Geoff Simmons says Labour's solution to the 'crisis' they have identified is based on incorrect analysis with solutions that are unlikely to work

Geoff Simmons says Labour's solution to the 'crisis' they have identified is based on incorrect analysis with solutions that are unlikely to work

By Geoff Simmons*

Labour has got itself in a tangle over their ‘leak’ of Auckland housing data. Putting aside the politics of playing the race card, are they right?

Foreign buyers may well be contributing to the Auckland housing crisis. But should it come as any surprise that foreigners are keen to share in the tax breaks that we have enjoyed for so long?

And would Labour’s proposed regulation actually do anything to stop it?

We doubt it.

The numbers

Labour’s analysis of real estate data shows that 40% of buyers have a Chinese surname, despite the Chinese only making up 9% of the local population. Therefore the difference, according to Phil Twyford and the Herald, must be down to foreign buyers. That, folks, is as complex as the analysis gets.

Statistician Keith Ng has already crunched the numbers and given Labour’s claims a thorough critique. Suffice to say it is hard to come to strong conclusions from the data Labour used, though that won’t stop people eager for a reason to shut our market off to foreigners. As Ng points out, it is certainly plausible that the domestic rather than absentee Chinese population bought the houses in question, particularly since recent migrants are far more likely to be in the market for a new house.

Besides, under our investment migrant category, once someone owns two average Auckland properties, they are eligible for residency under the Migrant Investment category. So if these people buying our houses aren’t Kiwis, they might be soon.

One worthwhile point that Labour made was that we should collect this kind of data. Like nature, data doesn’t like a vacuum, otherwise we end up with the patchy half-analysis that Labour have done here.

Hands off our tax-free investments!

The real question we have to be asking is why anyone is so keen to buy here. And the answers are obvious, Aotearoa New Zealand is a stable, growing economy with good natural and social capital, and most importantly of all we don’t tax the returns from housing at all. For Chinese investors looking for a safe place to store their wealth, the Auckland housing market makes total sense.

The Chinese certainly have plenty of money looking for a good home, and they can apparently borrow at very reasonable rates. So if our houses look like a good deal to them, what should we do? Should we complain or simply enjoy the fact that we can rent the houses far more cheaply than we could live there with a mortgage?

Those Chinese surnamed-people are just doing what we have all been doing for decades, sticking our money where we think it is safe. Add in some supply constraints and you have a speculative bubble. The only trouble is that we can’t all get rich from buying houses off each other – this is not a productive investment. Meanwhile our industries that actually create wealth and are competing for the investment dollar, are disadvantaged procuring the investment funds they need to grow.

The answer, as we have pointed out time and again, is simple. We need to tax the returns from housing and land in the same way we do all other investments. Capital gains are only a part of this. And for this to work any tax needs to include owner occupied housing.

Even Treasury at long last has seen the light on this tax loophole – in the recent Budget documents they proposed a temporary 1% tax on the capital value of all rental properties.

But the Chinese don’t let us buy their houses!

No they don’t, because they have a highly regulated economy. Do you really want an economy like China’s, where you need Government permission to move your money in or out of the country? Because that is really what is needed to really stop foreigners investing here.

We have open financial markets, which make it very difficult to stop foreigners investing in this country. While there are ways to stop the Mum and Dad Chinese investor, the really big guys will find ways around regulation, just like the really wealthy people in New Zealand find legal ways to reduce their tax bill. They could set up a company, or simply use a New Zealand resident (possibly a relative) as a proxy to purchase the property.

Should we follow Australia and ban foreign buyers?

Labour is calling for us to follow Australia’s example and ban foreigners from buying existing houses until they have been in the country for more than 12 months. The idea is that by not preventing them from buying new properties, economic activity wouldn’t be harmed.

The question is whether this policy would actually work. Our hunch is no – it hasn’t exactly taken the heat out of the housing market in Australia’s main cities. That could be for two reasons; perhaps foreigners aren’t the problem and domestic speculation based on tax loopholes is the real issue, or perhaps foreigners have found a way around the regulations.

Either way, it would be nice to see an evaluation done before we blindly follow in Australia’s footsteps.

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Geoff Simmons is a senior economist at the Morgan Foundation. This article was first published on the blog garethsworld.com and is re-published here with permission.

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

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....okay, so we should do nothing then? At least labour have got the debate going, something that MSM have been avoiding like the plague.

