Today's Top 10 is a guest post from David Whitburn who is a professional property investor, property development consultant, author, immediate past-president of the Auckland Property Investors’ Association (where he's still a board member), and proud father of three young kids. David is also co-founder of Fuzo Limited, an infill housing company.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.
See all previous Top 10s here.
My top ten focuses on property issues, asking whether we should present house price data in price bands rather than averages or medians, talks about why we don’t need to broaden the tax base by taxing capital, but asks whether we should instead have a bright line test to tax property speculators.
I then question if we should raise the retirement age, talk about the exceptional drought in the western USA, and explore an endorsement from All Black great Dan Carter for the National Party as accidentally prompted from Internet Mana.
1. Perception is reality. Are house prices really rising?
The Loan to Value Ratio (“LVR”) restrictions that took effect on 1 October 2014 have had an immediate effect on the market.
However this is not recorded by either the REINZ Indices which use median house prices, or the Quotable Value/Property IQ/Core Logic data which use averages.
The reason is the LVR restrictions hammered the bottom third of the market where first-home owners have traditionally dominated the sales, as well as newer property investors that needed to borrow at higher LVRs.
When comparing the period from October 2012 to June 2013 prior to the LVR restrictions starting, with October 2013 to June 2014 with the LVR restrictions in place, you can see a fascinating trend when sales prices are put into bands.
The volume of sales are down a massive 19% in the sub $400K price bracket, and down 4% in the $400 - $600K bracket. These figures do not cover a small number of pre-approvals at higher LVRs which were honoured, so the impact may be greater when this graph can be repeated next year. Conversely there is a healthy increase in volumes in the higher price ranges.
There is a 9% increase in the $600K to $1m price range, and a 28% increase in the sales for the same period in the over $1m price range. Let’s show the brackets like this from now on.
Source: REINZ, RBNZ C16 Housing Loan Approvals, ANZ Bank
While house prices appear to be increasing, and of course the median and average house prices are increasing, data like this should be reported more without having to say there is a world of pain for those, particularly in the regions, with houses on the market for over a year sub $400,000 that no-one wants to buy.
The prospect for thousands of these people is more interest rate rises, and maybe higher taxes for good measure in the event there's a change in Government.
2. Volume of sales down from the LVR restrictions
RBNZ Governor Graeme Wheeler stated last year the aim of the LVR restrictions was “to help slow the rate of housing-related credit growth and house price inflation”, with the ultimate goal of “reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy”.
The Governor has got what he wished for, despite huge immigration into NZ. The RBNZ’s analytical notes on how the LVR restriction affected the housing market,: a counterfactual analysis published in May 2014, sheds light on what has happened with house price inflation running 3.3% lower, and household credit growth 0.9% lower at March 2014.
Home loan approvals across the board are down, making life tougher for many mobile mortgage managers and brokers:
Source: ANZ Bank
The LVR restrictions are clearly having a massive effect on first home-owners and property investors. I would have preferred to have seen the Reserve Bank implement a hybrid of the Loan to Income Restrictions as the Bank of England has done at a lending multiple of no more than 5 times annual household income, plus LVR restrictions eased to a maximum of 85% to a maximum 10% of a bank’s new lending for residential property purchases.
3. The Tale of Two Cities
No it’s not Auckland and Christchurch this time, although much of the same report could be written about these two winners, although much harder on some of our regions that are really struggling.
Sydney and Melbourne are performing extremely well with their median dwelling prices up 14.8% and 11.0% respectively (and no LVR restrictions to complicate data).
Future Estate’s Residential Property Market Overview and Outlook provides some interesting reading and raises some interesting comparisons to NZ. For those without their green and red blinkers on, you will see that capital gains tax (which is in place in Australia) obviously doesn’t stop significant house price inflation.
4. Do we need a CGT?
Patrick Flannery, lawyer and taxation lecturer at Massey University wrote an excellent article published in the NZ Herald last week asking whether we need a Capital Gains Tax or not?
He states how we don’t need a CGT and says:
- The effect of CGT would be limited
- It’s not a big revenue generator
- It will not fix the ‘housing crisis’
Worth a read.
I would have added that there is a real need to focus on cutting Government spending, and the idea that big Government is good. It is not working so well for the US right with over US$17,000,000,000,000 (yes over US$17 trillion) of Government debt, the NSA spying on their own citizens, FATCA legislation, nearly 50 million citizens in food poverty, significant under and unemployment.
