By Matthew Nolan*
I often get told that economists see the price of everything, and the value of nothing.
But judging by many of the comments about foreign bond and house purchases, this sort of affliction is widespread across society.
If people overseas are bidding up, and thereby overpaying for New Zealand houses and bonds, then this is a good thing for the New Zealanders on the receiving end.
This is a benefit, and a significant boost to wealth, which too many people seem keen to ignore.
Now I recognise that there are a group of people who merely dislike the sale of assets to foreigners because they are either a closet racist, or simply xenophobic.
If this is your inclination scroll straight through the rest of this post as I’m not talking to you.
This post is simply written to people who are concerned about the welfare of New Zealanders given that house prices are high, and the exchange rate is elevated – both potential side-effects of rising flows of capital from overseas.
The more buyers you have for an asset, and the deeper their wallets, the higher the likely price that will be paid for the asset.
But what does a higher price really mean?
Let us start off with the case of a “bubble”. I have heard people far and wide scream about bubbles in the housing market and bond markets. So let’s start off assuming that there is a bubble, and work from there.
Thinking about bubbles
If we accept there is a bubble in these markets and the bubble is the result of foreign buyers rushing in and overpaying New Zealanders for New Zealand assets then this provides a very interesting situation.
Once the bubble is over, the price of the asset will fall back to its “fundamental” level.
The funds the foreign buyer paid the New Zealander will be sitting in the New Zealander’s hand, while the foreign buyers would have made a loss on their investment.
I imagine even our xenophobic friends who I asked not to read this piece would be comfortable with this situation – and yet this is the situation I see many people complaining about.
If the bubble is as I have just described, then this is a wealth transfer to New Zealand residents from the rest of the world – they are giving us the funds to invest in other things and buy consumer goods, and we are complaining about it.
People are complaining because they see a price, but they are looking past it to see what real value exists.
You may justifiably feel that this isn’t the whole story. Even if the foreigners selling to New Zealanders are just giving wealth to domestic residents, the price of housing is still higher. As a result, when New Zealanders buy houses from other New Zealanders during this period, the price they are paying is higher.
In the case of housing some buyers must pay more, and some do not get the chance to buy at all, given this bubble. This is the cost that has been widely flaunted in the media.
While this cost does exist, and should be recognised, it is simply a transfer between New Zealand residents. When we take into account the wealth sent in from overseas, then in net terms “New Zealand” is still wealthier.
Now this isn’t necessarily enough for society to believe it is “fair”.
Some people may have insufficient income to find somewhere to affordably rent or purchase. This is an issue that people are justifiably concerned about.
However, if this is the case right now it is not the result of foreign buyers – it is the result of the chronic underbuilding that has haunted Auckland since the collapse of the finance companies.
A bubble in house prices should stimulate house building and actually push rents lower – but it is the lack of a supply response that has made housing unaffordable.
In that environment, affordability has become a real issue in Auckland – and one that should be dealt with by looking at issues of supply, rather than trying to arbitrarily blame people like the Reserve Bank and the tiny market of foreign investors.
Bubbly bonds?
In the case of bonds no-one seems particularly concerned that they can’t own their own little piece of New Zealand government debt. Instead the complaints are based around the higher New Zealand dollar stemming from these bond purchases - a higher New Zealand dollar which is reducing returns to exporters.
But the New Zealand dollar only rises on the back of foreign purchases of New Zealand government bonds when the New Zealand government is busy borrowing – it isn’t the “bubble in bond markets” that is behind the lift in the currency, it is the general capital flows (and corresponding current account deficit).
As I’ve mentioned before, the currency is merely a price. And this particular price gives us just a murky signal of things that are going on around us.
The demand for New Zealand dollars so that foreigners can buy New Zealand bonds off New Zealand residents is symptomatic of the fact that investors overseas are currently willing to accept very low rates of return from investment – making New Zealand bonds incredibly attractive.
But what happens if things are going a step further and there is a bubble in bonds and other New Zealand assets?
Well, in that case bond and asset holders are getting a windfall gain – and the new foreign owners of the bonds and/or assets are the ones who lose out.
As the inflow of capital behind the bubble only occurs over a short period of time, the impact of the currency should only be transitory, acting as a very short term transfer between exporters and importers (if neither got around to hedging currency risk). Exporter’s long lasting concern about their low rate of return is a separate issue to this one.
