By David Hargreaves
Capital Gains Tax anyone?
As I write this it has been a mere 50-odd days since Prime Minister Jacinda Arden adroitly elbowed the dreaded CGT off the table and, it seems, into the bargain, completely out of the New Zealand consciousness.
Talk about out of sight out of mind.
This is the CGT that was being treated by some media outlets as if it already existed, and was going to end life as we know it in New Zealand.
Can I now suggest that the hysteria being generated by politicians, some media and some business lobby groups was, ahem, a bit overdone.
Clearly it would now seem that while the CGT was set to be a life-changing horror for some people - apparently necessitating getting underwear in a right old tangle - a silent majority of Kiwis were more sanguine about the prospect.
Remember, from when the Tax Working Group's final recommendation to have a CGT came out earlier this year, it was being claimed that business confidence and the housing market were being knocked by the likely onslaught of this naughty tax.
So, logic follows that if you remove this terrible thing from the futurescape then the people of New Zealand will rejoice in relief.
Er, well not quite.
So, how bad was it really?
With a complete month (May) now behind us after the sinking of the good ship CGT we can make some assessments of just how much the prospect of the new tax was weighing on sentiment and the extent to which there is now unbridled joy - or otherwise - at its demise.
The ANZ's Business Outlook Survey for May did show some recovery in overall sentiment. But from low levels and you would hardly call it a 'bounce'. And worryingly, intentions in the residential construction sector plummeted further. More on that aspect shortly.
And then there's the housing figures. Well, apparently the CGT spectre had been looming large over housing sentiment.
Well, apparently not, unless the 'relief rally' is going to be a slow burner.
Realestate.co.nz's May figures suggest that Auckland's gone into the winter months with its biggest unsold housing inventory in seven years, QV's figures showed more of the (not great) same and Barfoots had their lowest May sales by number since 2010.
The blame game
These figures suggest that those with a reason to do so were putting misplaced blame on the CGT when in fact business confidence was already down and the housing market has been coming off, particularly in Auckland for some time, and the reason has had nothing to do with concerns over a CGT.
As I said above, unless there proves to have been a delayed impact on the housing market from the non-appearance of a CGT, then it looks like being a pretty quiet winter.
And this in a market where a number of things, including the CGT axing, but by no means limited to that, have moved in favour.
The Reserve Bank loosened the loan to value ratio (LVR) restrictions in January. But this hasn't seemingly given much positive momentum - although of course we don't know what would have happened WITHOUT the loosening. Maybe this measure has helped to support a market that would have otherwise flagged more.
Interest rates have been conducive and are likely to continue being so. Even before the RBNZ cut the Official Cash Rate from 1.75% to 1.50% last month banks were trimming mortgage rates.
More bang for the buck needed
The RBNZ estimates that across the banks about 0.15 percentage point of the 0.25 percentage point cut to the OCR has been passed on to mortgage customers. The central bank would probably have wanted more bang for its buck than that.
I reckon we can definitely expect another 0.25 percentage point cut, probably in August, probably in large part because the RBNZ will reckon banks haven't passed on enough of the cut we've just had. That's likely to be a nice little fillip for the early Spring housing market.
If there isn't much of an upsurge in activity visible come the start of Spring then it seems fair and logical to assume that the RBNZ will further relax the LVR rules when it issues its next Financial Stability Report in November.
All these things suggest the housing market should at least hold its own between now and the end of the year. If it doesn't - IE prices start to really fall - then we'll know that things are not good at all, given the amount of supportive factors that are now present in the market.
Plummeting construction sector confidence
To come back to the question of the plummeting confidence in the residential construction sector, I think this is of real concern. It could of course just be a reflection of the fact that construction is at very high levels at the moment.
If, however, we see a big pullback in private construction - possibly fuelled by the current flat market - then we may not make up the shortfall of houses in Auckland. And that could be problematic later.