Oh well, just to show we are living in Aotearoa, the land of the Wong white crowd..

'Labour is focusing on the Wong things'.
Seriously? What a childish and insensitive headline for a 'serious' news site.

I totally agree - and if I were the Morgan Foundation - if that was an interest.co.nz editorial decision .. I'd be on the phone right now.

'Labour is focusing on the ‘Wong’ things'

Yep. A clear example of casual racism from this website. Oh wait doesn't Chaston throw the 'racism' accusation around with gay abandon?
Pot.Kettle.Black.

This article is a cross-post from garethsworld.com. We did not change the author's headline. But we did add the longer descriptive headline. You can see how the author dealt with headlines by checking the original post on the Morgan Foundation website.

I wouldn't take the feed then. Serves them right - as you, I suspect, have the far wider traffic/readership.

I wouldn't take the feed then

I totally agree. It's a bloody outrage.

Sum Ting Wong?

Calling Mrs Wantanabe.

The answer, as we have pointed out time and again, is simple. We need to tax the returns from housing and land in the same way we do all other investments. Capital gains are only a part of this. And for this to work any tax needs to include owner occupied housing.

I understand this was proposed as part of an overhaul of both tax and welfare - and the counter-balancing welfare side of the reform equation included a Guaranteed Minimum Income. So the question for Morgan Foundation economists is: why now promote only half of the reform as being a solution to this foreign direct investment in our residential housing market?

Point is, there are other ways to more specifically address this competition issue to balance the playing field between local and foreign sourced capital.

It would be nice to know what the Morgan Foundation sees as the options on this specific policy issue. It kind of reduces their credibility in my opinion if they promote one half of the Big Kahuna as a solution to "everything".

maybe we need to be having this discussion about removal of neg gearing same as the australians

http://www.smh.com.au/business/negative-gearing-momentum-for-rethink-gro...

And I see the Aus leaders have ruled out having the discussion - last line of the article.

only the currect government not the opposition and like over here people in sydney are even more worried so it is becoming a major issue.
article the other day said how are the people that make the wheels going around to keep the city running surviving on 1 to 2 hour trips back and forwards to work as they can no longer afford to live there
http://www.smh.com.au/nsw/housing-affordability-crisis-has-essential-wor...

You have just scored an own goal with that headline, mate.

the whole article is deluded - another clown who thinks landlords and property traders dont pay taxes, rest is just as idiotic

Is Keith Ng really a statistician? I don't think so.

Geoff - please comment on this:

"Aotearoa New Zealand is a stable, growing economy with good natural and social capital, and most importantly of all we don’t tax the returns from housing at all."

Since when do we not tax the returns on housing. I'm paying 30%... so really keen to hear how you managed this.

because its the income gained from housing that is taxed not the housing itself.
its just playing with words, same as the government claiming there is now a bright line 2 year GC when its not if you check the IRD regs its the income that is gained as a result of buying and selling properties that is taxed
all they have done is change the definition of whom is a property trader so its easier

The article touches on some of the right things but is only as good as I could figure myself. No, it is not about chinese, it could be any group but right now it is identifiably them causing the grief. The data vaccuum exists because the vested interests maintain it by just denying they have any data to present. We elect leaders to act in our interests and in this case it appears that they are deliberately avoiding action despite the clear disadvantage of their own constituents.

Lot of pious people here today.
Its all right to take the piss out of our poor old Pm of Parnell' s name (SmoKey, Donkey, ShanKey etc ) but not the Chinese names.

I think it's petty, and childish behaviour, no matter whose name is being ridiculed.
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It just shows the limited debating skills, or the lack of arguments, of the person posting.

so you would then say that when john key is screaming across the house angry andrew and many of the other names he calls opposition MPs that he also lacks debating skills

Yes - of course.
I think John key is greedy and arrogant, selfish and immature.
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But if I were to make fun of his name, that would reflect more on me than it would on him.

But one can choose to sit around wallowing or to simply get on with things!!

At the end of the day it is a form of attack - and we all do it - even your post in reply to someone's behaviour is an attack !! And you will probably see my reply as the same !!

It's not an attack
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it's a countermove, a response.
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Why so aggressive?

I'm still not sure who's is the most persecuted the rich Chinese or the poor Kiwis?

Forget the race debate, why are we making it easy for foreign buyers to buy up our country? I don't blame them, but how dumb are we? how dumb is the National party?

