I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
On the radio on the way into work this morning there was the ongoing discussion of interest rates to control housing that was in turn pushing up the Exchange Rate.
David Cunliffe (with his immigration hat on) was being hassled about immigrants causing the demand. Classic New Zealand logic. Lets stop immigration and that will solve our problems. Pah. We are so short of skills.
Then Barry Curtis said that raw land prices were to blame and that the answer is a new town where the land prices were state controlled. Hmmmm.
The real problem is New Zealands systemic investment in property. Rather than rearrange the deckchairs, for New Zealand to grow, we need to encourage investment in businesses. New Zealanders need to be motivated to grow personal wealth by the value of their businesses or dividend returns. We need to move away from this millstone of non productive investment into investment that grows our national cake.
The Reserve Bank really only has interest rates to play with. We need to think about other mechanisms. The taboo of a capital gains tax on investment property is the unspoken spectre lurking just behind the discussion, but it’s going to take something like that. Maybe that is not the answer but right now the discussion can’t even be had.
Politically unpalletable but lets get it up for discussion. If it’s raised as potentially cross party policy then the discussion can at least be had.
Time for more leadership please.
blog
Barry Curtus would say that. He’s the mayor of the largest city in NZ - and I’d bet he’d LOVE to have more control…..
:)
Rod, the discussion only has to happen if that is the main cause of the problem which is highly debatable and just gives politicians of all colours an excuse to hold select committee meetings and then behold we have a capital gains tax. Its the same with climate control. Nothing, absolutely nothing NZ does will affect global warming. Did I say nothing. This does not meen we should not do what we can as far as recycling etc goes. But why give the politicians an excuse to hand out another tax.
As John Key said in his latest newsletter, until the Labour government stops throughing money around like a drunken sailor, we will not get inflation under control and everything else follows. Gareth Morgan says basically the same thing.
Of course the cynic in me thinks you want more people to invest in the share market.
I see in breaking news Bollard is once again trying to lower the dollar. Most fund managers would say he is crazy as we dont have the money to compete against big overseas funds. Unless of course Michael is in the basement of the Beehive cranking up the gestetner to print off $100 dollar bills (with Helens face on it of course).
Rod, I would have to agree with you on the general population needing to invest in things other than property. As you mention it’s not productive. Add to that our poor productivity… we tend to add people to problems of scaling rather than investment in plant/technology.
I’m guessing that the trouble at the moment is that there is just so much cash around in the world that inflation is putting even more pressure on the desire for people to invest in property. It’s not happening only in NZ after all. It’s like the 80s, by investing in those things that have inflation of a % higher than interest rates, people don’t have to worry about their loans over time.
I’d be interested if anyone knows what % of families are long in housing.
It probably isn’t helping some people that they are discouraged now to diversify their savings/investments into countries other than NZ and Australia.
The UK introduced stamp duty and that didn’t have much impact on prices. Having said that i think it would be a good thing to introduce a capital gains tax here just to level the field. The ability of people to offset losses on property investment against personal income should go as the taxpayer is subsidising the investor.
But people should be aware that inflation itself is not a huge problem here in NZ. the last 8 years to Dec 2006 the CPI showed an increase of 20.7% which is less than Australia which had an increase of 27.6%.
House prices though were up 143% in that same period.
It is no coincidence that M3 (measure of money supply) was up 101%.
The problem lies with the banking system making loans on increased valuations on the back of strong demand. Prices have got way ahead of themselves because of this process. Valuations on commercial property work on rents and yields whereas in residential its just a case of what people are willing to pay for their castle. The emotional difference between the two forms of asset causes problems in valuation because residential purchases fall into two camps: personal and investment. This means investment properties are valued on the emotional basis of personal purchases. So if valuers took the same approach to residential as commercial we may see values change. Its a self reinforcing process.
Immigration certainly plays a part in creating new demand as well as the fact that immigrants have found housing cheap here and therefore probably prepared to pay higher prices.
House prices will retreat at some point as mathematical realities set in but as long as banks are prepared to expand the money supply at current valuations it could be a long wait and a rather painful fall.
