Auckland’s revised Unitary Plan looks good – realistically up and out is the only way the supply bottleneck can be addressed.
But supply failing to keep up with demand is not the underlying long-term illness that afflicts our property sector.
It is a periodically a source of ultra-stress but not the chronic, decades-long problem that has driven the house price-to-income ratio to giddy heights.
That issue remains – it is over-stimulated demand.
Unitary Plan aims to fix supply
The general thrust of the Unitary Plan is right – building far more houses than the Council originally planned, 2/3 by building ‘up’ in existing suburbs, 1/3 by sprawling out. This is a good result, particularly compared to the original Council plan; we’ve previously discussed how sprawl is a false economy. The plan isn’t perfect – there are some concerns about the removal of rules governing energy efficiency, cultural sites and affordable housing provisions. Still, on balance the plan is progress, so now the Council needs to just get on and pass it.
Now that there is a concerted effort afoot to increase supply of housing, this is a good time to also bring in policy that addresses the cause rather than the effect of this permanent excess demand. Through changes to zoning, the Unitary Plan should simultaneously reduce the price of new houses but also add a lot of value to existing land values, as they can be redeveloped for more intensive housing. The new houses that emerge are no longer houses with a quarter acre section, they are infill housing – and they will be cheaper, albeit only for a while. The temporary relief only underscores the need to address what keeps pushing house prices up relative to income – not just in Auckland but across the country, not just when there a population burst but decade after decade.
It’s about taxing housing and land appropriately.
The demand side
The demand for property remains higher than it need be, decade after decade because of regulatory bias and tax breaks that keep it that way. The political conundrum of course is how to correct this without (a) causing a property price crash and (b) alienating the property-owning class who are thriving from the wealth transfer this phenomenon bestows on them.
The Reserve Bank is slowly but surely addressing the regulatory bias than underlies its culpability for the housing bubble. The belated rise of deposit to value and loan to income ratios are a somewhat clumsy response, but better than the nothing the Bank has done since the financial deregulation of the 1980’s kindled the bushfire that is our property market.
Tax reform
However, equally responsible for this phenomenon has been the tax break that is conferred to property owners by not taxing the benefit they enjoy from ownership of the asset. And I don’t mean capital gains. The fact that $100k in the bank attracts tax on the interest income, while $100k in a property doesn’t do the same to the benefit an owner-occupier enjoys, is a distortion in our income tax regime. That distortion has long been recognised by economists and tax experts but is in the ‘too hard’ box for political leaders.
In other countries there are imperfect methods used to address the benefit of this ‘imputed income’. They include wealth taxes, stamp duty, inheritance duties, capital gains tax, and so on. None of them work properly, primarily because of the exemptions that are made.
Yet there are ways to solve this problem if the political will can be found. An income tax reform that included in the definition of taxable income, the implicit income that asset owners enjoy from merely owning assets would remove the incentive to buy assets in order to minimise tax. And the closing of this loophole need not result in one single dollar of additional tax being collected – because it could be offset by cutting tax rates.
It looks like there’s about $750bn of non-financial (so excluding deposits, shares or superannuation) assets owned by people in New Zealand, net of debt. So at a tax rate of say 30%, levied on a deemed income of say 5% on those assets, this is $11bn of potential income tax per annum that should be being collected. This is roughly 30% of the income tax collect so such a windfall could be totally applied to cutting income tax rates by 30% say.
Such a policy would neutralise the tax system when it comes to property investment, meaning that demand for property would be more akin to demand for accommodation, rather than as it is now, driven by the demand to exploit the tax loophole. So that makes it fair but it also makes it far more economically efficient – we wouldn’t have the bias in capital investment we do now, businesses would compete for capital on a level playing field.
Transition
Of course there are the transition issues to address. Where does the cashflow come from for those who are over-invested in low income assets to pay the tax? What about older folk who are the most grossly over-invested in property – how might they rebalance?
Neither of these transition issues should be show stoppers and certainly do not outweigh the benefits to the economy from fixing this problem. In time people will rebalance their investment portfolios so that they can bear the tax load on their imputed (or deemed) rental benefit. As they adjust to that position their tax could be deferred or alternatively the switch to the new regime could be graduated over a few years to allow portfolios to be adjusted – i.e.; the tax rate on this income could step up over time to the full rate.
As for the impact on older folk already over-weighted in property, they could either be grandfathered out or at least given a longer period than the rest of us to adjust, have the annual tax simply accumulate as a charge against their property without compromising their right to occupy (like a reverse mortgage) – or a combination of all three transition policies.
The main point though is that closing this loophole in the income tax regime is essential to aligning property prices with the demand for accommodation and finishing this orgy of entrenched capital gains that are nothing more than a redistribution of wealth to the property-owning class, exacerbating inequality and affordable housing.
