By Bernard Hickey
Just over two years ago I spoke to a group of Waikato property investors at an evening meeting about economics and investing.
I mentioned in passing that some other people chose to invest in shares in growth companies rather than the two bedroom brick and tile flats they were more familiar with.
I mentioned a then little-known business software company called Xero that had listed on the NZX in June 2007 after an initial public offering at NZ$1 a share raised NZ$15 million.
The audience's response was contemptuous. There were sniggers. There were chortles.
"It's never made a profit and never paid a dividend," said one. "The stock market is a rip off machine," said another.
There was little appetite that evening for anything other than highly leveraged investment in property where the interest costs could be offset against income and the capital gains were tax free.
It was actually hard to argue against their logic that night.
Our tax system and banking systems work together to make leveraged property investment a much more rational decision for individuals than investing in term deposit accounts and stocks and bonds.
It's the reason why most wealthy people will tell you privately that they made most of their money via the tax-free gains from leveraged property and not from their business interests.
It's why Parliament's register of pecuniary interests last year showed our 121 MPs owned 292 properties and 60% had interests in family trusts that owned many more properties.
Yet, just quietly, this structural bias in favour of property investment and against long term investment in other savings vehicles is even beginning to sour around the corridors of the Beehive and in the ministries up the Terrace.
The housing affordability crisis in Auckland, a fresh burst of leveraged property investment and the resulting limits by the Reserve Bank on low deposit borrowing have focused hearts and minds around government.
Politicians can feel the anger building, particularly among those of a younger and aspirational view that values home ownership.
The young and the poor are now pounding against the gate, demanding to let in to share the spoils.
The opinion polls in Auckland are telling the Government to change track.
The mood is shifting on the issue of tax incentives for saving in vehicles such as KiwiSaver funds, which are growing fast and pumping money into New Zealand's broadening and rising stock and bond markets, but which remain deeply disadvantageous for savers relative to rental properties.
That's where Xero comes in. Back in July 2011 when I talked about Xero with the brick and tile owners it had been on the stock market for four years and its shares were trading at just over NZ$2.
This week Xero's shares nudged the NZ$19 mark as it announced a near doubling of revenue and customers.
It has still to report a profit, but the early grumbles about profit and dividends have faded away amid the celebrations over the rise in its market value to more than NZ$2 billion and hopes it can become a global small business accounting giant in the cloud.
Most importantly, Xero's staff numbers rose from 41 in 2007 to 584 and it has a real shot at massive services export revenues.
This is the sort of investment New Zealanders need and our tax system should encourage it, not discourage it.
I may not ever be able to convince those property investors there is another way, but I hope they will think twice before dismissing the next Xero with a snigger.
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This piece was first published in the Herald on Sunday. It is used here with permission.
15 Comments
It is time that welfare and tax reforms reach the housing sector. Taxation should favour, heavily, people who own and live in their own home. Maybe owning one or two houses over and above your family home could be less onerous, taxation wise, and WINZ top ups need to be regarded for what they really are - welfare for landlords. I believe that one shift in attitude will very quickly sort the market out, if landlords had to be part of the application for WINZ support to pay the rent, what other benefit gets paid out to foreigners?
Housing yourself is a primary NEED, not a nice to have, so I disagree with you entirely. Buying a home should not be regarded as an investment just as you don't regard buying groceries as an investment. That is why a taxation system needs to FAVOUR the owner of the family home not disincentivise them. Trouble is you landlords only look at houses as numbers, for the people who live in them, they are not.
Your arguments are totally flawed. Property investors do outbid homeowners, and did so to us. The property we were bidding on two months ago had two bidders, us and a property investor. We were outbid, the winner has done a quick reno on the property and it is now on the market again, and they are expecting to sell it for $200,000 more than they paid for it. This particular speculator has spent money on kitchens and bathrooms, so I don't get what your point is there. Property investors and speculators win over home owners time and time again and are bidding any property with a bit of land attached to it. If you have a close look at the unitary plan though, those who bought in old Auckland city will be finding their development potential has been reduced by the latest iteration. West Auckland is the place to buy now if you want to develop apartments, terrace houses and high density. All the nimbys in old Auckland city and the north shore made sure their areas won't get changed. I'm sorry but speculation is causing this property bubble, and causing wage slaves and first home buyers to take out ridiculously high mortgages. Median house price in Auckland is $600,000 vs median household income of $90,000. This does not make sense.