The once great USA is not on its own, with other big Government countries in Europe like Spain, Portugal, Greece, Iceland, France and Italy joining them with their troubles.
It is too hard for an economy to grow sustainably when our Government debt to GDP ratio is around 35%. I believe we need debt to GDP to be 25% maximum, which is where it was for many years before the impact of devastating Christchurch earthquakes in late 2010 and early 2011.
This means we need a Project Fatburn in our country now, and cut down on the alcohol and sugar and focus on building muscle.
Having actuarial options and perhaps a choice to take National Superannuation between the ages of 60 (low weekly payments until death) – 75 (higher weekly payment until death) is a good start.
5. The great political lie – property speculators aren’t taxed
There is an outrageous lie right now being perpetuated by many in the Labour and Green parties in saying property speculators and traders are not taxed.
Many (but sadly not all) are taxed and so they should be.
Just like a café owner buying some bread and adding some fillings and wrapping these up and selling these at a profit and paying tax on it, a property trader buying a house, repainting the house, replacing the carpets and modernising the kitchens and bathrooms and on-selling it at a profit, tax is payable on it. Speculators buy and sell for the short-term. Investors buy and hold for the long-term. Lumping investors and speculators in together as Labour finance spokesman David Parker and leader David Cunliffe do is wrong, and scores short-term political gains only.
It may be an inconvenient truth that section CB 6 of the Income Tax Act 2007 states:
Income
(1) An amount that a person derives from disposing of land is income of the person if they acquired the land—
(a) for 1 or more purposes that included the purpose of disposing of it:
(b) with 1 or more intentions that included the intention of disposing of it.
Exclusions
(2) Subsection (1) is overridden by the exclusions for residential land in section CB 16 and for business premises in section CB 19.
Simplistically, the main exclusions are for owning and residing your own home in your personal name, or as a beneficiary of your trust.
6. The solution to the great political lie – introducing a Bright-line test now
What needs to happen is that we need to have a legislative test that gives far more certainty than “intention”.
This wording is hard to prove for the good people at Inland Revenue. The Government should look hard at giving certainty to clearly delineate a property speculator or trader, from a property investor.
I believe that this will catch more revenue than introducing a CGT. The reason is the line would be drawn 10 years after taking an equitable interest (going unconditional) on a property.
Anything sold for any reason (including serious illness) would have income tax and GST payable on the gains, and conversely losses would attract refunds.
I expect I'll get some criticism from property investors with shorter term horizons for having a long length like 10 years as opposed to say, 3 years for drawing the line.
However short-term gains are a business activity and constitute income, therefore they should attract tax as one of the consequences of having a property dealing or speculation business.
Long-term property investment provides solutions for those choosing to rent, and for the over 25% of New Zealanders with credit ratings so impaired they will not qualify for a bank loan who have to rent, will be valued and rewarded. These property investors are patriots of New Zealand, and greatly ease the burden of all taxpayers in propping up Housing NZ and the third sector for the provision of the fundamental human need of shelter.
Without a big army of property investors we would have tax increases all round, and even bigger Government paying several more billion dollars annually for housing to support our growing population and our great nations’ poorest and most vulnerable people. This big housing experiment didn’t work so well for Greece, so I wouldn’t expect it to here.
Bright Line Test > CGT
Capital should not be taxed, it doesn’t need to be and should not be as those risking their capital in an investment can lose it all.
Seen it with a significant number of members of the Auckland Property Investors’ Association in the last downturn phase of the property cycle (2008 – 2011) and I’ll see it next cycle.
Debt is a double edged sword – works well in a boom, but can be very dangerous in gloom. To say just because other countries do it means we should is not only lame, but appeals to the politics of envy – “Paul and Ting Wei have assets which can go up in value, so let’s tax them, so we can pay less whilst they subsidise our consumption”.
Do we really want to be like Greece, Spain, Italy, Ireland, France, Portugal etc who have a capital gains tax, or follow the discredited and largely useless IMF with their November 2008 predictions of global growth of 2.2% for 2009 when it was obvious to virtually everyone else that we were in the middle of the storm with the GFC and going to see the negative growth we saw?
Do we want to copy human rights laws in middle-eastern countries, and the treatment of homosexual people as criminals in Africa? No, of course not.
We are proud of our independence, who we are as Kiwis, and maintain the right to be our own country with our own laws.