Selling assets for the long-haul
So we’ve ruled out really caring about bubbles stemming from foreign investment. But what about if it is here to stay and foreign buyers are persistently willing to invest in New Zealand? Well there are a few points that should put you at ease:
1. They have to pay an upfront capital cost to buy the land and other inputs – this will at least represent the opportunity cost associated with what a New Zealander would have done with it.
2. They have to follow New Zealand laws and taxes.
3. They have to trade with New Zealanders, such as by hiring staff within New Zealand – again completely within our own legal system.
4. They are also people – people who are undertaking a legal trade that makes both the New Zealand seller and this foreign buyer better off. Even if we were uncouth enough to not care about their feelings, hurting domestic residents to stop someone overseas improving their lot in life seems excessive.
Foreign capital flows are a concern in countries without strong legal or financial systems – but this isn’t New Zealand.
If we believe there is a “social dividend” for our land, introduce a land tax as part of our tax system.
If we believe in environmental regulation, set up and enforce environmental regulation. The nationality of the owner has nothing to do with this.
There is a final fear that allowing investment will see New Zealanders become a nation of worker bees, or tenants on their own land.
For this to happen, all New Zealanders would need to sell up their capital and then consume it all. And then take any labour income they earn, and consume it all – never ever investing or even saving.
Putting it this way, it seems not only impossible, but an unintentionally insulting way to look at New Zealanders.
Foreign investment and the associated capital flows have been a net positive for New Zealand in the past.
Let’s not forget this as we try to figure out what policy to set in a post-Global Financial Crisis world.
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Matt Nolan is a senior economist at Infometrics. You can contact him here »
69 Comments
Actually - the problem with foreign investment is that much of it DOES involve cash (it's a good way to keep money safe instead of having it in the banks...).
This of course forces local buyers (regardless of their ethnicity) to borrow more from the banks.
Who loses from foreign investment? All of us who need to borrow more to put a roof over our heads.
As a low income earner in Auckland I could buy a house, and have a family, and afford to be a single income family for a while. All before I was thirty.
It was absolutely true. But it was also some decades ago.
Now, 2013, it would be an absolutely ridiculous idea. I hear the stories all the time.
When we count the 'cost' as in the article above we should count that huge disadvantage. Because it's certainly gone downhill for New Zealanders.
As a nation The system and the proposed fixes need to actually be in our interest.
I have a need -- the need for Mr Jensen to reiterate his point made in <Network> back in 1976.
Jensen: You have meddled with the primal forces of nature, Mr. Beale, and I won't have it!! Is that clear?! You think you've merely stopped a business deal. That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back! It is ebb and flow, tidal gravity! It is ecological balance!
You are an old man who thinks in terms of nations and peoples. There are no nations. There are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multivariate, multinational dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels.
It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today. That is the atomic and subatomic and galactic structure of things today! And YOU have meddled with the primal forces of nature, and YOU WILL ATONE!
Am I getting through to you, Mr. Beale?
You get up on your little twenty-one inch screen and howl about America and democracy. There is no America. There is no democracy. There is only IBM and ITT and AT&T and DuPont, Dow, Union Carbide, and Exxon. Those are the nations of the world today.
What do you think the Russians talk about in their councils of state -- Karl Marx? They get out their linear programming charts, statistical decision theories, minimax solutions, and compute the price-cost probabilities of their transactions and investments, just like we do.
We no longer live in a world of nations and ideologies, Mr. Beale. The world is a college of corporations, inexorably determined by the immutable bylaws of business. The world is a business, Mr. Beale. It has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality -- one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom amused.
And I have chosen you, Mr. Beale, to preach this evangel.
Hi Matt,
NZ has a chronic current acct deficit.... So... as Warren Buffett puts it.. We are selling off bits of the family farm to maintain a certain lifestyle.
swapping Hard assets for financial assets has never been a way to wealth.... long term ( in a world of fiat money )
I actually question whether foriegn investment has been a net positive for NZ.
If foriegn investment was used to create something new in NZ... creating new jobs.. then I would agree with u.
Take the banking industry... In a good yr for them.. can can repatriate between 1 to 4 billion dollars.... ( I would call that a net loss to NZ )
The fact that there are supply issues with housing in Auckland.... That in itself should negate ur argument about the benifits of foriegn invetment...in regards to Auckland housing.
U might not care about bubbles ... but I do when it comes to housing... Many ordinary NZers aspire to own a home... a bubble that pops can wreak havoc .... young first home buyer could be totally blown away by a property bubble that pops....
