remain silent on the power of untaxed money going in to get untaxed money coming out

(a) clean but Un-taxed Hot Money coming in from offshore
(b) Un-taxed Hot Money of un-known provenance coming in from off-shore
(c) a+b being laundered through property

A tax-free $2 is worth $3 before tax
$2 tax-free has the same buying power as $3 subject to tax
It is the advantaged versus the dis-advantaged
That is why New Zealand has become a Tax-Haven

What? - No mention of tax-haven status? - Wonder why

Who has the greater bargaining power?

I think the rbnz are highlighting the odd situation where an auck investor borrows $ at 5% to earn a gross yield of 4% then can still tell ird that their business plan had no intention or was not based entirely on capital gains.

Thats the tax preference right there. Neg gearing, so not only does this auck investor get 1k per week taxed free cap gains, the ird actually PAY HIM at the end of the year as on paper the property as a cash generator is making a loss. That's wrong. Anything bought neg geared MUST be considered bought for cap gains and therefore taxed as such

I have always wondered why IRD has never enforced this.
it would simple for them to do, every year they do a refund for a rental property send a letter with the refund advising as in their opinion the property has been purchased with the clear intention of obtaining capital gain due to the negative gearing of the property they will be taxing the gain on the sale .
and then red flag the file.
that would be the end of negative gearing, less refunds and more tax

Prior to the distraction of gst the ird would challenge business making ongoing losses - arguing that they were a hobby not a business. GST seems to have become a focus. ..with ongoing losses falling off the radar and the focus now being more GST related... the challenge by IRD being that you can't register as you don't have a taxable activity. Perhaps a taxexpert can enlighten but as I see it, if you don't have a hope in hell making a surplus due to gearing, then by default you have purchased for cap gain...Why are IRD not running such an argument....or have they tried and failed?

There's some good properties being advertised on "Property talking" on Chinese TV right now. You might have some competition for them though as they are being beamed during Saturday night prime time!

Maybe it would be better if Auckland did have a massive crash, it's probably the only way some people are going to realize how stupid the people running this country are.

But that is not what will happen. Although astronomical house prices seem to be almost exclusively Auckland's you can be sure that any crash will not be, which is why since way back, it needed to be better managed and it has not been. National have now dug themselves into one hell of a hole on this, but I fear what needed to be done may well have not been done by anyone

It was pretty damn clear what needed to be done before the last election and that National were hell bent on doing the opposite. I sure hope the voters that chose this path come to realise how stupid it was.

1. Remove or restrict the ability to claim a tax deduction for interest
2. Make capital improvements tax deductible
3. Tax vacant residential land excluding land which has had a consent issued
4. Introduce stamp duty on residential property of say 1% up to $500K and 2% to $1M and 3% thereafter. Excluding new builds.
5. Enforce 5 yearly WOF for investment property

Maybe use stamp duty proceeds to contribute to social housing initiatives and exempt first home buyers/low income earners from having to pay it to give them an advantage over investors.

Bit sad that Gareth.
There is more to the world than tax.
Ban non citizen ownership. Stop the fraudulent student visa fiasco.

Seems obvious to me that it primarily a supply problem..????
Why cant Gareth see that..??

http://www.interest.co.nz/sites/default/files/embedded_images/image/Auck...

Yes & no , Mr Roelof : there's plenty of land in NZ , and in & around Auckland city .... but there's horrendous restrictions placed upon how you use it , by the various bureaucracies and the resident Nimbys ...

... in Australia , they happily " 6 pack " onto 800 sq metre sections within the city limits , individual units can be either 2 or 3 stories high , or run 3 units on each of a top and a ground floor ... you try doing that here in good old NZ !

... which leads to fewer constructions and less efficient use of the available land ....

How is it possible to construct " affordable housing " when the section prices are so whoppingly high ?

... why are so many property developers going bankrupt during the greatest property bubble this nation has ever witnessed ?

... we need a land tax .... pure and simple ... forget the CGT , that's a crock of poo-poo that idea ... but a land-tax is simple to administer , is impossible to evade , and raises screeds of moola for the government , and acts as a suppressant on land price inflation .... the only off-set is for the retirees , those on a fixed income , everyone else pays ..

Re: The only off-set is for retirees. For political reasons this is essential but the exact off-set needs to be carefully managed. Firstly the off-set should only apply to owner occupiers, not the 'retired' who are also landlords or landbankers. It would also be helpful if the elderly had an incentive to downsize or move away from areas of high employment, but of course they need to near areas with good healthcare provision which might be areas of high employment.....

Let's get something right shall we. There is NOT plenty of land in NZ.

Solution..

1. Ban non resident buyers (takes 5-15% of demand out of market instantly)
2. Reduce LVR for any property after primary home to 60-70%. Slows "investors" down a little and reduces some bank risk.
3. Get the IRD to enforce the tax law already there. If the intent was to on sell for capital gain then the profit is taxable!

Thoughts?

These are all wonderful ideas - none of which will be implemented in the foreseeable future

Taxing gains as income. The IRD may be able to access Bank records and look at each time an investor used the increase in equity from one property used to provide the deposit for the next. At this point maybe they could argue that income has been earned and is taxable. I wonder if they have tried to do this. It looks like income.

It is income, it is tax free capital gain, it is fueled by cheap borrowing, it is a tax deductible offense against certain elements of society. It is imported, it is guaranteed, never to fail.

And many are enticed into the honey pot, to date. We have been led to the Promised Land, All in the National Interest.

All set up to defraud and expanded beyond all expectation. Glorious and Halleluiah. Praise de lawd and send on the Inflation figures, I need a Little more more convincing, before I vote Labour.

Maybe a little simplistic, but why don't they set the Auckland market by itself altogether. (a bit like a micro-climate with different rules to the rest of the country)
They keep talking about capital gains and other forms of tax, but the reality is that the buyer is still going to wear the cost one way or the other and will again just continue to compound the problem they already have.

You are correct, in case anyone has not noticed they are NOT making any more land ! What your now faced with is moving way out of Auckland to get a place you can afford and you have to commute. The closer you are the more expensive it will be to buy, doesn't matter if they begin to open up greenfields tommorow, the pricing which has been set by foreign buys is set to continue until someone has the balls to try and turn off the immigration tap, which is not going to happen as its now political suicide and not in their self interest.