International Monetary Fund suggests 'ring-fencing' of tax losses on housing investments

International Monetary Fund suggests 'ring-fencing' of tax losses on housing investments

The International Monetary Fund is encouraging New Zealand to take still more action against the rampant housing market, including potentially more macro-prudential tools and further tax measures.

One tax measure suggested directly by the IMF is the 'ring-fencing' of tax losses on housing investments - so that such losses can only be applied against housing income and not all income.

The IMF has issued a media statement on the completion of its 'Article IV' consultation with New Zealand. At first glance this is not much different to the 'concluding statement' that was issued by the IMF team that visited New Zealand in late October and early November as part of the consultation process.

However, the detailed report, just issued by the IMF, fleshed out views on NZ's rising housing market a little more.

New tax measures on housing were introduced here in October, while further macro-prudential measures from the Reserve Bank - particularly aimed at Auckland - were implemented by the RBNZ in November.

"Housing market risks are serious, and need to be proactively addressed," the IMF says.

It says while the impact of the newly introduced macroprudential and tax measures would need to be evaluated, "the authorities" should prepare further steps "in advance, should they be needed". This is slightly stronger, more urgent language than used in the November statement - particularly the suggestion of steps "in advance".

The IMF then goes on to reiterate that further steps could include targeted higher risk weights on housing loans, higher down payments, and "a formal debt serviceability test, as deployed in other advanced economies in the Asia-Pacific region that have experienced rapid house price growth".

On tax, the IMF is more forthcoming in the detailed report on its previously stated view that NZ could do more to lessen the taxation advantages housing investment has in this country.

"The newly introduced measures to deter speculative investment are welcome, and further steps in this direction (e.g., by widening the scope within which a resale of real estate is deemed for a business purpose and the proceeds taxable) could be envisaged," the report says.

"In addition, the incentives for buying real estate increase when real estate investors can write off interest payments against their other taxable income.

"This ‘negative gearing’ encourages investment that would otherwise be loss making, and thereby acts as an amplifier of price movements in the real estate market. Ring-fencing housing losses to within real estate earnings would therefore weaken an important price driver," the IMF says.

The RBNZ has stated that it wants to see February/March housing data before starting to draw conclusions on how successful its measures against the Auckland market has been.

But already, Treasury has previously stated enthusiasm for debt-to-income ratios, while the RBNZ - although saying its not planning any such policy - has been collecting detailed debt-to-income information from the big banks for over a year.

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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Bad news for all, renters, owners, landlords & banks as no matter which category we belong to, we are all tightly connected

Garbage. Negative gearing fills the pockets of landlords and banks. Removing it would only be bad news for them.

And no, it doesn't make rents cheaper.

Please consider this equation

Bad news for landlords = fewer landlords
Therefore less rental properties
Fewer rental properties = rising rents

12
up

Do the dwellings just vanish in a puff of smoke or something?

No of course not. Still the same number of houses, they just arent concentrated so much in the hands of tax dodging little landlords due to a tax system that favours rent seeking.

Less landlords, less renters, less tax dodging, more owner occupiers. What is there not to like?

Yep but its incomplete. You also have to consider that fewer rental properties = more houses for sale = more FHBers and since the quantity of houses is teh same ergo less ppl needing to rent, ergo no rent rises.

The problem isnt professional landlords who aim to make a career living its the speculators and gamblers out to make a quick $.

How does one differentiate between the two, if as you believe they are separate undertakings, given that it would be fiscally damaging to operate different gearing structures?

I really worry about the odd-ball thought processes that some people commenting here , have about property prices , rents , etc .

Some folk seem to think that house prices are going to miraculously collapse at some stage at which point they will get a bargain home and live happily ever after .

They are delusional , because we all wish for the same thing , and I want three cheap houses in Auckland for my 3 adult - children.