If we allowed unfettered foriegn investment in NZ.... I would predict that most of our food producing assets would end in foriegn ownership... We simply can't outbid ,for example, japanese companies whos cost of Capital is only 1-2%..
the only way we would win is to change the rules for foriegn investors after they had bought all they wanted.... BUT... that is about as morally ethical and likely as ..say... Cyprus deposit holders having 6-9% of their savings taken from them.. :)
Great article, you've hit the nail on the head.
We've been looking for someone, anyone, to blame fo the Auckland housing shortage. Who better than a nameless, faceless, 'foreigner' who doesn't look/talk like us. Just take a look at the stats, published on this site last week, that show only a small percentage of foreign buyers active in the market.
The problem of affordability should be laid squarely at the feet of Auckland council. It has been decades of inactivity and neglect that has allowed this city to sprawl without any thought to infrastructure or different housing options (flats, terraces, apartments, etc). Now that we have to fit more people into the same space there is a cronic shortage which is pushing up prices and will continue to do so for years to come.
Any attempt to reduce demand will decrease housing affordability, high LVRs, high interest rates, more tax, etc will all make it harder to buy a house. We must increase the supply of houses and Kiwis must lower thier expectations as to what thier first home will be.
There is nothing good about a housing bubble for this country. A small minority of property investors (note not homeowners who need to re-purchase) could make money by offloading property now. Although why would they if they believe the price will keep rising?
A property bubble causes the following (and more):
- less money in the real economy
- more bank profits sent offshore
- more risk of a property crash and resulting downturn
- less money saved/invested for the future
- lower tax take as people are spending less (GST) or investing less (Income tax, FIF)
- lower birthrate which will mean less tax support for ageing boomers
- less worker mobility and therefore reduced competitiveness
xingmowang
You were doing so well so dont spoil it.
Show where you saw, in the latest figures, that BB's are buying all of these houses.
I dislike LB but you say
"Len is a BB with heaps properties on hand"
So, if you know that, then tell us how many houses he owns and where are they?
Please stop the blame game unless you can back it up with facts
You misunderstood me.
I am not say BB buying. I am saying BB selling properties in this big fat market to come up with a big lump sum retirement payment.
I do not know how many properties LB owns. But I know he owns more than you or any of us do.
:-). hahaha. Don't you agree?
I am not blaming anyone here. I am sorry if I give you this sense. I love BB generations. I think they are still the back bone of NZ's economy.
All I am saying is policy makers/politicians/mayor of AKL have a conflict of interest when it comes to regulating property markets.
Someone please show Mike B the link to Alex Tarrant's article that analyzed the conflict mentioned above.
Zing says: "I don't know how many properties LB owns. But I (do) know he owns more than you or any of us do"
Zing.
That is a broad-sweeping statement. As Mike B says if you are going to make outrageous statements you need to back it up with facts, not biased opinion
Next Question - how many properties do you own?
Zing:
http://wiki.answers.com/Q/How_do_you_pronounce_xing
"x" makes a "z" sound. "i" makes an "ee" sound.
Pronounced "zeeng."
How do you pronounce it?
Wang can be pronounced Wong or Wang
There is no similar pronunciation in English for 'x'.
But, please use Google Translate (GT) to hear the sound of '西'. The sound of the character without the 'eee' part is the same as 'x'.
Again, please us GT to hear the sound of '姓'. That is the sound of 'xing'.
Nowhere you will hear anything pronounce 'z'.
反对偶像崇拜。
You are just the New Zealander that John Key wants his fellow New Zealanders to become rental slaves to.
Wonderful! You keep 23 real New Zealanders (and their families) born here or resident and patriotic to this country from buying the house that they would love and care for, so that you can get 23 weekly rents from them for many years ahead.
I say the sooner the politicians are made to wake up and count their votes the sooner we get rid of such scourges.
BB3: can you translate that please?
See my query down below
http://www.interest.co.nz/opinion/63639/matt-nolan-looks-winners-and-lo…
I cannot accept statements made as if they were true.i.e.'truisms'
Take this from Matt Nolan
If people overseas are bidding up, and thereby overpaying for New Zealand houses and bonds, then this is a good thing for the New Zealanders on the receiving end.
That statement is plainly absolute rubbish. It may be true for that individual, temporarily but all of the rest of us pay and keep on paying.
Good for whom?
