By Olly Newland
No matter how often the argument against a Capital Gains Tax is put forward, the subject is still popular among those who, it seems, fail to realise that implementing such a tax will solve nothing.
The suggestion comes up again and again, and it has almost become an article of faith for ‘the left’ some of whom seem to imbue a Capital Gains Tax (CGT) with mythic powers to right all social wrongs.
When the Labour Government of the 1970s brought in a version of the tax to curb rampant property speculation, the result was a further rapid rapid rise in property prices - on top of the 50% rise up until then!
Sellers rather withdrew their properties from the market than pay the tax.
It follows that Less stock = Higher prices. (This ain’t rocket science.)
The ’Property Speculation Tax’, as it was then called, was abolished a few years later by the Muldoon government, and I am proud to say that I was partly instrumental for that.
It was in those days that I first organised public meetings, wrote newspaper articles, gave interviews on TV and radio to quietly and logically explain that that sort of tax would not work. (Well, OK, I argued and lobbied hard against the tax.)
A master stroke in the PR war was a stunt where I ‘sold’ a property to a near destitute Pacific Island family on $10 down and the balance interest free - with a condition of sale that no Property Speculation Tax was payable due to the transaction. If the tax was levied the needy family would be evicted immediately. (Yes, I said it was a stunt.)
This was all over the news, breathlessly, and culminated in a call to Wellington to meet a red-faced and embarrassed Minister of Finance, Bill Rowling.
From that chilly meeting flowed changes over the next few months which saw some of the draconian aspects the tax modified. (I’ve written more about this episode in chapter 3 of Climbing the Property Ladder.)
Perception versus reality
There is no doubt that the idea of a Capital Gains Tax becomes at times popular, as the article below‘Frustrated home buyers want investors to be discouraged’ and myriad others suggest. This is understandable.
Ordinary folk who find themselves locked out of the market by rising prices feel angry. They have a right to be angry.
But if they believe the propaganda that a CGT will solve the problem, they’re wrong.
It won’t.
It would make it worse. Here’s why:
What riles people is their belief in a fairy tale that there’s a widespread phenomenon of speculators buying properties, then quickly re-selling them, making tens of thousands of dollars of easy tax-free profit. In doing so (the story goes) the speculators are depriving genuine home owners of their start in the property market.
A Capital Gains Tax, they believe, will discourage the buying and re-selling for profit by taxing those profits (if any).
Let’s get the story straight:
(1) The call for a CGT is a populist cry because it appeals to the masses and is promoted by those with a Socialist leaning (e.g. Labour and the Greens and those further to the left). Of course, sensible people know that these parties are using the issue as propaganda just to have a ‘point of difference’ with the ruling right wing National/ACT party government.
In my view, their cry demonstrates the usual envy and New Zealand’s ‘tall poppy’ syndrome at its worst or a loathing of the ‘rich pricks’ as expostulated by then Minister of Finance in the last Labour Government, Michael Cullen (now Sir Michael Cullen, excuse the smirks).
(2) Profits made on the turnover of properties is already taxed. If someone buys and sells properties on a regular basis they are already liable for the maximum tax under the present legislation. End of story.
(3) By far the biggest group of ‘speculators’ is the general public - buying and selling their own homes. If you live in your home then sell it for a huge profit it is almost certain you will pay no tax ... even of you do so regularly.
I know of many people who buy and sell their own homes on a regular basis for the purpose of making a profit. They rarely, if ever, are bothered by the taxman (and rightly so).
To look at if from the other side for a moment: exempting the family home from Capital Gains Tax (as the Labour Party suggests?) would be a huge blunder if a CGT was ever introduced. It would mean that house price rises would continue unabated. Since the majority - by far - of home sales are made by home owners, any dampening effect would, I predict, go by totally unnoticed.
It is true that without a Capital Gains Tax of any sort New Zealand is an outlier or oddball in the OECD. But rather than just mimic other countries, we need to take a logical approach so that currently tax-free gains are taxed in the case of deliberate profit seeking - but without causing major problems to the market as a whole.
Tax on profits = credits on losses?
The same cries for tax on ‘super profits’ happened in New Zealand in the 1980s when the sharemarket was going through the roof.
People were baying for blood because the share speculators were making huge day-to-day tax-free profits. Under mounting pressure, the Government insisted that gains on share trading would be taxed.
The ‘joy’ of the masses was short-lived: Along came the sharemarket crash of ’87 and share traders ended up with huge tax credits, giving some of them a tax-free status on everything else they did for many years to come.
It’s no exaggeration to say that there is a risk of serious damage to our property market and our economy in general if a Capital Gains tax is introduced across the board.
Look what’s happened in Spain, Portugal, the USA. Greece etc - all of whom have had long standing and draconian CGT taxes.
Despite their Capital Gains Tax they endured enormous booms and catastrophic busts ... and the tax will no doubt turn into life time tax credits for many.
What we need (if we need anything at all)
So, what could be done?
(1) Enforce more rigorously taxes on people who buy and sell homes (including their own) as a business. It’s far too slack at present.
(2) On the sale of any property, if the total proceeds are re-invested into another home or investment property then that would be tax free. Any surplus retained would be taxed. There would need to be exemptions for extenuating circumstances such as marriage split ups or entering retirement villages and the like.
(3) Some countries use a sliding tax system which applies to both private and investment properties. Simply put, tax would be applied in full if a property is sold for a profit within 12 months, but the tax would slide downwards over the next ten years to zero, encouraging long-term holding. The paperwork and record-keeping would be horrendous, but perhaps it’s an idea worth considering.