Indeed, and why are we making it easy for foreign buyers to "buy up" New Zealand exports, and for foreign tourists to "buy up" nights in hotels and the services of tour guides? How dumb is that?

It's always better policy to keep the cow and sell the milk, than to sell the cow and the field she's grazing in.

No, it isn't "always" better. Given what's happening at the moment to people who are trying to make a living out of selling milk, that is a quite astonishingly badly chosen example.

Whether it's better to keep the cow and the field and to sell the milk, thus providing yourself with an ongoing income, or to sell the cow and the field, thus providing yourself with a lump sum now, depends on the price you are offered for the cow and the field, and the price you expect to get for the milk, and what alternative uses you could put the money to.

You might, for example, have an idea for a new business which, given the up-front investment, will provide you with a far better income than the cow and the field ever will. In such a case hanging onto the cow and the field is clearly not better than selling them and investing the money in developing your idea.

I was choosing a relevant example - can't get more relevant than cows and milk.
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The new business might not take off, there's an amount of risk there.
If you keep the cow, at least you've milk for your own supply
If the cow dries up, you could still butcher her, and have meat to feed yourself, and turn the pasture into vegetable fields.
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The one off lump sum is a one off.
And unless you choose your new investment wisely (which is by no means a given), it can be easily squandered. Which would leave you with no food supply to sell, no land to grow your own food should the market for your produce dry up, and no lump sum to spend on a 'business'
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Bird in the hand and all that.

So, you'll be happy to give me ten million dollars for one cow and a field large enough to sustain her? I've a bridge I could throw in while we're about it.

After all, you have clearly demonstrated to your own satisfaction that no asset could possibly be more beneficial to own and less risky than a cow and a field, and that any continuing income stream is better than any one-off lump sum. So you'll be better off as a result of the transaction, and I'll be the mug left holding a lump sum and no cow. Unfortunate for me, but there's one born every minute ...

They weren't.

I'll hang on to the assets I already have and can sustain me, yes.
I'm the potential seller, here, not he buyer - I don't have 10 million, and if you don't agree with my point of view then you would not be prepared to buy my property off me for 10m so where's the problem?
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On the other hand, the fact that you're willing to give me 10 million for a cow and a field shows me how valuable they are, so I would be fool to sell.
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Taking it to the bigger picture, if our land and farms are really such a bad investment, why is it/are they being snapped up so quickly? Why are there so many eager buyers?
Do you think all those foreign 'investors' are fools?
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Or might they be able to see the value of prime arable land in a politically stable country with a temperate climate?
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Yes.
One born every minute, indeed, but it's not me.

No, of course they're not fools. Neither are the people selling to them. You don't seem to see the whole point of trade - that different people attach different values to the same things. That is why people buy things from and sell things to each other.

The same farm might be worth a great deal more to an enthusiastic, committed and capable farming expert than it would to somebody who had no interest in or talent for farming but who did have a great deal of interest in and talent for (say) software development.

Should the latter inherit a farm, it would make a lot of sense for him to sell the farm to the former - for a price which both are happy with - and use the money to set up a software development business instead. The farm will be better managed, the farming expert happier, the seller happier and the money put to better use - a better result all round than if the inheritor had taken your advice and hung onto the farm. And that would still be the case if the new farmer's a foreigner. Take a look at the Crafar farms now.

Fine, you can't think of any better use for money than keeping it invested in a farm - go ahead and hang on to your farm. But there seem to be plenty of successful and prosperous people around earning good livings in other trades, some of them much better than many farmers.

The people selling it to them might not be fools, but they are short sighted and greedy.
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Most governments around the world either severely restrict who can buy land in their country, or if they do allow it, they make sure it's heavily taxed so they can spend some of that profit on the welfare of all its citizens.
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You've established that you cannot personally see any way that anybody could possibly make a viable living, other than by owning a farm.

And you call other people short sighted?