A hypothetical example - imagine a housing development that is say 10 years old .. taking a single street for the purpose of this example .. there are 100 houses in the street .. cookie cutter houses .. all identical .. same size sections .. all the properties were worth (say) $500,000 last year .. and along comes one new arrival from overseas .. loaded with loot .. and buys one of those houses for (say) $900,000
What are the consequences of that 1 purchase?
Are all the houses now worth $900,000
The real-estate agents in the area will certainly be spruiking the last sale as a true guide
The statistics for the next month from the REINZ will be publishing an 80% increase
Local council will be updating its database for the next rates assessment
Insurance companies will be taking a note of it
So the remaining 99 residents will be feeling happy - until the bills start rolling in
When a land tax comes in, the 99 neighbours will feel that too ..
MdM: Weren't you looking? .. last year Basel Brush posted an instance of a property in Botany with a QV of $800k sold to an Asian buyer, non-resident, bidding via phone, paid $1.5 million
And, if I remember correctly, just last week, Stephen Hulme posted a similar example, of a German Lady, bidding at auction, via phone from Germany, paid double the price.
Both bought sight unseen ..
FWIW Anne Gibson from NZ herald was on Afternoons with Jim Mora.
Some 20 minutes in she seems to quote that Maurice Williamson says the Government is in "Do nothing" mode about any possible sticking it to overseas speculators (my words)
Matt,
As the inflow of capital behind the bubble only occurs over a short period of time, the impact of the currency should only be transitory, acting as a very short term transfer between exporters and importers (if neither got around to hedging currency risk).
We have had a significant current account deficit at least since we have floated the dollar with no capital controls to speak of, as well as tax and arbitrage incentives clearly favouring foreign investors.
So the impact on the currency is not transitory at all. It is always overvalued if we allow free inflows; and other countries do not, or they have deficiencies in laws, or their own xenophobic resistance to foreigners owning their assets. I understand the chicken and egg argument. Does spending more than we earn cause the current account deficit? Or does allowing free flow of money in (with very little management at all from the RBNZ) cause the dollar to be higher than it should be, encouraging spending on foreign sourced goods and services over domestic produced ones, causing us to spend more than we earn as a country?
I strongly subscribe to the latter reason as the predominant one. If that were true, then action to either stem capital flows, (and therefore foreign driven asset bubbles) or to counter those flows with flows out, or to manage the exchange rate would seem very sensible approaches. It seems to me Mr Wheeler is tempted; his very clear statements that the dollar is overvalued by 15% suggests he is minded to do something about it, which would be good.
Printed and spent it into existence on Christchurch and Auckland infrastructure with no interest attached. The money we "borrow" from overseas has probably been printed by foreign central banks and "loaned" to their big players at 0.5%. Either way it was printed somewhere. Lets just avoid the interest and go straight to go.
Gee. Matt's got the globalization gig cornered.
It's six core claims:
1.Globalization is about the liberalization and global integration of markets 2.Globalization is inevitable and irreversible 3.Nobody is in charge of globalization 4.Globalization benefits everyone (… in the long run) 5.Globalization furthers the spread of democracy in the world. 6.Globalization requires a global war on terror.
Matt's problem as I see it is he wants to boldly plan for this post-GFC world - armed with his Enlightenment textbooks :-).
And what's good for self interested individuals is in aggregate the optimum for a nation. We're all completely rational, utility maximising individuals, armed with complete and perfect information, acting freely in a marketplace creating a nirvana of perfect equilibrium
Exactly Mist - but I think your comment will fall on deaf ears.
The few that clue themselves get ridiculed by those who wont take the necessary action.
I have had so many people tell me - "Oh I couldn't be bothered doing all the bookwork etc that you do", then in the their second breath they go about the hand they have been dealt.
It doesn't matter how much you try to motivate and guide people you can't change their attitude as they are so stubborn that they want the system to fit their perception of how the system should be rather than make changes in themselves so they fit into the system.