(4) There is some debate on whether 'Asian' buyers (i.e. Chinese) are ramping up the market, especially in Auckland, and suggestions that restrictions should be placed on foreign purchasers. I have real difficulty seeing what this will achieve other than scratch the xenophobic itch that many people seem to display.
As I explained on TV 3 News recently (3News: Investor adds to rising housing market predictions) when a foreigner buys a NZ property, in most cases the money goes into the pockets of a Kiwi owner, who in turn can compete back in the same market.
The Australian model seems very xenophobic - banning foreign ownership of rental or speculative property unless it is a new build or it will be occupied for at least 12 months by the owner. (Hence hordes are buying property through friends and family to skirt the rules.) Any such ‘foreign buyer’ restrictions here in NZ will be for political reasons only, and in my opinion, will have little effect.
There was some suggestion that farm sales should be taxed if there are profits made, which I believe could hamper exports and turn the farming community into a major opposition force.
It’s increasingly clear that like landlords, farmers operate only secondarily for the lifestyle and cashflow of the endeavour - capital gains is where real end game lies.
Likewise with business sales, collectibles, shares and indeed any investment which produces a capital gain.
Any tax pushes price UP
Whichever way you put it, any form of tax imposed feeds into prices.
I challenge my readers to name one item that’s gone down in price because its been taxed. There are no such examples as taxes always feed into higher prices.
A Capital Gains Tax would only encourage people not to sell - thereby reducing supply and creating a greater shortage than ever. The laws of economics are crystal clear:
Supply more of any item and it becomes cheaper.
Reduce the supply and it becomes dearer.
Maybe, cynically speaking, punitive taxes should be applied to those who don’t sell! (Now that would be interesting.) That would certainly bring down prices with a thump and probably ruin a lot of people in the process, so that scenario seems extremely unlikely as well.
Yet I see some in the media keep pushing the same ‘Poor first home buyers’ line because such anguish makes for interesting reading e.g.:
Frustrated home buyers want investors to be discouraged
By Susan Edmunds
20.1.13Georgia Wilkinson and Dylan Ewing have frequently been outbid by investors as they try to buy a house in Auckland’s Herne Bay. Photo / Getty Images
When looking for a first home, it’s hard enough having to contend with all the other young families wanting their first step on the property ladder.But it’s all that much tougher bidding over a property an investor has bought, done up and wants to flick on for a profit.
That’s the experience of Georgia Wilkinson and Dylan Ewing, a young couple looking for their first home in Auckland.
They’ve been searching unsuccessfully for a house for six months and they are certainly not the only ones wanting something done to cool the heated home ownership scene.
A Key Research-Herald on Sunday poll of 1000 people showed 55.2 per cent support the idea of a capital gains tax on residential investment properties, although most of those said it depended on the level of tax payable.
The proposal – part of the Labour Party’s policy platform – is intended to discourage investors from putting all their money in real estate, making more housing available to families looking for homes.
At one auction recently, Wilkinson and Ewing didn’t even bother bidding.
link: NZ Herald
As an example of other countries which have far reaching Capital Gains Taxes, we need to look no further than Australia and read through a website which details how and when a CGT is applied. (Note the understandable similarities with the NZ proposals.)
The UK has tougher rules on CGT and indeed tax includes much in the way of personal items not only homes - and on property:
The subject gets murkier when you look see how the USA treats CGT:
Take a while to scroll through these websites and you’ll realise that if and when a CGT is introduced it won’t just stop at speculators doing up and flicking houses. It could well end up on your front door and touch much more than you think. Once such a tax is introduced, it becomes the thin edge of the wedge and can be built up more and more as time goes by.
Stamp duty
And just to add to the debate: Remember that Stamp Duty still exists (look at your cheque book) and can be introduced with little fanfare if any ruling party decides.
Stamp duty is one if the easiest taxes to police as it will be based on the value of the item transacted. The appeal of Stamp Duty, to the socialists complaining about the unfair burden of GST on the poor, is that with Stamp Duty, the rich will pay more, the poor will pay less or next to nothing.
Don’t laugh. Stamp duty was common on all sorts of transactions, as well as property in the recent past. It remained on commercial property until the late 1990s – I know because I paid my fair share of it and felt the pain.
It was also charged on commercial premises leases, and many types other types of invoices. Changing the rate from 0% as it is currently, to a real number is relatively easy to do.
If this is what the people want – the politicians will surely oblige. That’s democracy for you.
---------------------------
Olly Newland
© March 2013 www.ollynewland.co.nz Used with permission.
120 Comments
Tax also feeds into behaviour,,,just ask the garden centres what's going on..ppl are learning to grow their own...and that soon becomes ferment your own..then distil your own...all of which fits nicely with DIY Kiwi attitude.
Let's wait and see if the jaffa slum towers going up have space for the lettuce and 'herbs'
Utter rubbish from a vested interest, it's predictable and sickening to see a super-rich investor yelling out that taxing him more is a socialist leftist policy. Are Hong Kong, Australia, Singapore and the UK socialist states, because they all have such taxes?
Property taxes like Capital Gains Tax forces speculators to contribute to the tax take instead of draining it as they do currently (by running their rentals at a loss, getting their personal income tax back and then paying nothing when the capital gains are realised). More government tax can of course be used to help first time buyers.
Olly's argument that a tax would push prices up is also nonsense at least in the long run. Take it to the extreme, let’s say property investors had always had to pay 100% capital gains tax and 100% on rental profits, what would happen?
There would be no property investors, everyone would live in their own home or government housing or a hotel. First time buyer properties would be much cheaper and home ownership would be much higher period.
Are Hong Kong, Australia, Singapore and the UK socialist states, beause they all have such taxes?