The irony and lack of self-awareness in your first sentence is delicious.
Of course people looking for somewhere to settle and bring up a family have more at stake than a speculator or investor. To put it in an analogy, they're somebody looking for a life partner to have children with and grow old with. You're a pimp looking to add another hooker to the stable so you can parasitise on her hard work.
Well that's where you're wrong ZZ, the nimbys would much rather have proud homeowners than slum landlords for neighbours. With all these investors buying up all the prime real estate in Auckland they may lose their value over time. It will be the less affluent areas that are affordable that slowly gentrify over time as homeowners do them up. And with regards to the self centred comment, what is all that about? Of course parents want to do the best for their kids, we didn't create the school zoning system, but is a major consideration in home buying decision making. All the evidence points to speculators driving the market and your arguments are most definitely flawed.
I think it would be far better to remove the deductability of interest from tax and impose GST on rents and property to rebalance our taxation system which has historically favoured property. At least one could make an argument in its favour on the basis of equity. There is no justifiable reason that they be exempt, which only skews people's investment away from more productive investments. The taxation system shouldn't pick winners or favour one segment of economic actors. I guess in the old days, it was a means to recompense high salary earners for their absurdly high tax rates without the need for the government to cut taxes and thereby lose revenue.
The extra revenue could be used to fund the construction of social housing and the provision of rent to buy house ownership schemes.
A CGT which is a form of tax that is collected at the point of time when the capital gain is realised, it will only discourage home owners from selling, especially since its specifically targeted at house sellers. Fewer sellers, higher prices. A land tax will hit cash poor folks like retirees the heaviest. The economy won't gain anything should the retiree have to sell their home to pay a lax tax and then be forced to rent another.
Where we are in agreement is our shared view that the Reserve Bank needs to stop its absurd fixation on wage inflation and housing bubbles. Its interest rate policy only succeeds in precipating damaging downturns and provoking gyrations in home values, which only deters developers and builders from increasing the housing stock, because they are the ones who need stable pricing most of all in order to make credible ROI assessments.
How can you blame people for wanting to invest in property? When you invest in property you are accountable. If your investment fails it is you (and your bank) that pay the price. People can accept that.
When you invest in shares and finance companies and bonds you put your faith in the hands of Directors and managers of those companies and they are paid handsomely for that responsibility.
However when they fail we have seen our pathetic legislation gives them a slap on the wrist. An example being, Sir Doug Graham getting 200 hours of commnunity service or home detention served from a mansion in Remuera. People can't accept that.
Unfortunately too many people have learnt the hard way and now property is the only solution.
If the numbers are about right, nearly half of Auckland homes are rentals. My question is that if thi is so, do investors turn over property in the same way that owners do-? I think that capital locked into houses can just sit there and that this is the reason that the supply of property for sale is such a problem. These investors do not 'move housse' get a new job or divorce. So the trunover is gone form the market. Real estate agents used to talk about the three Ds Divoice, Death and D'bank. That was what they thought generated turnover. Now with so much of the market locked down in the investor market- it is this that has greatly effected supply. Is this just completely obvious or is there something else?
I did buy in early and sold a couple of dollars back, I was aware of zero a few years prior to listing and they have been fortunate enough not be stomped in their market as accounting software is not a highly competitive and actually the market evolves very slowly in the SME space.
In my opinion the Governance has moved way to slow in this market and if one of the big boys turns to the market they will be stuffed. They have been lucky todate but they suffer the same problems like most NZ companies.... hardly experienced & stella connected managment to realise the potential. They have been at it now for a long time in tech. terms
Zero being held as a golden example really just speaks volumes for the lack of real enterprise based companies on the NZX.
That is why serious investors are not in there.Why not consider the returns to be had in property market in comparison.
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