Nobody wants a property crash. But the serious issue of removing the tax-driven, artificial stimulant of demand for assets is yet to be addressed. Now is the time to do that, as a construction initiative temporarily takes the heat off the market.
Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. This content was first published here and is used with permission.
57 Comments
why would those with investment properties vote to tax their gains, and I am talking MP's here not voting public.
until a party is in power where the majority of MP's are not effected nothing will change, if you have a look at the pecuniary list you will see national and labour MP's with numerous investments.
even the language coming from labour now is they do not want to lower prices
That's bloody decent work for 26 years old. Nice work it's really no small feat. I had only just about paid off my student loan at that age and had nothing. Which is about when I ragequit at the peak of the last property bubble.
Alas, something in that ballpark got vaporised by Brexit for me. Can't win.
Up until last week you could have bought an investment property in most towns in NZ, now with the 40% down payment rule you truly are priced out of the market, this is a huge unintended consequence for FHB's, as surly the 40% rule should have been for investors and not people like you, but this is what you get when you tinker with things that should be left to run their course...I have always maintained that your first house especially for aucklanders won't be in Ponsonby nor the house you would want to live in, hence why an investment house makes sense for a FHB
It will crash there is no doubt that common knowledge is no longer valid read this
http://www.salientpartners.com/epsilon-theory/when-narratives-go-bad/
2 possible starters - European banking crisis or china free currency float probably both, ......
is your 100k safe? Retail investors can invest in short term gov bonds
With $100k saved and a decent wage you don't need to move overseas, you can buy a house anywhere in NZ except Auckland. But if you want to move and buy a cheap house overseas, go ahead...
You can buy very cheap houses in Syria, Afghanistan, Ukraine, Turkey... see a pattern ?
Question as mentioned earlier and also in this article. Why is National Government not even talking about Demand side of the problem as if in economy it is only supply that controls the economy and demand has no role specially the speculative demand.
This government is out to butcher the FHB from Auckland, come what may so expecting anything out of National Government is useless.
More upsetting is, this government giving away NZ on a platter to China. This sentiment can be echoed thoughout, though many do not speak out openly for the fear of being termed as racist.
Winston Peter if play his card, this is the situation perfect for him, just like Donald Trump, his vote share should double or triple and will be the kingmaker provided he announces that will not go with national as the time goes by and national being arrogant, behave the way they are doing now will be at the receiving end despite support of the Rich to which this party represent.
I strongly disagree with Gareth's contention that the loss of affordable housing requirements in the UP is a problem.
There is plenty of evidence from the USA in particular to suggest at best they are a token gesture that achieves little, at worst they are counterproductive in terms of housing affordability, and an administrative burden..
I think Gareth should stick to his knitting.
To old people, after having lived extremely austerely saving hard for their home, the idea of a reverse equity mortgage forced upon them to pay either the huge rates bills that are now being levied or for this Morgan tax is like the proverbial "tucking into a plate of cold sick".
The demand for property remains higher than it need be, decade after decade because of regulatory bias and tax breaks that keep it that way. The political conundrum of course is how to correct this without (a) causing a property price crash and (b) alienating the property-owning class who are thriving from the wealth transfer this phenomenon bestows on them.
For some at best.
Richter describes the consequences of turning homes into a financial asset, combined with policies that have neglected job and wage growth. If you look at his chart, you’ll see a rise in home ownership during the stagflationary 1970s. That was also financialization of residential real estate. Properties were an inflation hedge, while equities were flagging.
Something happened on the way when the concept of “home” transmogrified to a financialized “asset class” whose price the government, the Fed, and the industry conspire to inflate into the blue sky, no matter what the consequences. And here are the consequences.
The Census Bureau, which has been tracking homeownership rates in its data series going back to 1965 on a non-seasonally adjusted basis, just reported that in the second quarter 2016, the homeownership rate dropped to 62.9%, the lowest point on record. Read more
Is New Zealand different?
Yes, yes, GM. All fine in theory.
But exactly how does this get translated into practice? By politicians. Who live to get re-elected.
It's the oldest conundrum in the book. Our august Gubmint wallahs Know all about this, and in their quieter moments, away from bloggers, cameras, fellow troughers and Opposition spies, will even occasionally admit that GM's diagnosis is perfectly correct: there is indeed a massive and systemic distortion in the tax regime.
But they also know that to a) admit this in public, let alone b) attempt to enact it, will condemn them either to Opposition (if they are really lucky) or to the outer wilds of the private or public sector.
So there we are sat.
In Perfect textbook Stasis.