Quite simply , I know I have as much chance of this happening as winning the Lottery , so we are planning accordingly

One needs to recognise some fundamentals :-

1) There is a ( reducing ) shortage of housing stock to rent and for sale AT REASONABLE PRICES that will take some time to unwind or be supplied
2) Houses in even remotely desirable places have never been cheap anywhere ....... not ever in recent history, our first home was an horrendous sum 35 years ago earning $3,35 per hour it would take about 35,000 hours in after tax income to pay it off , today the original price is equal to just 6 months income
3) As long as we have the immigration tsunami from Asia , demand for housing will not fall and nor will prices
4) As long as Auckland Council faffs about with the supply of land , house prices will not fall .
5) If you remove tax incentives , rents will likely rise as weaker landlords will be forced to sell and leave the market ( remember some people will never own a home and will always be renters they don't earn enough and / or don't have the deposit required ) These unfortunate folk will be forced to pay more rent for an ever shrinking supply of rental stock

The IMF then goes on to reiterate that further steps could include targeted higher risk weights on housing loans, higher down payments, and "a formal debt serviceability test, as deployed in other advanced economies in the Asia-Pacific region that have experienced rapid house price growth"..

What does the IMF know about residential property capital risk weights that we don't?

Is it as bad and dangerous as Australia?

As a result of a combination of the “risk-weighted assets” system and the credit crisis, banks have basically withdrawn from the thing they were set up to do: facilitate commerce.

For the big four banks, only 16 per cent, on average, of a real estate mortgage is counted when measuring the bank’s capital ratio. This is rising to 25 per cent next year.

But every dollar of an unsecured personal and business loans counts against capital and in some cases the risk weighting is 150 per cent.

Capital — that is, the bank owners’ money — has to be 8 per cent of assets, although mostly it’s around 10 per cent. That is, the ratio of owners money to other peoples’ money has to be no greater than 12.5 to 1 and is usually 10 to 1. The result is that for every dollar of capital, the big four banks can choose to lend $62.50 secured against real estate or $10 unsecured.

Guess what happens? It’s only natural and totally understandable. It’s true that interest rates on personal and business loans can be three times what the banks make on residential mortgages, but that still doesn’t make up the revenue. Read more

Does this mean OBR is just around the corner?

I have just purchased a block of shops. I could have purchased two to three rental flats with the money I paid for the shops. Is it morally better to buy shops or dwellings to let out to either shop keepers or to house their workers. I could have used the money spent on the building to have a better life style.
Is it better for older retired people like me to buy more properties or live a more extravagant decadent life.

Unless you have an intention to pass on assets to your children at a much later date you need to ask yourself a question. If you have enough investment income to not just live out your retirement but live it out in luxury then why do you need to invest anymore? You might well be at the point where you can enjoy your money.

In fact the country would benefit from the additional spending as that provides jobs and tax income for the government. Also removing you from competing for property would help keep property prices down.

While that's probably not the answer you expected you had better have a reason for adding more work for yourself (most like having something to do).

Good on you Property Leader. We need more people like you who are not simply playing the property market, spreading untrue market rumors about how market will go banana, and generally fanning wild market feverish activities for the sake of personal gains.

"I could have used the money spent on the building to have a better life style.
Is it better for older retired people like me to buy more properties or live a more extravagant decadent life"

Very good question.
Answer is, do some ethical investing, and be a bit extravagant, but make sure your extravagance is not environmentally damaging.(Air travel, Humvees, electronic junk etc etc)

Interesting read. sure it'll be ignored.

Anyone know where I can find up to date auction/sales results for NZ - mainly BOP. Interested to see what things are selling for rather than just averages and medians etc...

1 Your local friendly real estate agent. 2) subscribe to a site that provides them. 3) noted on Trademe property listings at the bottom of each listing.

Just ignore the IMF.. Tom Cruise doesn't know what he's talking about!
Auckland is unique.

Looking at the slow-motion meltdown of international markets and banks, land, bricks and mortar are about the only place left to store wealth where there is little risk of evaporation or counter-party risk. And to get a positive return on your capital from rent, rather than being charged money for making your bank an unsecured loan. What happens when NIRP goes to -4% as zerohedge is reporting today? Hyperinflation in property that's what.