I thought that Bill English was being very disingenuous in suggesting that “Investment in rental property was given the same tax treatment as any other investment such as a business or shares and losses on any of them could be offset against other income”
Businesses generate wealth - rented real estate does not.
Our tax regime is somewhat biased towards asset holders in any case - other countries such as the UK do not allow *any* business losses to be offset against personal income, except in very tightly defined circumstances such as VCTs. They also tax capital gains on investments - again with exceptions for pensions and a single family home.
Capital gains tax on investment property…
NZ Reserve Bank Governor Alan Bollard prompted predictable reactions to the idea of taxing capital gains from investment property, ranging from vigorous head-nodding by CEOs of ‘real’ businesses and sharemarket players through to naysayin…
Rod et al
Almost seems to need an approach not unlike the what the irish undertook to lift its economy (terrific unplanned for bonus was massive increase in uni educated as a result). Make NZ a tax haven for IT co’s wanting to set up operations in what is the most safe country in the western world.
I would target the h/w manufacturers who have op’s in volatile countries in and around Asia.
Helen presented here in Mbne last week and was dumbfounded at a couple of figures being bandied around our table…. 30,000 extra public servants since labour took office, and now 650 people (net) a week migrating to Aussie.
Mark
Some other views …
http://tvnz.co.nz/view/page/423466/1187103
If you are going to have a capital gains tax on property, why not elsewhere? Why not selling your business, for example?
It is no coincidence that M3 (measure of money supply) was up 101%.
Er…bingo. I am really not sure how much we *should* be worrying about house price rises, they are not, after all, the reason Bollard increased Interest Rates. In fact, increasing interest rates makes it more attractive to lend foreign money to potential buyers.
Dermott, I haven’t noticed inflation being out of control. Where did you pluck that idea from?
Don, I said we need to get inflation under control (and I did not say it John Key did and I think he probably understands the money markets more than most). This of course is what drives Bollard. Maybe we need more flexible targets that can vary according to other variables. I think that excessive government spending has done as much as anything to force his hand to move interest rates up. Unfortunately when he does this he ends up screwing New Zealanders who have mortgages. Doesn’t worry me as I don’t have one buts lots and lots of people do. Part of the problem is I don’t think we have smart enough politicians in power who can adjust multiple parameters to keep the ship sailing at full steam ahead.
The reality is no matter what some public servant says, from an investment point of view you’d be nuts to have NOT been in the housing market in the last 5 years, if not longer. But saying Kiwi’s aren’t motivated to invest in NZ companies is beside the point. Investment motivation is easy, it either makes you money or it doesn’t. The government talk about “cooling the housing” market when they should be talking about helping to create some great New Zealand companies who are successful globally and attract local investors. If NZ could create a Sony, Nokia, Google etc, Kiwis will invest, don’t worry about that. Whether or not they actually have much to invest is a different story of course.
My suggestion: A lower tax rate for overseas earnings vs. local earnings. Get more of these smart brains out of IT service firms (who are using all that precious creativity building applications for all the new public servants) and get them to take some risks and build some products to take globally. Taxing overseas earnings at a lower rate would encourage that. It’s the one thing government CAN actually do.
“Unfortunately when he does this he ends up screwing New Zealanders who have mortgages.”
Not really. Interest rates are still way off their peeks of the 80s and 90s. I still plan any borrowing based on those levels…
http://www.rbnz.govt.nz/keygraphs/Fig3.html
“Doesn’t worry me as I don’t have one buts lots and lots of people do”
Well, most home owners have paid off at least one of their mortgages, so again, I am not sure how relevant that comment is. Going back to my original post, house prices are not the key reason for this rate rise, in my opinion.
“Maybe we need more flexible targets that can vary according to other variables.”
Agreed. One way of avoiding a boom / bust cycle was to broaden the target inflation band. This has obviously been successful over a number of years now.
