By Bernard Hickey
If New Zealanders had been really honest about finding a flag that reflected our true national character it would have been an open home flag.
We are obsessed with obtaining, protecting and growing our tax free capital gains from land. Our economy is set up to worship at the feet of our bankers and agents to get on the property ladder and claw our way onwards and upwards to owning as many properties as possible.
We feel in our bones that our tax and banking systems are set up to make it easy and relatively risk free to get ahead by leveraging up and then waiting for what it appears to be the inevitable rise in land prices.
It appears nothing can dissolve the magic. Labour has abandoned the idea of a capital gains tax, which means it is unlikely for another generation. The Government won't even discuss the role of its migration policy in pumping up house prices in Auckland. The NIMBYs in the leafy suburbs on Auckland's isthmus will fight tooth and nail to thwart and appeal any attempts to build lots of affordable houses quickly in Auckland.
And now the Auckland magic and joy is spreading into the provinces, regardless of the headwinds for dairy prices from overseas.
This week while the nation was working itself into a frenzy about which fronds and curls spoke the most about us, the real us was being revealed in the statistics emerging from the bowels of our real estate market.
Quotable Value reported that Auckland house values were up 20.4% in the year to August, but it was the surge in values in Hamilton (up 10.3%), Tauranga (up 8.6%) and the Hauraki region (up 16.0%) that caught the attention. There will open home flags aplenty flapping in provinces this spring.
"High prices and lower yields in the Auckland market appear to be encouraging investors to look to regional centres around the country for investment properties," said QV spokeswoman Andrea Rush.
Even the Reserve Bank seems powerless to dampen the speculative lust sweeping north and south from Planet Auckland as its new LVR rules seem only to be encouraging the expansive mood. Its rate cut expected this coming Thursday will also embolden borrowers.
"The new rules set to come in over the next couple of months requiring a 30% deposit for investment property in the Auckland region and a softening of the LVR for the regions may also be a factor incentivising this activity," Rush said of the headlong rush into the regions.
The speculative frenzy was undiminished though in Auckland through a record August and despite all the news of slumping business confidence and falling milk payouts.
"There is continued evidence of high levels of speculation in the Auckland market and we are seeing more examples where the same properties are selling two or three times in a one year period," said QV's Jan O'Donoghue.
The scale of the obsession with borrowing to buy and hold land was also clear for everyone to see in Reserve Bank lending figures released this week.
Mortgage lending grew NZ$1.087 billion in the 31 days of July to NZ$219.813 billion, which was the fastest monthly growth rate since December 2007. Mortgage debt is now growing much faster than incomes, helping to drive New Zealand household debt to disposable income up to a record high 162.2%, which is among the worst in the OECD. Landlords grew their debt by twice as much as owner occupiers and three times as much as first home buyers in July.
Banks are comfortable lending all this money to land owners because there has never been a big bust in house prices in New Zealand's major cities and because globally-set rules about capital allow them to lend much more against land and housing than against businesses.
This was also clear in the Reserve Bank figures showing businesses borrowed just NZ$12 million more in July, while banks lent an extra NZ$538 million in July to farmers as loss-making dairy farmers racked up extra debt against their land..
Just let that sink in. New Zealand's businesses are relatively profitable with pre-tax profits last year of 9.7% of income, yet they and their bankers are choosing not to borrow to invest in growing their businesses and jobs.
Meanwhile rental property investors, who in Auckland are receiving gross yields of less than 3% and net cash yields are far less and often negative, are gearing up massively to grow their assets. That's because of course they're betting on yet more leveraged tax-free capital gains and their banks are happy to help them. It's the same with dairy farmers, who are lucky to get a cash yield from their cows of 5% over the long run, and they're certainly making cash losses now.
Why would anyone borrow (and be lent) so much for such low cash returns? The deductibility of interest for tax purposes and the tax-free nature of capital gains make all the difference. The easy capital rules for mortgage lending by banks is the cherry on top.
The perverse result is that over NZ$1.5 billion was lent to loss-making businesses in July while just NZ$12 million was lent to businesses earning more than double the cost of capital.
It is a national obsession with borrowing to lose cash, but to make it up on the tax-free capital gains. It is a perfectly rational delusion that will no doubt be celebrated today by flying the real national flag high above the boot of a real estate agent's shiny new Audi.
Only a land tax and or a capital gains tax would force New Zealanders to act in truly rational and non-delusional way. Yet both would be seen as heretical and unpatriotic under the one true flag -- the open home flag.
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A version of this article first appeared in the Herald on Sunday. It is here with permission.
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