None of us like the system but some of us accept that is how it is and get on with things while the other group vote for the changes they think will better them and the system gets more bloated and more complex. If people keep pushing this tax agenda they will eventually get what they want and when they get what they want they will have to face up to the consequences. Somehow I think they will not accept responsibility and will lay blame elsewhere.
pfffft to that. The more property investors regail against a land tax the better it looks to me and it would sort the sheep from the goats as far as Chinese are concerned>>>>>>>
“Creating wealth, security and financial freedom is often an investor’s ultimate goal. 90% of millionaires get there by investing in real-estate”
New Zealand has strong population growth due to its progressive immigration policy and birth rates. Many parts of the country are experiencing housing shortages translating into strong tenant demand and price growth. This trend is expected to continue with recent population projections by the New Zealand Department of Statistics forecasting up to 64% growth over the next 17 years. *Auckland city is predicted to almost double its population in the next 40 years. * For property investors, this represents outstanding potential growth in demand and return on investment. New Zealand’s property prices are also relatively undervalued compared to its closest neighbour Australia.
*Someone has prejudged the disctretionary decisions of our politicians.. as in somebody knows something! And this kind of thinking makes me (and others) believe that the continual inflow from the elephant China will keep prices in the mouse (NZ) hign for a long time. .. So Matts bubble analogy is irrelevant.
From Neville Bennets article:
A useful quote comes from Thomas Jefferson, one of the drafters of the American constitution
Another means of silently lessening the inequality of [landed] property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise. -- Thomas Jefferson
I think a case could be made for a light tax on rent: the great earlier economists believed so.
Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them. -- Adam Smith
With the editors indulgence, I will write further on land in economic theory to stimulate debate on our predicament. I will particularly address the thought of the great John Stuart Mill who said:
"When the sacredness of property is talked of, it should always be remembered that any such sacredness does not belong in the same degree to landed property. No man made the land: it is the inheritance of the whole species."
But I think we need to go further and increase community control of land. My text will be from J.S.Mill:
“The land of Ireland, the land of every country, belongs to the people of that country."
However, if this is the case right now it is not the result of foreign buyers – it is the result of the chronic underbuilding that has haunted Auckland since the collapse of the finance companies.
A bubble in house prices should stimulate house building and actually push rents lower – but it is the lack of a supply response that has made housing unaffordable.
In that environment, affordability has become a real issue in Auckland – and one that should be dealt with by looking at issues of supply, rather than trying to arbitrarily blame people like the Reserve Bank and the tiny market of foreign investors.
.............
Looks like provision of infrastructure (who pays) is the sticking point and that begs the question: why have such high immigration if it isn't increasing percapita GDP?
Matt?
Overseas buying only accounts for between 5-6%, so not the real reason for house prices out of sink in Auckland. The council fees and 30% overpayment than Australia on building materials is our main concern. We need reform at Councils to allow easier and cheaper building and we need competition for cheaper building materials. Additionally when our currency becomes significantly weaker then this is the time when we would expect more foreign buying of NZ property and land since they would get a better deal on the exchange rates.
Buying NZ property is a great way for a foreign investor to convert a "fiat money" balance to a tangible asset. This form of "land banking" offers them a lot more security than having a bank balance sheet with numbers on it.
The lessons being faced by Cypriot savers is not lost on other savers/investors who seek to convert their bank balances to real assets. NZ real estate looks good to them. Very few New Zealanders have access to the level of finance that is required to outbid wealthy foreigners.
Why should we care about New Zealanders who now feel they will never be able to afford their "own piece of dirt"?
Because we should. That's why.
And to those who bleat that this problem is about lack of supply I say look closely at the mantra of people like Len Brown who basically says this:
"I want Auckland to be the most livable city in the world"
(translation: "I don't realise that Aucklanders already LOVE their city as it is - I want to change it into somewhere that wealthy foreigners want to buy property")
"We need more foreigners to create a greater concentration of people around our public transport infrastructure"
(translation: " I don't realise that everytime I bring in a foreigner to help pay for the infrastructure that means we have to build more infrastructure")
If these ninnies don't understand that Auckland is already quite big enough, and already a magnificent place to live, then their "we need growth" mantra will just make us more like Los Angeles, and turn Auckland into a less enjoyable place to raise kids.
Matt - you made the following statement...... "Now I recognise that there are a group of people who merely dislike the sale of assets to foreigners because they are either a closet racist, or simply xenophobic."
What a load of BS........what a limiting attitude and belief. The fact that you think that people who don't want foreign ownership of assets fall into only two categories and that there can't be any other reason is stupid.
An individual is only as wealthy as his/her asset base. A country is only as wealthy as all the individuals who live there regardless of their ethnicity.
Do you not understand real wealth, real assets and the ability for those assets to generate real income. An economist might see the price of everything but that is only one part of the equation. The real value lies in the ability to generate income from the asset that is the ongoing income which if an economist were to value this potential then they would perhaps understand that it is the most important component.