Gareth's Big Kahuna idea of taxing property yearly at 5% is all well in good, but shouldn't it be at the prevailing bank deposit rate say 3%? and falling. Big Kahuna works at 5% but with returns on bank deposits and assets falling to zero it won't work. Reserve Bank to drop interest rates by .5% and not .25% on 11th August?
It would also tax the foreign property investors who otherwise get off scott free.
There still two other sources of income related to property that are not taxed.
1 The devaluation of the mortgage due to inflation. To this end the inflation portion of mortgage should not be tax free. Conversely the inflation portion of interest on deposits should not be taxed. This would encourage saving at no net cost to government.
2 The capital gain on a property over and above inflation. Say for instance I buy a run down property and do it up, rent it for 3 years (gets round the bright line test) , then sell it at a healthy profit over and above inflation. This profit could well be far more than what your 5% deemed income represents.
While I have also advocated such a tax, going through those exercises raises the question in my mind of what are we taxing with a 5-6% deemed income.
1 Rental income and tax. In which case should this figure be offset by any tax liability that arises from rental profit
2 Capital gains. In which case is there still a need for tax on rental income?
3 Both. In which case 5% seems too low.
If we are going to seriously pursue this idea we need to carefully define exactly what we are taxing and marry it into all the other related taxes.
When "brave" Sir Gareth saw what a huge mean dragon the demand issue was he got frightened. So he turned his horse and galloped off in the other direction, waved his sword and shouted "Tax".
Meanwhile the villagers, left homeless, huddled together and died of cold.
Firstly Gareth stop going on and on about taxing people that own property.
You would be better off concentrating on ensuring that people don't lose their money on the risky sharemarkets.
SpaceX if you think overseas is cheaper in major cities you are absolutely dreaming and wages certainly arent any better!
People that run a business owning property pay their fair share of tax and also provides a roof over people's heads.
We all know that Auckland property is totally overpriced for what Auckland offers, but give it a break as the free market will sort it out when the overseas investors get the stitch and move down to Christchurch and it is starting to happen.
What a crap argument. Property is a tax shelter. Try running a real business, ya know one of those things that actually produces things like jobs, then you will discover what tax is about. And unlike property, it is advantageous to make a profit and have money in the bank and minimal debt !! Crazy !!
Is Unitary plan the only solution and supply the only cause of current housing crisis. Most experts have been fooled by national that supply is the only cause and national has been succesful so far in protecting speculators - so called investors bt crying supply but for how long.
Today few journalist are highlighting but soon will be many as cannot hide the truth for long.
http://m.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=11684…
http://m.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=11684…
Would like to see experts and politicians reaction to above journalist report or even it will be forgetten next day by givernment PR.
Would like to see resoonse from all on this website
Well, it is "play on people's emotion season again" most sympathisers in the press are using it to sell new stories ... think about the two article you mentioned for a moment ... speculator one bought a House .. maybe renovated it or Not .. put it on the market after a while , ..sold for a higher price ... cool, so did speculator 2,3,4 .. 9 ... so as long as there is demand and buyers out there at higher prices, this can go on for ever -- the last buyer actually happily paid the total capital gain of all 9 speculators where is the problem? ... were the house prices in the herald article had to stand still until Mr lucky final buyer appeared to take it ?? -- It is a free market, anyone who disagrees can try his luck in Syria, China, or Venezuela... avoid Sydney and London, they are a bit expensive at the moment
The CGT will not stop these people as long as there is good profit in it ... It is foolish to assume that they are contributing to house price increase. they are just TRADERS just like share traders and now they are being taxed ( as has always been) .. so this fuss is just pure political nonsense ...
Non of the speculators above could have made a profit when the market was stable 4 years ago before the immigration surge - this phenomena happens every time the market is on a sharp rise ... this time the move is steeper and longer and primarily because of the O/seas distortion factor ... so please don't blame people who have the money and see an opportunity to make a profit - just like anyone with sound financial brains would do - I cannot see why a FHB is complaining (moaning) about how many times that house was sold or bought ... it is completely irrelevant and silly = there is no fixed price/value for a house , ever! .... the Value of a house is what a buyer is prepared to pay for it at any given time.
what happened to the young generation who used to buy run down houses and renovate them and move up the property ladder?? their parents did that, why can't they?? -- that is what most "speculators" are doing and they did that fast this time while the party was hot .. and not only in Auckland
There are liveable 3 bdrm houses for under $120 K today ... in Tokorua. Putaruru. and Kawerau .. any takers?? ..
I know a lot of people who bought good properties in Hamilton for 1/2 their Auckland equivalents , they commute to Auckland for work everyday, it takes them the same time if they have bought on the edges of Rodney or even in Waiuku.