7. Raising the retirement age
There has been little made of the inadequately low retirement age we have in New Zealand this election, with the left wing happy to talk Dirty Politics, and right wing happy to talk about burning effigies of John Key, %*^k John Key parties, and how Labour leader David Cunliffe has been endlessly mocked for being “ashamed to be a man”.
We are living a lot longer than we used to with lifestyle improvements, and massive and costly improvements to the Government in healthcare and pharmaceutical technologies.
The retirement age had to go up in the 1990s from 60 to 65, and now in the 2010s it needs to go up again. The Dominion Post has a very good editorial on this. This sets out the ability of the typical 65 year old today as opposed to them a few decades ago. We are living longer and from having 650,000 Kiwis aged over 65 in the 1980s we are likely to have over 1.3 million Kiwis aged 65 and over in the 2040.
Who is going to support them?
Will it be KiwiSaver if it is universal as many banks, the Labour and Green parties, powerful financial service providers and their lobby groups want? Will National Superannuation still even be there in 2040?
As an extra for experts have a read of the University of Auckland Business School’s Retirement Policy and Research Centre Working Paper: Now We are Six – Lessons from KiwiSaver.
8 Droughts in western states of the USA raise food prices
There are some sharp increases in US food commodity and crop prices. Some of this is not helped by an exceptional drought in California, a leading agricultural state. The Washington Post last week stated the problem well. The result of the weather, combined with increased demand for water, is water rights have been slashed with aquifers shrinking. These can take decades to recover.
This is a historically awful drought impacting 12 states and well over 500 counties, ranging from southern Texas to the northern Rockies. Crop and commodity prices have soared in recent months as this gigantic area covers half of the USA’s fruit and vegetable produce, wheat, and one-third of the country's beef.
The other impacts include a direct cost to agriculture of US$1.5 billion to date (revenue losses of US$1 bln and US$0.5 bln in additional pumping costs). The state-wide economic cost to California is $2.2 bln and counting.
To date there have been over 17,000 part-time and seasonal jobs lost, adding to under and unemployment figures, which the State of California has in common with too many in the US right now.
With over 46 million Americas in food poverty and dependent on food stamps, this drought doesn’t help. Some 428,000 acres of irrigated cropland is going out of production in California’s Central Valley, Central Coast and Southern California due to the drought.
9. Dan Carter on Twitter: National 1 vs Internet Party 0
There has been a bit of excitement from the young anti-establishment revolution led by leading DJ Kim Dotcom and his latest acquisition, the Internet Mana party, led by hard core trade unionist Laila Harre, who is threatening to sue John Key for accusing Internet Mana of involvement in the John Key effigy burning with matching ‘F*^k John Key chants’.
I had to have a laugh at the Internet Party for their social media fail on Twitter. The Internet Party on Wednesday last week pestered legendary All Black Dan Carter on who he is voting for:
Nice cheap shot at the end to help turn a few more rugby fans against the Internet Mana party. Surely the Internet Party is actually internet savvy and should know how to use basic functions like Google and Twitter searches. They may have been better to see John Key opening one of Dan, Richie McCaw, Kieran Read and several other All Black’s and Crusader’s retirement villages in which they are shareholders, or realised what a fan of rugby John Key is, and with a simple Twitter search they would seen our Prime Minister’s congratulations to Dan and Honor on their child’s birth.
Internet Mania may have been better to ask if hard-hitting blindside flanker Jerome Kaino had changed his voting preference a bit further left since last election.
10. The Mountain, Teide National Park, Tenerife
Now for a change of pace. Embedded below is one of the most relaxing videos ever, as taken from the Teide National Park, Tenerife in the Canary Islands just off the coast of southern Morocco and Western Sahara. You will be amazed at the beautiful scenery.
The Mountain from TSO Photography on Vimeo.
12 Comments
Bright-line test , a great idea. It could immediately generate income on any sale of a property bought as early as 2004 and therefore capture tax on the boom period. Tax at a rate without any inflation discounting is justified because the investor has had the benefit of 'use of money' for the period and in most cases the use of the bank mortgage money as well.
Do not bleat about retrospective taxes either!
#4
On what basis do you call USA a 'big government' country? Their tax take is 25% of GDP, compare with our (and spain and portugal and greeces) 31%.
You seem to be basing it all on government debt. Then there's a certain trusim in saying these countries have troubles (recession, austerity, deficits leadign to large govt debt) and the reason they are in trouble is they are 'big government' and we know they are big government because they have large govt debt.