A more pertinent question I would have thought would be whether there is any evidence that property speculation is discouraged and house prices lower as a result of the CGT there.
No one can answer that with certainty but given their house price to earnings ratios are lower than ours it is reasonable to assume the tax has not done any harm. I can say with certainty that those governments receive more tax revenue from property investors than we do.
A master stroke in the PR war was a stunt where I ‘sold’ a property to a near destitute Pacific Island family on $10 down and the balance interest free - with a condition of sale that no Property Speculation Tax was payable due to the transaction. If the tax was levied the needy family would be evicted immediately. (Yes, I said it was a stunt.)
Such a savoury fellow - can't someone find a place for your solitary confinement - just joking.
AJ - I'd recommend that everyone has to do their own taxation. Everyone would then have to declare all income they received in a year, all those cheeky little employees who don't declare income outside of their PAYE would then be captured.
All off-shore investors/speculators would also have to comply with these rules. Everyone would be on the same platform regardless of where you lived and what you did.
This would also solve the problem of unscrupuous employers who are not paying the correct wages. The employee would invoice the employer and the payments made would match up to actuals. This system would have all employees become self-employed. Usual GST registration threshold rules could apply.
This would decrese the compliance costs to all business as the burdons are fairly distributed. It would also make all people fully accountable as they would have to understand the taxation system and cause and affect.
CGT is useless if it only affects the sales transaction. So the seller pays it only once and does not think about it until the day.
Land tax or similar hits where it hurts. Once a year ..... every year.....year in year out.
I would go further and tax at a notional income based on the capital value. Tax every property that can earn an income at 6%. If you can earn more than that you keep the extra. If you earn less, you still pay on 6% return. Exempt the family home unless it is available for rent for a minimum period, say 6 months
Not as radical as his Big Kahuna, but there is flexibility in the rate percentage.
As an example if you owned and rented out a house in Timaru on a 10% return, you would love it, while the investor with a $900k house in Devonport would need a rent of well over $1000 per week after rates insurance and depreciation to avoid paying extra tax. He would need capital gain to make it worthwhile
Bob Jones, years ago commented that farms were overvalued as a business proposition. Prices appear to be determined by supply and demand. Too few farms available for aspiring farmers to acquire or afford. Too many existing farmers greedy to accumulate holdings for the retirement super scheme.
That should answer the question. Overseas buyers would soon learn that paying dearly for farms would be taxed with no relief by any tax shifting to outside NZ. More farms available at more affordable prices but the farmer superannuation schemes would take the hit. Such a scheme could be phased in anyway.
Most New Zealand farmers have moved from farming crops and livestock into farming capital gains. They went into it with their eyes open and should have known that one way or another it won't go on forever.
They can't complain when the chickens come home to roost on cheaper land.
There's something fundamentally wrong with a system wherein savers get taxed on bank deposit interest even when that interest doesn't cover inflation but speculators get off scot free.
Ollie and his ilk seem to like threatening or holding us all to ransom. In my personal life anybody who attempts this becomes persona non grata. So yeah, make changes to even things out and temper these players. They may be right and the sky will fall, housing will double in value over a 7 day period or whatever. But I think most of us at this point are prepared to wear that risk.
*/
"Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains —and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived. (Winston Churchill, 1909,
quoted by Barker 2003, p. 116).
*/
Land tax: options for reform
By Iain McLean
www.nuff.ox.ac.uk/politics/papers/.../McLean%20Land%20tax.pdf
- Most of these city improvements are financed by the homeowners rates payments(which includes the rates paid by the small number of property investors and speculators out there).
- The property investor carries all the risks, and property insurance is expensive, especially since the Christchurch earthquake.
- Investors also pay interest on the mortgage of their rental property
- Investors pay for the maintenance and repairs of the house
- The world financial crisis caused many property owners to loose their houses. Property investors and property speculators were particularly hard hit since many were forced to sell at a loss.
Perhaps you were not retrenched, and perhaps you had a steady income during the financial crisis, and, had you bought a house then, after the collapse of the property prices, you could have been a property owner yourself.
Imagine that.
Olly Newland was right on the money as long ago as July last year. Maybe he’s right again.
“The property market is in a state of flux with rents rising rapidly at the cheaper end and pushing people into buying as rents become too expensive.
The pressure on the existing housing stock is at bursting point in the main centres and we could be facing another bubble - which would be a very unhealthy state of affairs given the weakness of the economy both locally and internationally.
In my view the whole property market is approaching some sort of crisis and I am picking a large upward burst of prices and rents in the next year or two until a new equilibrium is reached. That will hopefully be a situation where, the mix of low interest rates, shortages of housing stock and rent levels reach some sort of balance once again”.
Read it here:
The property market is in a state of flux with rents rising rapidly at the cheaper end and pushing people into buying as rents become too expensive.
Which NZ businesses are able to pay higher wages and salaries to meet this rising market other than the government?
When a stock of existing representations of spent energy are traded for 'more', the questions are:
Why are these folk not doing something productive?
What productive work is being done to underwrite the increased expectation?
Who is doing it?
For how long?
My answers would be - because we are at the limits opportunity-wise; not much; the tenants, and less than 10 years. The only way those mortgages get repaid, is via massive inflation. The alternative is guaranteed mass defaults.
What does it take for folk to realise that it was always going to be different one sometime, and that this is the sometime?