I’ve lost the link, but I heard the other day that there are more NZers in manufacturing jobs now than there have been for “n” years (close to 25, I think). This partly comes from the confidence one gets in business of having a stable economy. Wildly fluctuating sucks, even if the ups are as big as the downs.
I also don’t rate our leading politicians as stupid - whether we are talking about Clark, Cullen, Key or English. I can disagree with them all about stuff without having to stoop to personal invective that is plainly inaccurate.
Steve, being able to get imputed credits on tax paid on profits made overseas would be great and not require any differential rates at all.
Don, if you read my comment I said “I don’t think we have smart enough politicians in power”. I did not say they were stupid. There are a number of levels between smart and stupid, average springs to mind, unqualified is another. When Michael Cullen was an under secretary to Roger Douglas he was so numerically challenged that they used to have to explain things three times to him. Like many other politicians of all colours, he has no business experience. What this means is that he does not understand the issues that we all discuss from a first hand perspective. He relies on academics in treasury whole also have no real experience.
I do not believe house prices are the main cause either.
While their may be more people in manufacturering, the high dollar hurts manufacturers who expect. I think the government has run out of ideas.
I’m a Kiwi in economic excile in the UK.
I was back in Wellington a few months ago to assess the possiblity of coming back home.
It seemed that everyone was saying there was a skills shortage in Wellington,
but a quick check of the maths suggested that it simply isn’t possible to move back given the present cost of housing.
If you’re talking about the IT industry, I worry that NZ is well on the way to pricing itself out of the labour market and hence missing the opportunity.
I think the government really needs to do something -anything- to knock this on the head.
Normal people just want -one- normal house, and that just isn’t looking possible anymore in New Zealand.
Tony, I assume you do not own a house in England or are living in the Shetland Islands. While housing is considered expensive in some parts of NZ it is certainly not as expensive as in Sydney. There has been a huge amount of press around this in recent months with various people young people, say 25-late 30’s complaining in the press about not beeing able to afford a house. What some of them mean is we cannot afford the house we want. They forget that we don’t all start in the house we will probably be living in when we are in our 40’s or 50’s. One couple were both 38 and had saved $14,000 towards a house. Their problem which the journalist did not ask questions about was how come between you you have only saved $14K over 1 combined 36 years of adulthood.
I am not commenting on your situation because I don’t know it, but if young people spend all their income, then in their mid 30’s expect a house, why should they expect sympathy from those who saved and bought earlier.
The other alternative is people rent, lots do in Europe, even Jim Donovan over at En Avant does and he is a respected CEO of a large company. But I doubt he spends all his income each month. He chooses to invent elsewhere.
Can’t help but agree with Dermott - sure the inflating house prices don’t help but one can’t help but think that part of the problem is sub-optimal consumptive decisions on the part of non-property owning individuals (translation - people without houses waste their money on cars and coffees and wine instead of saving).
I bought my first house at 19, had flatmates covering the mortgage while I was an apprentice earning $180 a week and haven’t looked back. Those decisions 10 or so years ago put me in the position I am now. High house prices aside, it is a little galling to be told by some people that spend $100 a week on coffee for crissakes how difficult things are now. Sheesh when I was a lad nescafe was all there was!
I’ve been listening to the debate on the radio, especially John Sherwin from PwC and understand now that a Capital Gains Tax would not be best way to solve the problem. John makes the point that using tax to solve a non-tax problem has never been effective. Sold.
There are few related things here:
1. Our exchange rate, fueled by high interest rates
2. Housing affordability
3. Lack of investment in productive enterprises
I believe the root issue is that it is compelling for New Zealanders to invest in the largely non productive property market, which drives prices up. I believe a positive solution is to divert that expenditure to growing the cake for all New Zealanders by encouraging investment into things that create ongoing value. Thinking about our Exchange Rate and Housing Affordability without thinking about Economic Development and productivity seems like rearranging the deck chairs.