The difference between what we're arguing about, is that I'm talking real life examples, and you're talking theories.
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The truth is, is that unless we want to go back to a hunter gatherer lifestyle, we will need mass production of food to feed everybody. Industrialisation has caused an explosion in the number of people currently living on Earth.
They all need food.
The only places that produce food, are farms (there are not too many people these days - in an industrialised nation - who live off the veges they grow themselves).
The Chinese know this: they have, as one of the most populous nations on the planet, also, in comparison, a very small percentage of its arable land.
The Chinese have been farmers for millennia.
Only very recently have they started to become the world's factory, and they've now found that demand for their products is drying up - we simply can't afford to buy their stuff anymore.
In the process of becoming an industrialised nation, they have heavily polluted their country.
They realise they need land to grow food to feed themselves. They've been spending the money they've earned (being the smart traders you so admire) to buy arable land where ever they can find it, and from whichever nation is stupid enough to sell it to them.
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I look at reality, at what's really happening in the world - the rich are buying up resources.
And I just happen to be of the opinion that the not-so-rich are being shafted in the process.
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It may be apparent, but I don't get my opinions out of libertarian books.
It's been shown over the past 30 years, that unfettered markets cause more harm than good.
Libertarianism assumes everybody starts from the same position.
The truth is that we don't.
So libertarianism can't ever be "implemented' successfully, because it only serves to enlarge existing distortions.
It is an ideology of the supremely selfish, which at the same time relies on "the markets' to find an ethical compass.
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MdM.... Do you think running Chronic current acct. deficits matter..???

If you do.... how does your view of Foreign Direct Investment fit in....??

If Foriegn Direct Investment does not create something NEW..or create employment , is it in the long term interests of NZ...???
( In a Global sense we are a small nation ..and we lack "bidding power".... A friend who is in Private equity has been wanting to buy into large food businesses but has been outbid everytime.... at prices that made it impossible to generate a return on capital... The foreign purchasers have a number of "edges" that allow them to over bid.. ( one being taxation ).... )

I make a distiction between someone who comes to NZ to live and work and invest ...to become a citizen ...and someone who simply sees NZ as a place to invest..

If you are uncertain if you'll be able to invest wisely on your own, just use a managed fund's returns as a benchmark. I've always admired the performance of is the "Renaissance Technologies Medallion Fund". Although there are plenty of good funds to use as a benchmark. (Another one that immediately comes to mind is "Two Sigma Investments").

Consider the value of selling the cow and pasture, putting the money in a managed fund such as the above for a year and then re-buying the pasture and cow.

Still exposes me to risk, and if I don't need to, why would I?
Especially if the ultimate goal is to end up with a cow and a field, anyway?
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To risk my assets for some (uncertain and unnecessary) monetary gain is just greedy.

Which is what's caused this whole mess to begin with.....

You are assuming that the cow and field, will still be in the free market and correctly valued after sold. When sold to a foreign company with a HQ answering to the CCP that will not be the case.

Our homes are NOT export commodities

I rest my case.

Your conclusion as regards a ban on foreign buyers ...

"The question is whether this policy would actually work. Our hunch is no – it hasn’t exactly taken the heat out of the housing market in Australia’s main cities. That could be for two reasons; perhaps foreigners aren’t the problem and domestic speculation based on tax loopholes is the real issue, or perhaps foreigners have found a way around the regulations.

Either way, it would be nice to see an evaluation done before we blindly follow in Australia’s footsteps."

... is very sensible, but it applies with just as much force to

"We need to tax the returns from housing and land in the same way we do all other investments. Capital gains are only a part of this. And for this to work any tax needs to include owner occupied housing."

It's a bit more involved than that - not complex - just more threads at play

Here is an interview with Peter Cai a Sydney based ChinaCommentator
http://www.businessspectator.com.au/businesstv?channel=149816

Distil what he has to say down to its essentials
doesn't matter what obstacles are erected - they will still come - price no object - you (govt and councils) might as well make sure you obtain some benefits while they're coming - clip their ticket

NSW collects $5 billion annually in stamp duty which is spent on infrastructure - no problems

Distil what he has to say down to its essentials

They (Aussies) are poverty stricken. As are Kiwis. We didn't experience the monstrous shadow banking credit creation episode directly. One step removed is too far.

Yes, the only question left is who will repossess us - and will it be the same entity as Aussie's?

I have no problem with Labour using what they can, when officialdom won't oblige with anything authoritive.
And it seems "the man / woman in the Auckland street" knows there is a problem, even if the government doesn't want to hear about it.
As for solutions there are plenty will work. Strangle off the immigration options, especially the 'education' industry rort. Restrict purchase of houses and land to citizens. (not including residents).
There are risks of course including a hard landing or collapse of Auckland house prices. But the situation is so bad already that many are already badly hurt.
And I am not convinced that open immigration has bought benefits at all. Look at the Auckland infrastructure costs that the residents can't afford. They will take decades to get done what is overdue already.