PM says 'no'
Prime Minister John Key reiterated later a land tax and broader capital gains tax were still off the cards. Asked whether the implementation of one or the other could allow government to reduce income taxes to give people more income to spend, he replied:
“At the risk of repeating myself from last year, we looked at a land tax, and land taxes, one, reduce the value of land in New Zealand, by definition, and it has an impact on every single homeowner in New Zealand."
http://www.interest.co.nz/news/52737/imf-recommends-govt-broaden-capital-gains-tax-base-and-introduce-land-tax-your-view
Contradicts Olly
The question for you AL is who is the counterparty to your profits? And how do you expect to keep those profits in the long term with the ill will you generate in the process?
Woulda, shoulda, coulda? Look at the population graph buddy, as a leading indicator it already did!
Well lets look at the greatest crisis, the Great Depression...the only reason we are not in another or worse is the Qe'ing. Then consider how the market is so stacked against the ordainary investor (things like micro-trading, delayed access to info etc) which means ppl like me would be left holding worthless stocks when it happens. So the only way to beat the system is to bail early ie think longer term....and given the finance industry thinks in what seems like 20 days max that isnt that hard as long as you dont get sucked in by greed and stary too long.
regards
Ollie is a real dick. Sorry for the ad hominen but he really is.
He so pathetically writes off meaningful ideas such as a CGT and limits on foreign (non resident) investment as sociaiism and xenophobic.Because of course it suits his back pocket to do so.
Having his totaly biased and unbalanced opinions on this site does its credibility no favours at all Its pure propaganda for his agenda.
I guess it gets a few cheap hits though.
MIA - How the heck can you consider CGT a meaningful idea????
I suggest you have got yourself completely flustered on this issue Matt. CGT will not help in the way that you want it to and will have the opposite affect and you and other people who are advocating it need to be held accountable for pushing this concept.
All taxes increase the price of Goods and Services. They do not bring the price down. I can't believe that you would wish for an escalation in property prices.
I think you should read Kimy's post below. It is very much on the money of what will actually happen.
Kimy says it all.
A CGT would keep property off the market and thereby drive up the price of the rest.
But there is no pleasing some people judging by some of the personal attacks on Olly's opinons, no doubt driven by jealousy that he has suceeded so well while they have failed so badly.
That's typical of people who don't have the wit to argue the point, but throw dirt instead because they have no abiltiy to do otherwise.
Olly's Golden Rule is:
"Play the ball not the man"
Some of the posters on this site should try this tactic on ocassion.
Your logic up to your usual std I see.
If ppl are not selling what they have then fairly logically they wont be buying to drive up the price of what is left. On top of that there is a suggestion that the CGT cools the market a little, so while its no cueall its effect is the opposite you guess at.
There is difference between attacking Oily's logic and indeed pointing out he's a vested interest and attacking olly personally.
Now while I agree a CGT isnt a silver bullet it does discourage ppl who gamble for a capital gain and in the meantime claim a tax loss...or ppl who buy and sell just to make money.
Given the well worn buyer beware that seems to pervade NZ then I cant blame ppl for investing in property, it is after all fairly low risk most of the time and you can see where your money is. Therefore a range of things need to happen to level the playing field across investments some of it means a re-balancing of risk between parties. Unfortunately it seems that the ordianary voter is the shark feed that all the pollies are happy to let happen.
regards
Bg Daddy and Kimy - at least you two understand the mechanics of what is happening and the cause and affect of taxes. Most of the respondents above don't have a clue.
I think that it has become quite clear that many of the respondents above have never put their toe in the water and been in business.
Maybe the best thing the Government should do is make all people complete their own taxation obligations yearly as at least we would have a more education on how taxes actually work. This should also allow the IRD to capture those who are speculating without paying the appropriate taxes.
Apparently a few days ago the Chinese government announced it was going to bring in a capital gains tax on property - and it has caused a rush for the exit from 'property investors''
http://www.whocrashedtheeconomy.com/blog/2013/03/20-per-cent-capital-ga…
''Forbes reports on data from the Beijing Municipal Commission saying 9,400 homes were sold in Beijing last week, up 279.5% from the same time last year. Existing home sales have tripled last week in Beijing.''
It rather looks like a CGT can have the desired effect after all, chuckle. The more the vested interests tell you something wont work the more you can be sure its something they dont want to happen because it WILL work.
Yes indeed it seems as though Forbes is telling lies as well:
http://www.forbes.com/sites/kenrapoza/2013/03/12/selling-frenzy-in-chin…
''Something else is happening now in China housing. Investors who buy homes as a store of value, rather than as a place to sleep at night, are rushing to their realtors before the government implements a 20% capital gains tax on housing sales. Beijing introduced the new rule on March 1, but no one knows when it will go into effect.
“The new measures will have a significant impact on both demand and supply in the existing home market,” Lina Wong, a managing director at Colliers International, was quoted saying in Shanghai Daily Tuesday.''''
Or if you want it straight from the local press:
http://www.shanghaidaily.com/nsp/Business/2013/03/13/Planned%2Btax%2Bre…
''On March 1, the State Council, China's Cabinet, posted a statement on the government's official website specifying an array of new measures aimed at reining in property speculation.
They included tough enforcement of the capital gains tax and increased down payments and mortgage rates on second home purchases.''
So who do I believe, Forbes and sources on the ground or errr, lets see, you..........
Oh really notaneconomist?
From the article:
“I did not plan to sell my apartment before the launch of the 20 percent taxation policy. But considering I may have to pay around 200,000 yuan ($32,100) tax once the policy is in place, I’d better make a deal right now.”
That person is acting entirely rationally. He will be acting rationally in acccepting anything up to 200,000 yuan less than what the 'previous market price' was prior to the announcement as he will still be making more than he would have as long as he gets the property away before the tax comes in.