There's plenty of 'big government' countries doing well, and plenty of 'small government' countries doing badly. Does that mean we should rack up more debt here in NZ?
#6
Once again, totally selective list of countries with capital gains taxes. You are suggesting spain is in trouble because it has a capital gains tax, where is your evidence for this? Plenty of countries doing well that have capital gains taxes.
#4: option to take NZS at any age between 60 and 70, subject to actuarial adjustments.
(A) To make it an attractive option to delay collecting your pension, the Goverment will have to make the pension more than you would have got if you'd collected it from age 65 and stuck it in a savings account to spend later, which is an option you already have. You won't have to live long past 70 to end up costing the Goverment more overall.
(B) Suppose you take a lower level of NZS when you're 60. If you die before you're 65, you have cost the Government more than you would have before, so where's the public saving benefit in that. If you live a long time, you may cost the Government less overall than you would have if you'd taken the higher rate at a later age - but at the expense of a long old age in poverty. Is this really a way in which we want to save public money?
Further to your point B. I would think that people taking the pension early would be self selecting based on their current health and family history. So people with major health problems will start collecting at 60 where as healthy people are likely to wait til 70 and end up getting paid out more in total.
So the result is likely to be an increase in pension payments anyway. (all this assumes people are rational about their health of course).
We could just raise the pension age to 67 but no doubt John Key will see that as a smear campaign from the left.
Tiresome discussion of property here. When did property become exclusively residential? Why are residential properties only portrayed as an object of speculation or investment?
Residential properties are homes for people. (Note the full stop). Sadly, It has become the default repository of lazy money stashed by the timid and dimwitted to the detriment of those seeking a roof for their family unburdened by the shackles of the rentiers.
Go ahead and speculate all you want by building houses for sale at a profit and invest in commercial property to your hearts content. But ownership of your own home should be the limit of your residential land banking allowance and exemption. Subsequent residential property could be taxed on any gain on a reducing scale from 90% down to 0% over 10 years to deter the speculators and force the "investors" to treat it like the business it is.
I accept there is a place to earn a living by providing accomodation to those whose circumstances are best suited to renting. But I despise the notion that some in our society seek only to effect the transfer of wealth to themselves from others by taking hostage the need for shelter. Would you auction off food to those who had none?, or would you just set a fair price for all?
Your argument against a CGT seems to be that it won't collect much revenue- maybe that is so, in which case I'm not sure why you and others seem passionately against the idea. It would level the field of most income, even if the family house is excluded. You rightly quote Melbourne and Sydney as success stories. They have had a CGT since I think the late 80s.
Just maybe your particular business model is under some threat. Good landlords would still find a reasonable return, although there may be a bit of adjustment as capital gains themselves dropped back to more sustainable levels.
I'm not sure Labour and the Greens really plan on spending a lot more than the Nats; e.g. less on roads and more on public transport. The Civil Service is at an all time high now. Higher minimum wages and therefore less on Working for families under Labour. They had a history of surpluses; the Nats have had constant deficits. It's not entirely a GFC thing. The US under the Republicans had massive deficits, which Obama has tried to bring under control. Under Bill Clinton there were surpluses, and a booming world economy. dtcarter above also points out that the US is far from a big government economy; and if you took the defence bit out of their budget it would be smaller still.
Labour/ Greens are clearly keen to promote the productive economy over the property economy that we have now, and if you are heavily in the property bit, then I understand your preference.
A CGT is not a tax on capital, it is tax on the gain in the capital value of an asset. I.e really no different to the interest on an investment. Should the work input to increasing the value of an asset be treated differently to any other work? I dont think so.
But it should not stop there; the inflation portion of the interest on a mortgage or comercial loan should not be tax deductable as it is now, because the borrower is benefiting as inflation effectively pays off the loan. (you would have to ammend the CGT to apply to the inflation adjusted asset value.)
Finally, any government has a fundamental responsibity to vigorously ensure that all markets are free and competative. The supply of land and building materials are anything but at the moment, If they were, we would not be having these problems with property values and the competitive market would ensure housing is supplied at minimum cost. House prices would be stable and affordable as with any other product we consume.
It's isolating the "gain through work" and "real profit from capital increase" that's the hard part. A bit like when you ask a real estate agent for a price value of a property it's $X...then when you ask them to sell it...suddenly it's worth far less than $X
and what you say about government is entirely unsupported.
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