This is an interesting article and I agree with much of it. However, the assertion that property is not taxed is wrong. In New Zealand we have a capital tax of sorts on property called rates. Every property owner pays it and it has been the subject of much debate in the NZ Herald. Just because Rates is not paid to Central Government does not mean it is not a tax. It is not an insignificant tax either. The Auckland City Council's long term plan at http://www.aucklandcouncil.govt.nz/Plans/LongTermPlan/VolumeThree/sectio...
shows general rates at $1.4 billion this year and they are projected to increase to $2.2 billion by 2022.

Have I got this right? If someone dodgy gave me a million dollars in cash to put into my bank account, saying that I could keep half, I would have to satisfy money laundering rules, verifying where that money came from. I probably wouldn't get away with it.

But if I sold a house at a vastly inflated price to someone dodgy, say half a million more than its worth, it seems that there are no questions asked because I have "sold a house" - which is OK. But then the dodgy money has been legitimised because it's now in the system. The house can be sold again, yielding clean money. The bank has facilitated money laundering.

Doesn't the solicitor arranging the house purchase stake their reputation on the money being legit? Do they care if it isn't? What is the likelihood of being caught? What are penalties? Are there any?

So many questions...

Money Laundering - Real estate agents can't assume they'll stay 'under the radar'

Overseas enforcement agencies have begun targeting agents that become involved in criminal activity or turn a blind eye to obvious 'red flags'; agents have been prosecuted, and imprisoned.

In New Zealand, after a drug dealer's houses, farm and vehicles (valued at nearly $6 million and purchased without mortgages) were forfeited earlier this year, a senior New Zealand Police official at a public forum asked "Who was the real estate agent? Who did the conveyancing? [Big criminal enterprises] can't operate these schemes without professional help. If there's wilful blindness, that's where it resides... It astounds me that professionals like that can be involved and not see what's going on. He pointedly added "it's a reality we can't ignore any more."

link is
reaa.govt.nz/News/NewsletterLinkedPages/Pages/Nov%202013%20Newsletter%20pages/'Exemption'-from-new-laws-increases-licensees'-risks.aspx

"Besides, under our investment migrant category, once someone owns two average Auckland properties, they are eligible for residency under the Migrant Investment category. So if these people buying our houses aren’t Kiwis, they might be soon."
This is cart before the horse stuff, time it was the rule they make the commitment to NZ THEN they can buy a house. Allowing residential property into that investor category was borderline criminal.

Twyford raised the issue, and Simmons correctly points that a rational taxation system for taxed property or property gains should be part of the solution. Ironically, Labour via its leader has taken that option off the table. D'oooh.

GC is a flawed tax they would be far better having a land tax, you could also have different rates for rural against city and as it would be based on GV would be easier to enforce and collect

As much as I don't really like Australians, you have got to give it to them they don't piss about in taking hard line action. Yep send those boat people back and they don't delay in stopping foreign buyers. NZ is so PC and soft we stand about like sheep watching our country going down the gurgler.

Dont know how much publicity the boat-people saga got in NZ. In AU it was on the news day and night. In our faces. The AU government tried for 10 years to stem the flow but it kept getting worse. At its peak they were arriving 1,000 pw or 50,000 per year which is the size of 2 medium sized suburbs, every year. It was only when the data came out (sound familiar?) as to the cost to the nation they realised it was costing $3 billion per annum in welfare, walking around money, accommodation, housing, medical services, education that they realised it had to be stemmed. What turned the tide was women stepping off the boats and demanding breast-enhancement surgery - immediately

See here
http://www.theaustralian.com.au/national-affairs/immigration/seeking-asy...

The well healed property investor minority are calling the policy to stop foreign investment in housing racist because it does not suit their future housing returns.
After speaking to many middle class intelligent people, the feed back I get is that National will be out in the next election if they do not have the will or ability to solve Auckland's housing mess.
It is better for a dairy farmer to sell his farm and stock and buy up houses in Auckland. He would get a far better return. How crazy is this Goverment's economic policies that allow this! If I was a farmer I would be very annoyed.

National has no evidence to suggest otherwise that Labour is onto something here. Labour is not been racist that is just a rubbish response from National. You cannot blame foreign investors for investing here but poor government polices.