Magnify his decision by however many thousands of others making the same calculation and the effect on the average property price is pretty obvious.....
Andyh - And your point is?
One speculator makes a comment and so the whole housing market of China will be affected.
Perhaps the Speculator is making a decision to clear the profit now and save himself the 200,000 yuan which could be all profit.
Did the Speculator say he/she was not going to enter the property market again?
China's situation is completely different from NZ's - they seem to have plenty of vacant property something NZ does not have the luxury of. How many houses were not showing a meter reading for power in China?
Don't confuse taxes on goods and services which do push prices up with taxes on assets which contrary to what the property investors are saying here do actually bring prices down.
Take Brazil who were unhappy about the excessive level of speculation in their currency, stocks and bonds. They correctly responded with taxes which forced many speculators away and brought down the value of their currency, stocks and bonds. As long as measures are taken to ensure new supply is not slowed down all taxes on assets can over ever lower prices.
The nonsense I keep reading here from landlords about how a capital gains tax will force prices up because they will simply hold on to property for longer misses the point, the main long term impact of a tax is that further property speculation is discouraged. That is what will ultimately bring prices down.
I agree that most New Zealanders are over taxed especially young families but the wealthy asset holders are most certainly not. Being cash poor and asset rish does not make you poor, it just means you have invested your wealth in the hope of making more wealth. The wealthy in this country need to pay a larger share rather than hiding their wealth in property to avoid paying tax.
That's the point the wealthy are not employing anyone they are bidding up the price of each other’s homes and condemning us all to being slaves to foreign lenders.
Of course I don't expect the wealthy to be foolish with their money which is why I'm in favor of a property tax to encourage more creative and productive investing.
Julz I suggest you go and have a chat with an experianced tax professional. Privately they will tell you that a CGT will not work as intended - there any number of schemes and techniques they can dream up to avoid this tax. The big accounting firms have interantional coverage, this enables them to easily research, copy and emulate succesful avoidance schemes from around the world.
Publicly tax professionals say little in objection as a CGT will provide them with bucketloads of work.
Jultz - There is a difference between Property Speculators and Investors. Speculators trade realestate that is their business.
Property investors generally use the activity from the land and bulding as the means of income.
Speculators are meant to pay tax on profits derived from their trading activity. For an example a real estate agent might buy sections in a development and on sell at a later date, assuming a profit is made they should be paying tax on that profit.
Landlord property investors derive their income from rent received. They wear all the day to day costs of keeping that property up to a rentable standard and if they make a profit at the years end they also pay tax.
Off-shore property investors and speculators are not captured in the NZ tax take.
People on wages in NZ do not attract scrutiny from the IRD from their property speculation activities. The people who buy a place do it up and on sell it for profit and then repeat the process.
Anyone who is registered for GST in business comes automatically under the IRD rules and must comply with all taxation compliance. They must also complete annual tax returns to the IRD each year. I don't believe it is this group in business who are having an effect on property prices.
I think the problem lies in a few areas which are all contributing to the overall problem:
- The Councils have limited supply of land.
- The horrendous costs of the RMA and other Council costs.
- The Off-shore Investors/Speculators.
- The People who are not captured under the tax rules.
To suggest that the introduction of CGT is going to solve the problems without addressing the problems is silly. The only effect will be to push prices even higher as the underlying issues have not been resolved and will actually escalate prices higher.
Believe me any property investor and speculators will make money out of CGT because they are not the drivers of the increases in prices.
I agree with your list of other impacts on house prices, you list off-shore investors as one of those but to the first time buyer local investors are just as much of an issue. Any tax on property will remove some of these buyers from the equation which will all contribute to a few less bidders for the first time buyer to compete against at auction.
Jultz - Any tax on property will increase the price. I cannot find one case in history where a tax brought property prices down.
Property investors actually have a stabiising effect on the property market. These people know what the building and maintenance costs are and what rent is able to be achieved. This assists in keeping things valued at an appropriate level.
However Property investors have to also contend with Government issues like Council mistakes in limiting land supply which enables speculators to drive up the price.
The property investor is not controlling the market they just end up piggy backing because that is the business they happen to be in.
It is in the Property investors best interest to obtain property at competitive prices as they have to rent out at competitive prices. They have all the normal working expenses for their business type plus they have to service their mortgage.
The Australian Government at the start of the GFC dedicated a larger portion of funds to first home buyers. The increase was factored into the market before the day was over and property increased in prices by the amount of the first home owners grant.
Getting into your first home is never easy and first home buyers in NZ have to knuckle down for a year or two and commit to making the project work. Get a flatmate in or whatever it takes to reduce that mortgage down to a managable level. It is amazing what can be done in 2 to 4 years. They can always trade up in house size at a later date if they get married have kids etc. But if you put a CGT on them you will limit their opportunties and affect their quality of life.
If the Auckland City Council designated large chunks of land immediately for housing with more than enough sections for say the next 10 to 15 years something positive will happen. If the Government at the same time changed the off-shore investors taxation so that they came under the same rules as local investors everything would calm down in the market. the IRD needs to be chasing up those speculators who have not paid taxes on the profits from real estate. In fact they would be better off doing this than hounding over the accommodation paid to workers coming to Christchurch.
The Government also needs to get the RMA changes through el pronto and stop mucking around.
I'm certainly on the same page in terms of the other issues you raise driving house prices.
The trouble is if a property investor out bids a first time buyer at auction they can now charge him whatever they can get away with in rent. Had the property investor not been there the buyer would have had the house at a lower price with a very clear mortgage payment to the bank.