It's now the multi-billion dollar question how committed, if at all, this Government will be to itself overseeing a reduction in shortages given the way KiwiBuild has seemingly become KiwiBust before ever really being given a chance.
The Capital Gains Tax was a great excuse for whatever ills were seen as befalling New Zealand. By removing it, the Government's removed the excuses.
And it's left with business confidence in the cellar and a wobbly old housing market going into winter.
We probably don't need wellbeing so much as a big dose of feelgood factor. Where it is going to come from is not obvious at the moment.
61 Comments
"Apparent absence of any uplift"
This is not what REA-TTP predicted would happen.
This is further proof Spruikers are indeed lacking the much need foresight to make sound predictions...
FHB's need to sit tight, watch their savings grow, enjoy the security and watch this all hype gradually unravel.
... Hmmmm, the benefits of paying interest, insurance, rates and maintenance (also dead money) on an asset that's declining in value. Housing as a profitable investment by way of capital gains is fast falling out of favour. Unfortunately for FHB's, its now critical they time their entry. Their term deposits are buying more and more house as time passes by. Why line another man's pockets with profit? Wait for the distressed, fear driven sales - they're coming. Printer8, if you're here to admit you lack the discipline and can't save, a mortgage is the best way forward for you...
Hi RP
It is important that a distinction is made between a home and an investment property.
I think that many - including yourself - fail to see that distinction.
I have no problem with your view as a cautious property investor.
Why doesn’t the same rationale apply to FHBs? Rather than giving the answer, I think that both FHB and those who advise FHB really need to think deeply about it.
Oh, by the way RP
You made a couple of false assumptions about me above.
I am retired, I own my own home, I showed balanced financial discipline over my adult life, and I am now comfortable.
Please be careful you don’t continue to make false assumptions including those relevant to FHB.
I care about FHB and I don’t think your advice is necessarily great.
That separation between investment and a home is narrower than you might suggest. If prices are falling it is a miserable life seeing that hard-saved equity turn to zero. And a $50,000 house price reduction is a big contribution to the revamp you want to do on that doer-upper. I think in that in the current market the house you actually want, rather than the one you accepted to get onto the property ladder, gets closer every week - with a deposit growing and a house prices falling.
Well, I can see the Spruikers are coming out in force! Feeling threatened are we? Pleased to see youre taking my posts seriously, and so you should. I appreciate how unpalatable advice from a financially independent individual who isn't a slave to a bank or a Landlord must be. I guess it goes some way to explain why Yvil's resorted to telling lies. I do own my own property in Central Auckland outright and live comfortably of my savings. Much of my time is spent as a volunteer assisting a local charity. Life has been good to me.
Much to the disgust of resident Spruikers, I couldn't give a hoot about its future value as its all one market anyway. It's been a family home of 22-years. Yes, I consider myself financially successful especially having reached financial independence through hard work, not at the expense of others and not through greed. This is a suckers market and FHB's would do well to steer clear of it. Wait it out, see what unfolds - especially beyond our shores. Don"t raid your Kiwisaver and take on 30 year mortgages. It's not a pathway to financial security when your giving a greedy speculator a dignified escape!
Yvil, printer8, prove you're not liars and put up a link substantiating your post where I've said I don't own property ;-)
RP
You make a really, really very telling comment; you couldn’t give a hoot to the future value of your home. I agree, but that is contrary to the premise of your often stated argument re FHB that they need to not purchase at the risk that property prices are going to fall.
It has been my contention, just like any short term fluctuation in a KiwiSaver growth fund, it is the long term that FHB are committed to. As long as they can service their loan - and banks have a built in buffer expectations - they have nothing to fear and over the long term everything to gain.
Your claims of the future of the housing market are at odds to the likes of Adrian Orr, and from a DGM sudden bubble burst, you argue that FHB hold out for the bottom of the market but you see this being a slow deflation over 6 to 8 years. Seriously, are FHB expected to put their lives on hold for 6 to 8 years.