Interesting comment. My wife is doing a thesis on retirement in NZ and has commented that often what you hear in/on the media about how well NZ’rs save or done is not actually based on hard statistical evidence. Baby boomers in particular are not bad at saving for their retirement. Also while NZ’rs use credit cards lots do actually pay it all off at the end of the month. One of the problems with too large a slice of the population is that they do not actually really save. How many people do you know that have houses, and mortgages, and draw done money from their equity to go on holiday, buy a car (a depreciating item) etc etc.
We have just been having a discussion at work with one of my staff who is considering joining Kiwisaver (no one else wants to). She will join because of the mortgage diversion clause where people can divert half of their contribution to paying off their mortgage. When I said to my wife this was crazy she said “I told you so, it sends a mixed message”. So after Cullen saying we don’t save enough he creates a last minute scheme where you can divert 50% of your contributions to property!
The other thing the misses says that no one she has spoken to has twigged on is that women are disadvantaged with Kiwisaver because everything you get back is based on what you put into it. And if you leave the workforce for 10 or 20 years to have kids you won’t get so much back. And she says “don’t be surprised if a future government changes the universal pension to dumb it down to be like the basic pension in Australia and says your real pension will be your Kiwisaver returns. Then women will be really hit hard.
I think Sydney is a bit more affordable than Auckland now, compare:
http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2006394081
with
http://homes.nzherald.co.nz/properties/search/printBrochure.php?qAdid=CCRPMN100560000687a617001
and remember Australian wages are about 50% higher than ours.
Rich, not sure of your logic here. You are comparing an apartment in Sydney with one in Auckland and its $75k more with one less bathroom. Both in the city.
Not sure people I deal with on business in Sydney necessarily think there take home pay or lifestyle is better than that in say Auckland.
If you live in West Sydney its a big haul to the beach.
One of my staff lives 450 metres from a beach on the North Shore in Auckland and did not pay a fortune for the house a few years ago. You would not get that in Sydney for under a mill!
Rod, I think John Sherwins’ comments were misleading. He was making the point that rental property is treated exactly the same way as other investments. True but that misses the point. Also several commentators have said rents will go up if the tax break is removed.
Actually the problem is that residential housing is overpriced on a yield basis and buying to let is a major part of that. If this tax break were removed rents would not go up because people cannot suddenly magic up new money. What would happen is house prices would fall as the price adjusted to the new high yield.
That could have a serious knock on effect to the economy so i wouldn’t advise rushing into that policy. The market will fall in its own time but people need to be aware that they are being subsidised by the taxpayer and are paying higher prices than they would do because of that.
Remember houses are not the same as shares.
I agree that New Zealanders need to be motivated to look at business opportunities more. In the medium to long term Kiwi Saver should help here - employees savings and business/tax dollars channeled into providers more likely to invest in business than property - even taking into account Kiwi Saver mortgage diversion.
With regards to capital gains tax on property, why add another tax to increase the governments already overflowing coffers? I agree changing the tax rules shouldn’t be seen as a solution to the problem here… the Government needs mum and dad property investors to help provide for the ever increasing need of rental accommodation.
With interest rates looking to move towards double digits alot of “investors” will already be feeling some pain. The property market is cyclical and price growth will slow. Yields will drop and other options will be more attractive.
Given the price pressure and buyer competition on entry level housing, how about incentives for property to be build more at the market entry level to fuel supply rather than making it trickier http://www.taxpolicy.ird.govt.nz/publications/files/assocpersons.pdf or even not possible to develop http://www.wellington.govt.nz/news/display-item.php?id=2909 ?
How about Housing New Zealand upping their ante e.g. by selling their million dollar homes and using the leverage to provide a bunch more lower end properties http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10123178 ?
As a reference of note, Malaysia has recently dropped capital gains tax on property, and has policies in place for developers to include low cost housing whenever developing new properties. Obviously New Zealand and Malaysia are very, very different animals, but its interesting seeing a country going the other direction with capital gains tax on property!
“The Reserve Bank really only has interest rates to play with.” - this is true, however the reserve bank is not all the Government has to play with. They have alot more at their disposal to influence various markets.
It seems that the new Government in Australia is discussing at length, measures to curb this very inflation, or at least increase the supply of affordable housing stock.