Your articles show a clear lack of understanding on business mechanics and maybe this is the problem with economists.
If you used a simple multiplier effect on the economy of when assets are owned by residents vs off-shore ownership and looked at all the components including the repatriation of profits to off-shore owners you will find that there are substantial benefits to NZ.
The price of assets going up is currently not in line with earning potential. The differences between fundamentals and technicals creates market distortions which end up being funded by locals when things go wrong.
To say that people are Xenophobic when they are being competent in the market place is extremely misleading. It is an appalling accusation against the people who make up the mixed culture of citizens and residents of NZ.
Economists should come out of the closet and admit they have no skills in business and accountancy.
Aer you saying, then, that the fact that an asset is capable of generating future income means that it is always a mistake to sell it?
Even if (say) its future income was expected to be $100 per year and you were offered a price of $1000000000000000 for it?
If foreigners are paying prices for assets which are not in line with their earning potential, then it's more fool the foreigners and good for the New Zealanders who are acquiring money which they can then use to acquire other assets whose earnings potential is more in line with their price.
The fault in Matt's logic, and why I agree with notaneconomist in at least at a national level not selling net assets, is the effect on the exchange rate of selling those assets.
Assets are sold or mortgaged against using foreigners' money; that money buys NZ dollars to complete the transaction. In aggregate those net transactions lift the NZD, giving all other NZers, and our potential customers, key price signals to buy foreign goods and services over NZ ones all else being equal. Until all the money is blown by NZers (who may be different people to the one actually selling the asset). Then we end up with no assets as a country, and have blown all the money. The fiscal multiplier in a fully free economy like NZ is zero.
This is why selling the power companies will inevitably just be a free gift to foreigners.
Matt fudges it by saying this effect is transitory, but am sure he fully knows that the effect has been embedded as long as we have fully floated the currency, with no counterbalancing controls or actions. The current account deficit for forty years is the proof.
To stop it, the Reserve Bank needs to act; Mr Wheeler clearly understands this in talking about the NZD being overvalued by 15%; but he can't quite bring himself to do enough about it.
"Even if (say) its future income was expected to be $100 per year and you were offered a price of $1000000000000000 for it?"
If you are ever offered that much for a $100pa asset, there are three things to consider:
1) the person making the offer is a psych patient and you should not consider their offer genuine
2) the asset is not making much money because it is far too precious to offer up to a money-making role (eg: your one remaining kidney)
3) There is rampant hyperinflation and the price you are being offered simply reflects the ridiculous "lack of value" your currency currently exhibits.
In all these cases it's probably better to hang on to the asset until the market returns to a state of sanity (or you are 10 minutes from expiring and no longer need that kidney...)
MdM - I don't believe that it is correct to look at only the asset price benefit of a sale as this only one leg of any deal.
The income produced from an aset is part of the equation.
The tax that can be generated from the income of the asset.
The tax liabiilty on all other tax-payers of NZ when assets are disposed of off-shore.
The tax liability has a few arms and legs with consequences to all NZ'ers when assets are owned by off-shore entities. Off-shore asset owners may be contributing to the GST tax take if there is a business model operating behind the asset. However little to no income taxes are contributed to our system which burdons the rest of NZ'ers.
Every NZ should be highly concerned by the tax liabilites that any Govenment spending has on their personal pocket either now or in the future. There are every individuals personal books and then there are the Governments which are every individuals liability.
There are broader issues that affect the economy when profits are repatriated etc. Or when off-shore money enters our system.
Your example of an asset being sold for $100000000000000 with only the potential for a $100 income is an extreme when the asset price paid is completely out of line with income able to be achieved. I would however point out that one should consider your extreme situation as there could be serious tax liabilities from such a transaction on all NZ'ers from such an extreme if losses where claimed under the NZ system.
Assets whether tangible or intangible are basically pieces of paper with a valuation.
It is what is able to be achieved from that piece of paper that is important and has effects. The buyer, the seller, the Government and all Government organisations, the banks etc are all trying to obtain some benefit from that piece of paper (the valuation) and each benefit to the entity concerned has an effect on the entire economy it is only the proportion of benefit that differs.
Benefits can be positive, negative or neutral but all have an impact. In the case of off-shore owners having assets in NZ even though the asset may not be achieving any income profit there could be negative GST implications (cost of inputs higher than output) however the overall tax position has to be viewed as losses on assets in NZ could be having a benefit on other tax liabilities in the country the off-shore owner is operating from. Off-shore owners tend to use a countries tax system to their advantage claiming their losses but not paying their share of taxes on profits.