In future, each and every time you give advice to FHB - remember what you have said today. You don’t give a hoot about the future of property prices because it is not going to affect you - nor FHBs.
Printer8, you say "You don’t give a hoot about the future of property prices because it is not going to affect you - nor FHBs" This statement spews ignorance. If I've exceeded my personal financial goals, how can you suggest I couldn't give a hoot about others reaching theirs? Given the prevailing global outlook, taking out 30-year mortgages and raiding Kiwisavers to buy in at the top of a market is plain foolish. Financial security can be obtained through other means in the interim. Unlike yourself printer8, others don't need to shackle themselves with debt in order to get ahead. I certainly didn't.
Printer8 and Te Kooti, I suggest you both sit back, read your comments out loud and listen to how ridiculous youre now sounding ;-)
Yvil, that's right, I truly don't give a hoot. Unlike yourself, who has leveraged his afterlife earnings on property, I haven't.
Why is it exactly that financially successful people irk you? Its sad that well diversified finances make little sense to you. What's really going on Yvil?
Falling property prices are inevitable given the changing climate. As long as it's not a damaging crash, its a healthy thing. If you had any financial experience, you would also be rejoicing this development.
Still waiting for you to prove you're not a desperate liar. Where on interest.co have I commented I don't own property? If I had said such a thing, it makes me the liar!
I was thinking exactly the same thing. Savers have been hammered since National were first in power and we hoped that the credit credit credit demand would slow down but that was too scary to maintain GDP so we imported 700,000 immigrants to prop it up - among other measures. In 2007, we were getting 8% gross on money invested in Term Deposits. Imagine the difference that would have made to so many exisiting people and families
David, I don't believe the axing of the CGT will start an upswing in house sales or values but less than 2 months since the surprising news is not enough time to come to any conclusion yet. It takes much longer for people to digest the news, make a decision to buy, look for a house 30 days? put an offer in, settle 30 - 60 days later, then another month for that sale to be recorded and published.
"It takes much longer for people to digest the news, make a decision to buy, look for a house 30 days? put an offer in, settle 30 - 60 days later, then another month for that sale to be recorded and published."
Hmm interesting, I remember not so long ago people were buying houses on the phone, without even visiting the property. A lot of houses sold less than a week after they were listed. It certainly didn't take them months to make up their minds. I wonder what has changed...
Srapping the CGT was announced on 24th April. Let's say on the 25th you start looking for a house to buy, 1 month later you have the house, agreed on a price & signed the S & P agreement. One month after that you settle and move in, that's the 25th of June and some buyers will settle later, in July, so realistically the first house sales after the CGT was scrapped will be published in August.
I reiterate, I don't expect much change
There is no panacea for the missing millions/billions in false liquidity that was propping up the whole house of cards. The Morphine hit of lower rates will be administered to ease the pain but this patient will struggle to survive regardless.
The marginal buyer controls all things, the flow on effects when they disappear can be enormous.
Sales in Rodney according to Barfoots yesterday, down 43% on last May.
If that is a relief rally then I am recalling the dead parrot sketch.
CGT was relevant, potentially, only to "investors" post 2021.
Given that prices are in all probability going nowhere/down in interim, they would have had no profit to tax and anyway, had 2 years to sell and avoid it.
Really, this is , as David says, excuse modelling.
Prices will fall further because top end buyers and on-mortgage purchasing been hit hard by overseas buyer ban and anti-money laundering. This has led to 42% fall in sales, for instance, above $1.2m in Albany ward, in first 4 months of 2019 compared to 2018. Only 16-18% in lower brackets down to 600k mark. Money supply sorely neglected by analysts of prices in Auckland. As Joe Wilkes says, marginal buyer gone AWOL
How come is hard to digest that housing market is in donward trend - how much only time will tell and though worrysome in short term specially for speculators who all bough in 2016 and afterwards for fast money. Just saw another property in Howick which will go for mid 800s to may be 900 (CV of $1020000) but when checking the history for a friend who was interested realized that has been purchased in 2016 for Mid 900s (When the CV would have been in $600000) so visiting that open home is a waste of time as vendor will not be able to sell unless takes a hit - BIG HIT (RE Agent needs a listing and as long as vendor is ready to pay for marketing - they have nothing to lose except the time - which now they have in abundance :)
For long term investors. itwill be an opprotuinity to enter (Only if have long term goals) and is perfectly normal in ecenomy cycle (nothing is one way street) but still some way to go so one should wait and watch (Now waiting will not harm).