The rent the property investor needs to charge to cover his costs is higher because he is competing with other investors for the same homes. It is a self-fulfilling prophecy, many of the investors are not wanted, the tenant is just after an affordable home to buy at the end of the day and all the property investors are standing in his way.
There are plenty of examples of taxes bring prices down, at least for assets granted it doesn't work for goods or services. All the financial taxes you see imposed on stocks, currencies etc have had the desired result of bringing prices down. Property has so many moving parts as you say it is much harder to see, usually property taxes are deliberately introduced slowly so as not to shock the market.
Jultz - I want afforable property for people as well. It is in the people's and countries best short and long interests. NZ also needs financial stability at all times. I have a rather broader definition of financial stability than the RBNZ on this issue.
The average Joe Bloggs buying a family home which is the biggest financial committment they will probably make in their lifetime basically has a poor understanding of how pricing is determined. They frequently look at their income and their ability to service the mortgage and buy on that ability which has nothing to do with the price or value.
I was closely following a property here in Chch that was going to auction. GV was $460k it sold last week for $785k at a brought forward auction. The house was only 147 sq m plus garaging. Not one investor in site all average Joe Bloggs at the auction. In this case it was not investors pushing the prices up it was the average Joe Blogg setting the bench mark. When people fall in love with something all rationality goes out the window. Property Investors cannot afford to fall in love with properties and that is another fundamental difference.
Personally I dislike the auction system immensely. Too many people behave irrationally.
It is handy to remember that the biggest players in the housing market are still the Joe Bloggs average citizen they are the ones controlling prices simply because they own the biggest market share of all housing.
Property investors are good at keeping prices down.
The biggest capital gains are where there's the least property investors and the least capital gains have been in the areas with the most property investors.
There was an article a few days ago about how wonderful the Swedish property market is (with LVR's, better affordability etc) - they have way more property investors and much lower home ownership rate than here.
Just look at Reinz figures. If you want capital gain you buy the best house in best suburb (which have negligible rental returns). If you want retal returns buy cheap - like CBD apartments - and expect zero capital gain.
Have you not noticed all the big price rises reported are in the central suburb owner occupier territory?
Don't confuse cause and effect, there is a very limited supply of central suburb properties and they are the most desirable places to live. Of course there capital gains will outperform when population or wealth is growing that has nothing to do with property investing.
I could just as easily say it is all the wealthy property investors competing for central suburb homes to live in from all their new found property income.
Your proposition is that property investors are cause of prices increases. Is not the logical implication of that arguement that the more property investors the bigger the capital gain will be? That is a disprovable proposition in that examples can be shown where this is not the case (such as CBD apartments).
You present a whole list of other possible reasons for capital gains (desirability, limited supply, increasing population, increased wealth) and even state it has "nothing to do with property investing" while clinging to your disprovable proposition that it's all the fault of property investors.
Clearly property investors are not responsible for price gains in areas where there are no property investments! like expensive central suburbs, no one is saying that.
It is the first time buyers squeezed out of the market in cheaper areas by investors that everyone has an issue with.
Can you honestly tell me that if property investors stopped buying there wouuld no impact on entry level house prices? I can tell you right now there would be half the bidders at each auction and the genuine first time buyer would get a much better price. If exisiting property investors were all required to sell there properties there would be an even larger price fall.
If you are trying to tell me that additional buyers like yourself are not impacting prices then it is you who has abondoned logic. That is the basic nature of supply and demand, buyers equals price rises sellers equals price falls...
I like how you assume I'm an evil property investor just because I disagree with your logic.
You are arguing for a capital gains tax to reduce house prices by removing property investors from eqation. Now you admit that there are big price increases in areas where there are no property investors - you claimed that in that scenario houses would be cheaper.
You had some other more sensible ideas for what might cause house prices like lack of supply etc. Sydney property people tell me that in a market with a shortage of stock CGT is not paid by the vendor - it's paid by the purchaser.
Waiting to subdivide is a what im doing also with one place; mainly because I see a trend towards reduced costs in this area to help promote infill developments, so am hoping council costs etc get cheaper...
Interesting to see that at current prices building/development is still marginal, and risks likely exceed rewards still.
Prices will rise slowly over time until it gets to a point where development makes sense (either by councils finally making development cheaper/easier, or prices simply getting so high that its worth the costs to develop).
Unless the government/councils step in to give an advangtage towards cheaper new houses, then most of these new developments will be aimed at the above median price bracket, something governed solely by economics and best bang for your buck as a developer.
Exactly, Simon. And if you impute interest on every outlay, at even modest rates, the 'carry' on early costs will, over a small number of years, exceed those costs. The old Rule of 72: so the interest at say 10% will only take 7 years to equal the original cost, give or take. And seven years, from bare land purchase to sold sections, is a super-quick cycle in today's ineptocrat-infested environment.
I've suggested to the DIA Development Contributions Review, that Councils be forced to calculate and disclose imputed interest at ruling IRD rates on all of their imposts, so as to bring home to them the time=money equation that is so signally lacking at present.
No. They must be running late. Please post it if you find it.
ohhh
http://unitaryplan.aucklandcouncil.govt.nz/pages/xc.enquire/default.aspx
I'm going to have a read and see.
http://unitaryplan.aucklandcouncil.govt.nz/pages/xc.enquire/default.aspx
Mixed Housing One dwelling per 300m² net site area where up to four dwellings are proposed
No density limits apply where five or more dwellings are proposed and the requirements of clause 4.3.1.3.1.2.a and b are met
Is this news to anyone and/or a significant change, or going to help affordability?
