By Bernard Hickey
Treasury officials included the option of a limit on foreign buying of property in a briefing paper to Finance Minister Bill English on July 2 as the Government grappled with its response to the Reserve Bank of New Zealand's impending high Loan to Value Ratio (LVR) speed limit.
The briefing paper was designed to offer English some options to mitigate the effects of the policy on first home buyers.
Those options included those that "would require more lead time to design and implement, but may help alleviate excess housing demand over the longer term," Treasury officials said.
They included more targeted LVR limits, more first home buyer subsidies, discounted sales of state houses to first home buyers, a capital gains tax, a land tax, extra measures to increase housing supply and restrictions on overseas buyers. It said these options might be feasible. It said it would not recommend stopping the Reserve Bank from implementing its speed limit. The bank went on to announce the speed limit on August 20 and introduce it from October 1.
The Treasury officials said the benefits to financial stability of restrictions on foreign buyers of homes were likely to be limited and that current data suggested non residents were "not significantly contributing to house price inflation."
"Policy flexibility appears very limited in this area due to restrictions under our Free Trade Agreements," they said, adding it could be considered further if further more specific options that complied with trade agreements could be found.
'Risky and undermining the speed limit'
Later on August 1 Treasury officials wrote an 'aide memoire' for English and Prime Minister John Key on proposals to mitigate the effects of the LVR speed limit, including increasing the number of Welcome Home Loans.
Treasury said a proposed increase from 850 Welcome Home Loans a year currently to 3,000 would mean that up to 50% of the likely 6,000 to 8,000 first home buyers who would be affected by the speed limit would be able to avoid it.
"The policy option of increasing Welcome Home Loans (which would be exempt from the LVR policy) from 850 to 3,000 would therefore undermine the ability of LVRs to dampen house price growth, increase risks to the Crown balance sheet and may cause the Reserve Bank to reconsider the use of this tool and/or the OCR," Treasury said.
"It may also work against housing affordability objectives to the extent that excessive house price growth continues. In addition to reducing the effectiveness of LVRs, expanding the Welcome Home Loan scheme may also reduce market discipline and lending standards, since commercial banks are no longer bearing the costs associated with losses on those loans," it said.
"A significant positive feature of our mortgage market was that banks did not relax their lending standards to the same extent as in other countries. A significant increase in the Welcome Home Loan scheme would encourage a move in that direction."
Treasury ignored
Treasury went on to challenge the Government's plan to increase income and house price thresholds for the KiwiSaver Deposit Subsidy scheme, whereby the Government pays up to NZ$10,000 to a couple saving in KiwiSaver for 5 years.
It said the expansion of the subsidy presented fewer financial stability risks because users would still face the banks' LVR limits.
"However, we do question the value of the additional spending, particularly as it will consume most of the between-Budget contingency. It is questionable whether the house price caps for KDS need to be lifted," Treasury said, pointing out that most of first home buyers using the scheme had bought houses below the current caps.
Treasury recommended the Government only increase the supply of Welcome Home Loans from 800 to 1,600.
Government eventually decided to increase the Welcome Home Loans to 2,500 a year and to increase the income and price thresholds for the KiwiSaver Deposit Subsidies. Here's that announcement.
Papers released by Treasury and the Reserve Bank also confirmed various factoids released through Parliament and various briefing papers, including that 6,000-8,000 first home buyers would be affected.
However, they also revealed that the Reserve Bank had found from data provided by two banks that 65% of first home buyers had high LVR loans, but 60% of the value of first home buyer borrowing was high LVR. They also said 40% of new high LVR lending was to first home buyers and 12% of new lending was to high LVR first home buyers.
The Reserve Bank also revealed in this briefing paper that house price inflation could be reduced for as long as eight years by the LVR limits.
'Unlikely to hit house-building'
The Reserve Bank also said it did not believe its LVR limit would have a significant negative effect on house building.
"Property developers will not be captured by LVR restrictions so will not be constrained from financing new developments," it said.
"Banks are generally cautious in lending at high LVRs to finance new house building anyway, given uncertainties over costs and final valuations," it said.
"There is a significant shortage of houses for sale, particularly in Auckland. Therefore, where a potential purchaser of a new house is unable to do so, it is likely that a replacement buyer will be easily found (but at a lower price)."
27 Comments
Why not introduce a stamp duty for foreign buyers?
Genuine overseas buyers wanting a Queenstown holiday home will still buy, but speculators in Auckland will be discouraged. A 7.5% stamp duty would create good extra revenue too! If the average foreigner spent $750k on each of the estimated 2600 houses they bought last year then $150m would be raised in taxes at no expense to NZers, it's an absolute win-win situation.
why not just ban them?
regards
Wasted comment Steven.