Construction is not at very high levels. NZ's big problem is that, due to earthquakes in Christchurch and idiotic Auckland Council, construction of new housing has been at low levels for a decade.
The Auckland problem is so bad that the current catastrophic decline of NSW and Victoria construction sectors means those places have now plummeted to the levels of Auckland. Auckland has been so bad at building housing that this construction peak is about 20% less than last boom when adjusted for population change.
Yeah, thank goodness for the non-residential sector (and the rest of NZ). Imagine if had planning that allowed the same level of growth in residential construction, we would not be having a housing crisis. Imagine if residential construction had not been actively impeded by idiotic Auckland Council inflating residential land prices.
https://www.interest.co.nz/charts/real-estate/building-consents-residen…
I would imagine the imminent end of negative gearing, or ring-fencing losses to be more accurate, will have an effect, too. So many landlords rely on a tax break to make their 'investment' work, at the expense of those who do not get the benefit of untaxed capital gain. What a rort, and it's about time it was ended.
David your singling out CGT as the only factor which then should cause the opposite affect. Things aren't linear or myopic with a single cause and affect but its a complex system with a big factor being CONFIDENCE.
CGT was just one of many issues that has caused confidence to be lost, the fact our govt has come out just about every second week with another tax idea to burden people with is a huge weight on confidence.
What was the result of Cullens report was summed up in we also have 100 different potential taxes to also put in place.
Certainly the government running a giant surplus and getting even more via a Kiwisaver tax windfall won't help sustain aggregate demand or the feel good factor.
How about writing off a chunk of outstanding student loans and a tax credit to those who have paid them off? Government needs to reduce private indebtedness. It could easily do this via a spreadsheet entry. Student loan forgiveness is becoming quite a big policy proposal in the US. Increasingly it is recognised that student loans impede family formation and the kind of middle class spending that our economies used to rely on to keep chugging along. Especially as post GFC a degree doesn't get a lot of people where they were promised. False advertising on the part of tertiary institutions.
Maybe we should sort out the income tax bracket creep before all that. Median wages in NZ have gone up more than 28% in NZ since the current tax slabs were first introduced in October 2010 and inflation over the same period is up more than 11%.
The so-called government budget surplus is actually a result of the median wage creeping from the 17.5% marginal tax bracket to the 30% bracket. If we adjust the 17.5% bracket for inflation over the same period - we get to 53k (rounded down).
This should put roughly $487 per annum back into the pockets of those earning at least the median wage. I admit 9.36 a week is not a lot but it's a decent start.
Agreed Advisor
I am a supporter of CGT on the basis of fairness.
To dismiss a CGT and not address tax bracket creep is a double whammy for those who work hard to get ahead.
I feel for those wage and salary workers of who many struggle but are increasingly meeting a greater share of the tax burden while investors (such as those in property and the Gareth Morgan entrepreneurs) make significant income tax free.
I have done well out of capital gains so don’t have an axe to grind.
However I also have a strong value position on fairness and I sadly don’t see that in increasing numbers of New Zealanders.
I agree with you; we need tax capital gains for a more equitable society.
The one point that is seldom brought up when arguing on the benefits of CGT is that it could work well in combination with the R&D tax credit to unlock our economic productivity. A 12.5% credit on risky R&D initiatives is insufficient in moving more money into productive assets when compared to the alternatives - low-risk property investments, which have virtually 0 tax implications, provided you play your cards well.
no quite right - those irresponsible millennial need to be taught a lesson about trying to better themselves. Too right.