Could somebody who knows about tax talk us through this example please?
An American living in New York buys a flat in Ponsonby from a New Zealander. He rents it to an American couple. He then sells it to another American who also lives in New York.
What tax is payable on each transaction; and how would it differ if all of the Americans were instead New Zealanders?
AJ- correct but there are certain advantages to US and other citizens as Kimmy has mentioned below.
Also the other issues that gives an advantage is the off-shore investor who can claim all expenses of travel etc on their down-under holiday while attending to their investment here.
Corporates like Google and FB have not contributed to our income tax take or that of their own country. There are certain rules that can be used that offer significant advantage.
There is also no cross-sharing between IRD and other countries tax authorities.
For example the IRD cannot enforce an Australian investor in NZ to supply their Australian tax information. A relevant section in Australia's tax legisalation provides a nice little outer.
I know of several large Australian property investors who love skiing and hold property in some of our best ski resorts. The pop over frequently throughout the ski season all tax deductable in Australia. They contribute no taxes in NZ. The can ensure neutral to negative obligations to tax authorities on both sides of the Tasman on that business while achieving a their lifestyle goals.
Thank you for your time - Dammit, I should have used a different nationality, sorry - the unique US practice of taxing its citizens wherever they make their money has confused this example. Let's make all the foreigners Brits instead.
The price the first Brit is willing to pay for the property should take into account his expectations as regards future income, tax liability, profitability fo future sale etc. What about the money paid to the original NZ owner - does no benefit accrue to NZ from that?
When you say he can accumulate losses and so avoid tax if he does become a NZ tax resident - What if he makes a profit? And can't a NZ investor also avoid taxes by making losses?
Do NZers get similar advantages if they buy property pverseas?
I'm no expert or CPA, but know; If an investment property you're allowed to write off from IRD taxes any expenses incurred for maintenance etc, no matter where on planet. So it obviously makes sense to own in same place where you regularly holiday (if applicable).
MdM - you have asked if there was any benefit accrued to NZ from the money paid to the original owner.
The answer in short is no there is very little benefit. I looked at this from several possible scenarios.
Money deposited in the bank, into a business in NZ, into bonds, into a foreign purchase etc and there is little benefit.
Depending on the type of business invested into in NZ there are variable outcomes with low benefits obtained.
MdM - You don't want to concentrate on what is taxable you want to concentrate on what is tax deductable for foreign owners of NZ assets in their country.
NZ is viewed as a great place to invest....WHY? Because we are viewed as a stable Government and country. Investors don't have tax obligations on earnings here.
The off-shore investor can obtain the luxury of tax benefits that there chosen residency country can provide.
Once you have an investment in NZ you can quite easily apply for residency here and many use it as a steeping stone to access Australia once they have obtained citizenship.
If your have come from say India but never lived there you automatically qualify for Indian citizenship. You can also deposit funds in India and get a pretty good rate of return.
NZ has opened up it's economy and all assets rather than the Goods and Services that many other countries trade have been exposed without the necessary abililty to capture profit income derived from those assets.
That is why I stated that Matt and other economists seriously lack the skills of business and accountancy in the real market place.
MdM - I would add to what AJ, Kimmy and what I have already written.
The American can also deduct all interest cost on the house in Ponsonby from the IRS.
While NZ PI can claim interest costs against income ordinary home buyers cannot.
Homeownership is a good thing but living in your own home vs renting it out should be looked at.
Renting your residence and operating your business from these premises. While being a landlord to the house you have purchased would appear to offer advantages.
Hey Matt
Some pretty bold statement made there. Would you like to elaborate on Kiwi Rail as an example of foreign investment?
I think you don't quite understand the depth of selling land etc to foreigners. Do you think the Chinese will ever sell the land they buy here? No it's now china land and they are planting the flag here mate, you're just too blind to see it !!
There is such a thing as strategic foreign investment happening where china is wanting to secure its future food supply. They have a plan my friend - to control product from production to marketplace - NZ only benefit would be a few farm worker or factory jobs - and they will probably bring in chinese labour for that too as already happening in NZ we import phillipino workers for the dairy industry.......
So my question for you and challenge......what long term benefit do we have of selling our farms to the chinese? is this all free-trade happy partnerships? you seem naive
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