"2. In the Mixed Housing zone:
a. where three or four dwellings are proposed on a site, the site must at least 15m wide:
i. at the road boundary
ii. for at least 80 per cent of the length of its side boundaries.
b. no density limit applies where five or more dwellings are proposed and the site:
i. has a minimum net site area of 1200m²
ii. is at least 20m wide:
- at the site frontage
- for at least 80 per cent of the length of its side boundaries.
c. development that exceeds the maximum density or does not comply with clause 4.3.1.3.1.1 or 4.3.1.3.1.2 is a discretionary activity
d. this rule does not apply where a dwelling is converted into two dwellings as a permitted activity complying with clause 4.3.1.3.3."
600 sq meter mixed site = 2 sites; With this, extra sections have just been created out of thin air in this mixed housing zone. Nice work.
Look at the map, any areas that have been moved into 'mixed' zone that now are able to accomodate more dwellings?
Heaps of Res 6. Haven't looked at minimum sizes, parking, contributions or other stuff that makes housing expensive yet.
There's a granny flat type provision in both Mixed housing and Single house zone with no parks.
In over 20 years I have never seen plan provisions make housing more affordable. From what I've read so far 3-6 months after this becomes operative affordable dwellings (to rent and buy) in great locations will start to appear.
This is so logical and sensible I'm scared to read on in case there's some twist that negates it all.
There are two distinct perspectives here in favor of more of the same, from Olly's viewpoint anything that impinges upon speculative profits long or short term is seen by him and the real estate institution as a whole as counterproductive, ...therefore unwelcome,notwithstanding most ammendments to legislation come with a built in bolt hole by way of appeasement.
From Key's perspective , it is all about captured monies, irrespective of origin or cleanliness of the funds.
You set a platform to encourage investment in other areas of N.Z. productivity by holding up the shining examples...and so far for Key that is largely property and a coupla crappy farms to show our new best friends...this ....is the place to stash your moolah...
Now when Key told you clearly he wanted to see N.Z. as the financial hub of the South Pacific, he wasn't shitting you.....a great big bank with cows outside to give the dirt munchers something to do....an oversimplification perhaps but closer to the truth than most care to believe......
i would ask a question at this point of all the believers in Holy John...Would John Boy knowingly and willingy allow a recurrence of Tranzrail to be visited upon the Mom N Pops by way of MRP, given the financial climate of recent times , the recent mismanagement of SOE's, the involvement as yet undisclosed between this Administration and Solid Energies indebtedness on venture hype...?
You ...bet ...your ...ass...he...would........!
Why..? because that is what he does best, it is what he knows best , hype and pluck, a true boiler room technician ......
On that basis there is motive for reluctance to discourage the further fueling of an already rampant , yet unstable property market, unstable, in terms of earning capacity to purchase value ratios for your medium high throught to low middle income resident NZ's.
A great big Bank ...with some cows outside...
Rant..? uh maybe...time will tell, and you won't have long to wait.....where's that bannana gone..?
Not a guy I'd take a punt on again iconoclast....from eary on , a glaring unwillingness to accept responsibility for errors in judgment, a genuine inability to be contrite.
That inability itself is the first requirement to hold others in contempt.
It appears to have been catchy among the inner circle....does it not.
I understand that the government is budgeting tens of millions of dollars on irrigation schemes to encourage dairy conversions. Tax payers money of course.
Presumably this leads to a dramatic increase in land value to the farmer. Totally tax free, and all courtesy of those who are stupid enough to pay their taxes.
Or am I reading that wrong somewhere??
Tensions seem to be brewing regarding CGT, I see property bulls being right for a fair few years, until the population gets so sick of greedy landlords that they revolt against them, don't think that will happen for a while, the status quo will be kept and everyone will go blissfully about their days.
You're right, MK. Traditionally tax has been only for the "little people". However with western governments not making ends meet, it is becoming less and less tenable to leave gaps in the tax net. Especially (or even) where they benefit the wealthy. Look at Cameron in the UK taking on the corporate tax cheats.
NZ will have to follow suit eventually. Clearly Key and English would see hell freeze over (or borrow hundreds of millions a week to stay above water, which amounts to the same thing) before they would consider a CGT or property tax. When you see where there wealth is, you can see why.
Cheers
They will be affordable to build for the people who currently own the land, and they are likely to on sell at market value, the increase in supply should help cap price increases.
I still believe a lot of the really high prices of places sold past couple of years (above GV) were from people buying properties, that once re-zoned into this 'multi' zone are able to be sub divided.
Valuers then use these sales to estimate high values on nearby properties (even if they can't be subdivded or benefit from the new zoning), and so we see the price increases that seem to defy logic over past 2 years in Auckland.
Buy the rumour, sell the fact. Now its fact, don't be supprised to see Auckland house prices stall this year.
Spain's property could fall 55%, how about NZ I wonder,
http://theautomaticearth.com/Finance/spain-has-a-long-way-to-go-down.ht…
Draft Unitary Plan seems to be getting rid of all sorts of stuff that's mades housing more expensive. CGT is old news. the sooner this is operative the sooner we get more affordable housing.
Maximum carparking in many zones. Deleting unreasonable minimum sizes. Minimum stud heights in apartments and terraces (makes them more expensive, but much nicer and with deletion of big minimum sizes is fine). Increased density in many areas, plus increased HIRTB and site coverage (same heights in housing zones). Granny flat priovisions in housing zones.
Don't know about devlopment taxes yet but I suddenly like Len Brown.
What a silly argument, Olly.
Yes, of course is all about supply and demand. And it is simple.
Capital Gains tax constrains demand, and so increases supply, lowering prices. THAT’S THE WHOLE POINT.
Good lord.