But in the interests of fairness, we should levy a windfall tax - the amount - adjusted for inflation - invested by the NZ state in the education of all those lucky enough to graduate prior to the early 1990s debt free. It could come off estates say at death. Or out of Kiwisaver honey pots? That would only be fair. Teach the oldies about taking responsibility for the accepting the generosity of the state. .....No? Didn't think so.
David, the sad fact about our zeitgeist is that "hysteria being generated by politicians, some media and some business lobby groups was, ahem, a bit overdone" applies practically everywhere in the MSM. Let's count a few current examples of hysteria:
- Housing in Awkland and a few other areas (Queenstown, Tauranga)
- Climate 'Emergency' - great for the click-baiters, but not so hot (sorry) for the mental health of impressionable teens who now claim to be 'terrified of their future' to the point where offing themselves seems like a Great Idea
- Species Extinction, and this in a land that has seen the destruction of most South Island East Coast forests by early Maori between the 13th and 16th centuries, and don't even ask what happened to our megafauna - moa, Haast's Eagle and so on
- AOC and her '12 years until We Fry' shtick and the Green Nude Eel 'solution' - but then that's US Politics, which has always had its share of lunacy
This was all summed up neatly in the late 1950's - referenced here:
The Historian Norman Cohn, in his 1957 book, The Pursuit of the Millennium: Revolutionary Millenarians and Mystical Anarchists of the Middle Ages, found that Millenarian movements always picture salvation as:
- Collective, in the sense that it is to be enjoyed by the faithful as a collectivity.
- Terrestrial, in the sense that it is to be realized on this earth and not in some other-worldly heaven.
- Imminent, in the sense that it is to come both soon and suddenly.
- Total, in the sense that it is utterly to transform life on earth, so that the new dispensation will be no mere improvement on the present but perfection itself.
- Miraculous, in the sense that it is to be accomplished by, or with the help of, supernatural agencies.
It might have been expected that millenarian thinking would disappear with the Enlightenment and the Age of Reason. But Cohn found that these ideas and the manias they inspired reemerged in the twentieth century’s secular totalitarian and revolutionary movements.
In what could be a description of the Green New Deal (USA), Cohn argued that these movements felt themselves to be engaged in a struggle of unique importance, “different in kind from all other struggles known to history, a cataclysm from which the world is to emerge totally transformed and redeemed…this is the essence of the recurrent phenomenon of revolutionary millenarianism.”
What this all boils down to is that we have simply gotta hunker down and wait for the irrationality and madness to pass - as pass it will. But, and this is the kicker - not before it has done an awful lotta damage - wasted lives, misallocated resources, and large dollops of completely avoidable misery.
Hey ho....
"Species Extinction, and this in a land that has seen the destruction of most South Island East Coast forests by early Maori between the 13th and 16th centuries, and don't even ask what happened to our megafauna - moa, Haast's Eagle and so on"
Truly pathetic whataboutism.
a silent majority of Kiwis were more sanguine about the prospect.
I would think that Labour discovered that the "silent majority" had very strong views about the prospect hence the dropping of if like the proverbial hot potato!
Just the prospect of a CGT has left the punters shell shocked. It will take a while to regain the previous level of confidence.
Retired Poppy. I have read your comments ad-nauseum over the last 12 months, and am sure you just dont understand property cycles and the consistency of these, or your just taking the piss. The time to buy is now while the market is flat. Not next year. Mid next year the property market will start growing only people like you wont see it. Mid 2021 people will look back on growth figures and see that is when the market started to grow.
....is that you REA-TTP? How many times have commentators told you to stop looking in the rear vision mirror? Maybe you'll learn once you trip over something that lies hidden in plain sight in front of you.
You, your ilk together with all the naive expectations surrounding property are a risk to the financial system. Nope, I'm not taking the piss - I'm deadly serious.
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