Chris, best idea ever posted on this site.
No new problems here. Just rinse, repeat. Copy.
Maybe, just maybe, we should stamp it out as per above, though 7.5% will not cut it. $150m is peanuts to the big guys.
http://www.bloomberg.com/news/2013-10-24/families-blocked-by-investors-from-buying-u-s-homes.html
When is enough, not enough for certain investors.
Greed is the problem.
As a vigorous opponent to foreign ownership of NZ land, I concede that is not a bad idea. The proceeds should be used to help kiwis get into properties themselves.
I have a real problem with non resident foreign landlords, and think that no money from WINZ should go to them, that should scare a few of them out as their pool of prospective tenants would dry up, house prices would come down and perhaps home ownership in some of the lower socioeconomic areas would flourish again.
Why not just deport them as soon as they landed at the airport or the Port of Auckland?
I agree, great comment and makes great sense too! One of the better ones posted on site!
Looks like a great idea with fine intent. But it reminds me of Labours "speculation tax" imposed in the early seventies in response to that surge in prices. Cost a fortune to implement and ended up being paid on exactly one transaction.
A whole new industry would immediately appear to circumvent it. House sales to non-resident foreign buyers would appear to disappear while the actual numbers more than likely increase.
Find me one example where such goverment measures to stem price increases have not achieved the opposite and I'll give you a chocolate fish.
The loopholes could be avoided by including all companies that have more than 25% foreign ownership, all trusts with any foreign beneficiaries, and any properties purchased with foreign non bank mortgages (ie individuals couldn't just get a NZ associate to buy the property and then cede control the property to the mortgagee). I'm sure most loop holes could be avoided. Australia seems to manage...
Another simple way to halt the boom is to clarify capital gains tax rules. Make them clearcut and don't penalise long term investors.
Say 24% tax (no matter what your marginal rate is) if you buy and sell in one year or develop for a profit (that would give total tax of 34% on developers when GST is considered which is lower than now and would hopefully encourage development).
That could decrease by 2% a year so that if you own a property for 12 years there is no tax to pay. It solves long term complications in introducing a capital gains tax and doesn't dissuade long term investors (who are needed).
What such a capital gains tax clarification (because we already have CGT!) would do is reduce the velocity of the market so that speculators either did not participate or were more reluctant to participate.
Avoidance would be virtually impossible as all transactions are recorded.
The current situation allows the myth that quick flicks aren't taxable to perpetuate. It probably wouldn't generate a lot of revenue but would be very cheap to administer as there are no exceptions (except for the family home - ie where you are on the electoral roll), and even that should probably not be exempt for ownership of less than 12 months.
great idea Chris!
Why not introduce a conscience to a politician....?
Because they wouldn't get along.....!
The commonsense you suggest Chris _J conflicts with foreign investment agendas, and would be met with cries of racism from the Minister as they were by Key when that subject was visited upon him.
Ironically, Stephen Joyce while railing againt the Green ?Lab consortium referred to them in the most derisory way as Communists.....
Yes he figured the worst thing he could call them was Communists, and yet he's happy to sell the land out from under us to them ....Communists I mean.
What a fat lying disingenuous prat ...no joke Joyce.
Dont hold back there Christov, its bad for you, let it out....
regards
Direct Action christov
Maybe he is unaware - you could disabuse him of this undersight - DIRECTLY
http://www.national.org.nz/MP.aspx?Id=269
Email: steven.joyce@national.org.nz
Website: www.stevenjoyce.co.nz
Phone: (04)817 6813 (Parliament)
Phone: (04)8176813 (Electorate)
Steven Joyce is not a prat - he is a zoooooologist or maybe a psepholigist too
it says .. after completing a zoology degree at Massey University .. prolly knows Bernard
and you can even go and have drinks and nibbles with Minister St... - 01 Nov
Animal Farm NZ needs a Zoologist..........apparently this qualification provides the necessary knowledge for looking after the various types of stock. Reduction in the number of calls to the SPCA.......
Has the Government got a Resource Consents for this Activity?
iconoclast...feel free to copy and paste that in an email to the Minister in question asking him what he thinks of it....don't hold your breath waiting on an answer.
If you sincerly want direct action , find a copy of the Ministers rail on Wednesday I think it was maybe Thursday....forward that to the Chinese Embassy, pointing out the Minister was being derogatory when the Communist reference was made...just in case they don't get ....it.
I should say you will have far more luck with that.
Cheers Matey.