GM took his TAX sword out again .. I felt from this article that he is running out of ammo and keeps repeating the same old song ... again he chooses to forget about the consequences on RENT and tenants after his tax collection - investors do not lose GM, they pass the buck, I guess you already knew that. CGT has never slowed a market, albeit temporarily, every one knows that the market will adjust and take off again if the inherent reasons
are still dominant. I guess he knows that too !!
Then the country is not only investors and speculators , enacting TAX laws and putting exception rules around it sounds very premature to me .... and thanks heaven above that most polys are not naive enough to follow the old red socialist mantra of "burn the village and count casualties later" in the name of equality !! ... sounds a bit like medieval thinking times to me.
Yes it might be wise to introduce a blanket Stamp Duty on Investors and foreign buyers, though not sure how affective it would be?
Apparently within hours of Canada's introducing their new 15% on Foreign Buyers Tax, the Real Estate Agents were already coaching their Buyers on how to avoid the new tax.
Article from CBC News: Vancouver realtor probed for 'how-to' email on avoiding new property transfer tax
http://www.cbc.ca/news/canada/british-columbia/real-estate-council-inve…
My understanding is the Speculators (those investors who hold property for capital gain) have to pay 30% of capital gain to IRD when when property is sold. If you are investing for rental income after the 2 year bright line period, your capital gains are tax free. If I am correct I fail to see how the issue is any more then the IRD failing to collect the tax. With the rental yields so low in Auckland anyone buying an investment property has to be speculating on capital gain (liable for capital gains tax), so the IRD should be tagging every property transaction to an investor as CGT owing when resold, anyone who can make a case that they have invested for rental return is not going to pay CGT. If the IRD are doing there job, is there really a distortion in the tax system driving up property prices?
Yes I think your understanding of our current CGT rules are correct ARB. Though I would be very surprised if the Government allowed the 2 year period on the so called "Bright line test' to continue. I think the original two year limit was put forward as a sweetener to allow them to introduce CGT here.
There already talking out stretching the time frame to 5 years for CGT, which I would be very much in favour of to stop property flipping. Also I think your perspective on why Investors still continue to buy in Auckland given the negligible rental yields might be a bit naive.
There are quite a few reason why Investors want to move their capital in to Auckland. Such as; money laundering and hiding ones capital from overseas Governments so they can't reclaim it or just plain old tax evasion.
Well education is another reason. Name one other country where you can gain citizenship shift your wife and kids to a prime school catchment area. Get world class primary, secondary, and Uni education for next to free, then make a capital gain on your home pay zero tax and then disappear back to your home.....
Investors are speculators. Anyone investing is taking on risk. When you take on risk you are speculating. You
can win and you can lose. Whether that's capital gains or rental yields. Rents can move up and down just like property prices.
Another silly tax rule that only nz would have. Most other places don't distinguish for tax purposes on capital gains. So many long term investors paid zero purchase tax and will pay zero capital gains tax.
Gareth says "The fact that $100k in the bank attracts tax on the interest income, while $100k in a property doesn’t do the same to the benefit an owner-occupier enjoys".
I do not understand what kind of income $100k in the property (home or investment) earn to be taxed. Family home does not earn any income. Rent received from your investment property is considered income when a tax return is filed anyway. On what basis that $100k in the property is supposed to be taxed? I do not see any associated income or benefit out of that $100k unless the property is sold. Can someone explain?
Your $100k in the bank gets 3% interest... which is merley an adjustment to maintain the value of your $100k at current levels. Yet the govt taxes this adjustment at say 33%. So you go backwards.
and you havent sold your cash.
If you house value goes up at 3%, you keep it all.
and you didnt sell that either.
Can check your statement "So you go backwards"? The government tax 33% of 3% interest. For example if you earn $3000 of annual interest for you $100k in the bank then IRD takes $990 of that $3000.
Despite of that argument I do not think we can compare the deposit interest rates with property value fluctuation rates. Because I have never heard the bank will put negative interest rates on deposits whereas your property values can be devalued. If IRD starts taxing property value increases then people will get tax refunds for value decreases as well.
..of course you go backwards. You have lost 33% of the interest. This interest is only serving to maintain the status quo of your $100k. Loosing a third means you are going backwards. Ask anyone hwo has had a term deposit over the last 5 years just how far back they feel have gone.
Meanwhile the 3% of the gain in the home is still 3%.
A lot of the investors in the property market are people with some savings held in the bank. The issue for them is that if you have $1million in the bank you get taxed on $30000. So you end up with $20k. I'd you're going backwards. Until interest rates increase property will boom.
Getting pretty bored talking about housing 5 times a week people. It is what it is right now and its going to be the same for a couple of years to come at least, then if your lucky it may plateau, time to move on. There is no short term fix and based on history there is no fix at all otherwise it would have been done already. Prices have been ramping up steadily for over 40 years and your wages have not kept up.
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