Yes, some investors may choose to hold onto their properties rather than sell because of the CTG, and leave them as rentals instead. So what? Firstly, the lowered demand offsets that lowered supply in the short term, and in the long term you will see them having to sell at some point anyway, particularly when interest rates rise (afterall, a taxed profit is better than no profit at all) -> increased supply; decrease in house prices.
I genuinely wonder if you are being willfully or genuinely ignorant in your assessment? I suspect willfully, as it largely seems to suit you politically have people misunderstand the reality of the supply/demand dynamic that would play out with CGT.
Either way, what a waste of space.
And BTW, the gutter level political maneuvering re: the Polyneisan family you are apparently so proud of, is repulsive.
Sorry, but it seems to me that yours is the weird argument.
Why does CGT constrain demand? Precisely because it increases prices.
But it doesn't increase supply. The supply side does not benefit from the price increase, and therefore sees no more of a price signal than before the tax was imposed.
You're kidding right?
It restrains demand because the incentive for investment is lowered because the investment is taxed, ie - those seeking the profit motive will turn to different investments.
Althought admittedly, many other investment opportunities require a bit more moxy than property investment, so I can see why the lazy would bleat about the goal posts being shuffled.
I think the tone of that comment suggests that no, she was not kidding, that sums up her understanding of supply and demand as it does for many on this site! If there is a real argument about CGT to be had, its that every implementation is so badly weakened as to be ineffective (e.g it never achieves what you just said).
Lol, who says I am not on the property ladder?
Just because I dispute the somewhat venal attitude that success in property development = smart and disciplined.
All my profits in property have come without the slightest real effort. In fact, I find it a little embarrassing that someone's ego would genuinely inflate, and they would suddenly think of themselves as anything like 'entrepreneurial' let alone suddenlly have expertise in macroeconomics.
Yes the size of the market is smaller, but because of higher prices and ability to pay is increased (known as "demand"), the investment improves.
As I've pointed out, the idea that CGT will decrease market size is a fallacy, along with the accompanying increase in house prices.
A rise in house prices does not naturally increase demand, although potential rises can. Ability to pay decreases as rises in cost increase, reducing demand.
Ahh, screw it. It's silly to try and argue this stuff when people don't want to know.
"As has been pointed out _by_people_who_own_property_ that CGT will _decrease_ supply.
Short and Long term."
1)Who says I don't own property?
2) Since when did owning property become the equivilent of Masters in Macroeconomics? From many of the comments here, I'm beginning to suspect the relatoinship is actually inverse ;)
"Any reduction in demand follows from the rising sale price (as property owners don't have to sell, and as many are price setters they can just add the price of CGT on to the shelf/sale price).
Actually the market determines price, not property owners. That's the whole point of supply and demand
Likewise In a tighter market, if interest rates rise, then rents will rise. The only reason rents wouldn't rise is if there are more empty properties to rent...but with a CGT retarding supply that won't be happening."
So... according to you CGT will make investors hold onto their houses rather than sell. But according to you rents will also rise, despite the increased supply of rental properties, because... interest rates are going up (although this is an entirely different point).
No mention though of housing purchase demand going down because of increased interest rates of course...
If you are actually going to follow the argument that property developers will hold onto their properties rather than sell them, then you have to look at the follow on effects in a bit more depth:
1) Increased rental supply: lower rental rates due to higher competition for occupancy.
In fact, the logical argument would go on to say that lower rental prices would take more heat out of the purchase market because renting would be more attractive due to increased supply/lower prices. (although this would be a marginal difference, and offset by potentially lower demand in house putchase market as well)
2) Decreased number of houses onto market, decreasing supply (sure) BUT also decreased demand due to property looking like a less strong investmentment.
I don't disagree that a CGT will not solve every problem, in face the real issues are lack of supply by inflated land and house build costs, but most of the arguments against CGT here are fatuous.
peterc
If you read Olly's book you will see the the Polynesian family went on to buy the property and ended up eventually selling it for a massive tax free profit some years later.
They sent Olly Xmas cards for years afterwards in gratitude for being "used", and it was all done with their express permission in the first instance.
Had you told them to pay CGT on their windfall, your chances of reaching old age would have been severely diminished.
Because BigDaddy is NOT Olly and i should know.
He would never stoop to using false names, but always is up front about who he is and his opinions and never stooping to personal insults.
The only time he "hides" is identity is when he is involved in his benevolent work which is considerable.
The vast majority of his day is taken up with pro bono advice and practical hands on help about which he does not boast - unlike others who seek the lime light and hunger for constant praise from others.
Upton Sinclair:
'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'
Peter Schiff was right before and he's right now.
It's going to hit the fan again and it won't be long:
Economist Peter Schiff Forecasts Second Crisis to Hit Around 2013
When are all these arseholes going to realise that capitalism can't continue to work if the consumers who feed it have their purchasing power destroyed?
To me, the guy loses all credibility when he starts bagging those who disagree with his arguments.
Having said that, i get the distinct impression that the man doesn't understand the role of taxation in the modern economy.
I wish he'd just quietly disappear into the past where he actually belongs.
How much does it cost to build a new house? This is the only bloddy question that really bloody matters.
The heart of the problem is not the supply, as such. It's *the cost* of supply. This is what the established market must respond to in the compeition for sales. This is the foundation dictating final prices - not taxes.
Olly Newland is right in so far as property investment spruikers (like Dolf deRoos) would say (over and over) that you never sell your investmenbt property. Eventually you are cash positive... but at some stage you will be flogging a few off. I know someone who retired recently and sold a rental for about $350, 000 in Rangiora where prices have been rising due to the earthquake. Of course he paid no tax on that.
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