Agree completely, but as a very experienced diplomat, relation once quiped to me; "never let your principals get in the way of good politics" Disgusting, but that is the way these specimans work.
Brilliant!! I was wondering how long it was before someone commented re: Joyces anti-communist spiel.
You forgot to mention ignoramus in there Christov.
JK as well, quite why they think the NZ voter will believe them is, well strange.
regards
I agree, no telling how high the Aussie house prices would be without CGT or foreign ownership restrictions
Factboy says: Stop ALL Government subsidies ie. WINZ rent assistance etc etc
Ironic. you don't have to travel too far back in new zealand history to find a parallel example of "cause and effect"
Back, prior to 1984 nz was dependent on the UK for the outlet of its wool, beef, lamb and butter, and when the UK joined the EU under the Common Agricultural Policy, things got tougher for nz, farming was tough, and the nz government was subsidising farming substantially in the form of fertiliser, lamb, and butter subsidies and standard valuations of livestock
Roger Douglas was an Auckland accountant who saw (coming through his doors) Queen Street Farmers who were buying farms (with their ears pinned back) for the subsidies they could obtain. It was a golden hand out. The farming profits were marginal to non-existent, but when you added in the total subsidies it was a good return on investment. Queen Street Farmers were buying and investing in a guaranteed stream of government subsidies.
In 1984 the first thing Douglas did was to eliminate ALL farm subsidies and standard valuation of livestock. What happened? Farm values plummeted 50%
One can only assume the very same effect is being seen in rental properties, underpinned by government rent assistance. But then Gabriel Mahklouf of Treasury wouldn't be aware of that history would he? He wasn't here.
At the risk of repeating myself, foreign property owners only contribution for the services that they use, is the rates that they pay. That means that they contribute nothing to all the other costs of running the country which they enjoy by owning property here. They should not only pay their full share of the whole running costs of the country but also a premium for the privilidge of owning property here. Accordingly I suggest that foreign owned property should be taxed annualy at about 2% of the capital value. If the property is income earning and NZ tax is being paid on this then this can be rebated against the 2% property tax.
I agree there should be no further sales to foreigners, especially as we cannot adequately house our own people. I would stop all immigration also for the same reason and the fact we have unemployment that is too high and we need to significantly raise the productivity of our current work force, but that is another story.
However I would introduce a property tax now as there are allready a lot of foreign property owners who may be encouraged to quit our market if faced with being made to appropriately share in the costs of running the country.
So , the expanded Welcome Home Loans scheme is going to undo up to 50 % of the effect of the Reverse Banks increased LVR limits ...
... and this government , exactly as the previous one did , is totally ignoring Treasury's recommendations ...
Then what is the point of having the RB and the Treasury if no government takes them seriously ?
All of the above contributions have missed the Treasury recommendation based on
risk free rate of return
The tax system could then clobber the landlords in Auckland who accept a 3% net yield while rewarding those in the south who can get 8%.
I would add an annually adjustment (+/-) to the RFR to balance recent price and ownership movements.
Use the same to get to holders of vacant property and undeveloped land banks.
Add on a bit of incentive to ban foreign ownership and pressure those already here to sell within a limited period or get hit by a retrospective stamp duty. The rate should be 20%+
Based on the fact that it is seldom lack of profit that kills investment but poor cash flow. hence annual taxes beat CGT into a cocked hat for effectiveness.
Treasury has not addressed rentals and especially land banks held in the name of a resident but actually financed (and effectively owned) by overseas interests.
The OIO seems to be totally toothless on this one too since there may be no audit trail of financing locally and also no application has been made. The answer is potential seizure without compensation if/when discovered.
Crusher Collins threatens RE agents and accountants with revealing potential money laundering responsibilities but as usual they are given a minimum of four years to keep playing the game.
The drums are beating.
Macquarie Banker calls for extra stamp duty on foreigners (ie non-citizens)
FORMER Macquarie Group banker Bill Moss has called on the states - particularly NSW, with Sydney's red-hot housing market - to levy an additional 5 per cent stamp duty on foreign investors, claiming Australians will be priced out of the housing market.
The wave of Chinese investment in Australian property could increase tenfold, according to Mr Moss. He also called for the reintroduction of a 50 per cent cap in the number of units offshore buyers were allowed to purchase in new apartment buildings in Australia. call-to-raise-stamp-duty-for-foreigners/
Of course its a win win for them.
Makes it look like they care about their [would be] Australian customers and since the foreigner is a cash buyer with no mortage they lose no business and hopefully gain business from a Ozzie taking out a mortgage.
Surprised its taken this long.
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.