by Russel Norman
So the Reserve Bank has pushed up the official cash rate to 7.75%. This is problematic because it punishes the entire economy for what is mostly a housing asset bubble. I really think it’s time for a rethink about the absolute reliance on one instrument to manage the economy. I’ve put out a few releases on this topic to try to broaden the debate on options. The ideas I’ve thrown out there are for consideration are:
1. a capital gains tax excluding the family home;
2. reforming the tax system to stop tax advantages coming from investment properties;
3. limiting the sale of land to New Zealand residents and citizens only;
4. increasing banks capital adequacy ratios for housing loans;
5. building more public housing with income related rents;
6. requiring developers to provide a proportion of affordable housing in larger developments; and
7. investing in mass transit systems in our cities to allow greater urban densities.
Some of these aim to take the heat out of the housing market by reducing demand for investment properties (1,2,3). Some of it tries to tighten the credit tap a little because there is a vast ocean of capital out there looking for some nice easy returns by loaning into the NZ housing market (4). And some of them try to ease the supply side by providing more affordable housing options (5,6,7).
Published in Environment & Resource Management by Russel Norman on Thu, April 26th, 2007
Tags: environment
More posts by Russel Norman | more about Russel Norman
on the trolls and those who are unable to keep on topic
Thought I’d paste the comment below on this topic from jc2 on another thread to see what people think:
“jc2 Says:
April 26th, 2007 at 1:24 pm e
So the exchange rate is going to need more controlling in future.
Here’s a plan for lowering it now:
- there’s a tax called the Approved Issuer Levy
- if you’re overseas and you invest in an Approved Issuer (a bank or Telecom) in NZ, then you pay 2% tax in NZ
- if you’re in the UK and domiciled in NZ, then you pay no more tax on that interest
- give the Reserve Bank an exchange-rate target, and control over the Approved Issuer Levy tax rate
- have them manage down the exchange rate, for now, so they can stop managing it down if it tries to tank
- expect them to raise the tax rate, to discourage the wall of overseas money that’s currently flowing into our housing market
I don’t know:
- how to set the target
- it does have to be public and explicitly set, like the inflation target
- what you have to do to avoid creating a distortion between debt investments and equity investments
How do people like this proposal? who know how this part of the system works.”
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Russ
Have you seriously thought through this little list of suggestions?, it seems to me that this comes straight from the red left of the Green party.
Your first two points will result in a massive drop in rental accommodation, I suppose the Green party want the state (me) to pick up the shortfall?…end result, higher taxes.
The third point is plain scary, I see nothing wrong with foreigners owning holiday homes in NZ.
The govt has no place building more state houses with my money, of course to fund this they will have to raise taxes, at the very least they should be charging market rental rates.
Requiring developers to build affordable housing in new developments is laughable, all housing is affordable it just depends on the quality of the building.
Are you seriously suggesting that somebody who has worked hard and finally got the chance to build their dream home runs the risk of ending up with neighbours from hell just because it make the socialists feel good? or do you see this as another way you can socially engineer the classless (communist) state
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We are always looking for new solutions. How about an old one instead: The Land Value Tax introduced to NZ by George Grey and John Ballance in 1878 worked very well. The gradual elimination of this most excellent tax (recommended by folks like Adam Smith and John Stuart Mill) has been bad for the NZ economy in many ways, in part by unleashing land values (“housing” bubble is misleading, as the houses for the most part depreciate like any other built object, it’s the land they sit on that “bubbles”). Restoration of LVT was Values policy at one point, New Labour too, and it appears (though not, apparently, enforcably) in the constitution of the Australian Labor Party. I hope one day it will be NZ Green policy.
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Re 1: This is already the case in Australia, and it didn’t cool the house market. Most states also have high “stamp duty” taxes on house purchases. This effectively became another tax, but didn’t cool the market that much. There is a case for CGT in the property market – but I’m not sure how much it will directly help curb inflation. Especially as its driven by several factors – including the amount of government spending.
Re 2: Don’t disagree, but then this is pretty general. Again, I’m befuddled at the amount of tax loopholes that exist for the seriously rich when Socialist Labour have had 8 years at the reigns. Must be a conspiracy. As usual, its the middle class that shoulders the burden. The latest rate hike continues with this theme.
Re 3: How much land is owned by businesses, property trusts, insurance companies, and other investment funds? Would you ban them if the shareholders weren’t up to scratch? How practical is this?
Re 4: I wonder if this will generate a market for “unsecured” deposit loans?
Re 5: Or turf out people on good incomes?
Re 6: Why don’t you just force builders to build houses and the government set the selling price? The ones that don’t comply, you could take out and the back and shoot. That seems to work in most communist countries.
Re 7: This is needed anyway. But part and parcel of this and #5 would surely be reworking the RMA, allowing more apartment construction, more townhouses, more development – all pretty much hamstrung by excessive bureaucracy. So why not even a mention on plans to help developers develop, rather than demand they set low prices on some of their buildings? And it’s not just mass transit we need, but electricity supply, water, sewage capacities all increased. We could possibly fund this out of greater immigration if we had a total growth plan in place. I haven’t seen anything like this – it’s all about clamping down on immigration and shuffling the tax burden around.
Also, it seems you missed an opportunity to plug for a tobin tax.
JC2 has an interesting idea – just haven’t had time to think about it.
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In the spirit of kicking around ideas:
Perhaps a stamp duty on all property sales, of say 2% on all sales over and above $200,000 (the amount payable calculated from dollar 200,001, and 4% above 1 million $.
This amount is rebated if the purchaser lives in the home. Penalties apply for cheats. If the house is sold within 12 months, 50% of the fee becomes payable (on sale) if it was rebated.
Then the money is grabbed by the State up front, no CGT to calculate and confuse people and home owners “advantaged” over the fact that if they bid against an investor, they have a better chance of matching the price.
The proceeds of the tax go towards infrastructure.
I’m not sure it will cool the market enough for the Reserve Bank’s liking, but it does deal to investors versus home owners. It does not preclude additional support for first home buyers, low income couples etc.
The other thing I’d consider is some kind of national program to insulate all state owned housing and provide 100% tax rebates on insulation (including double glazing) projects, rainwater tanks and solar paneling for the next 5 to 10 years. Ideally, we resign from Kyoto and the money we would have spent each year on Kyoto goes to supporting similar initiatives.
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The problem is the linkage between domestic monetary policy and the international trading position as per the currency value.
At present the first people hit by attempts to diminish inflationary demand in the domestic economy are the export sector, when it is really the consumer demand that should be diminished (we have a problem with deferred public sector investment catch-up – investment that the National administration of the 90′s should have done when we had unemployment/spare labour, this rather than hand out tax cuts. Now we import labour to help us cope with the infrastructure investment catch-upand this increases demand for housing and roading congestion also increases etc).
The most direct means of resolving the problem is to end the currency interest rate relationship.
This can be done by linking our currency to a another (this is called a dirty float). The European’s did this pre Euro, and we should within CER. By valuing our dollar at 80 cents OZ – we offer exporters a stable value in this market and also a lower international value than we usually have. It of course allows the RB to raise interest rates higher (to manage domestic demand) without impacting on the trading economy.
Policy in the housing market area (to encourage more smaller/cheaper house building – with a state house building programme boost – and also assist first home buyers) is a separate matter.
While I have voted Green in the past few elections I might vote for a party changing our currency policy. Hopefully I can do this and also promote a sustainable economy as well. As WR said a country which cannot “trade” is losing it’s economic and political sovereignty and at these dollar value we are struggling (our BOP deficit is 10% of GDP).
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PS
I do agree with the housing market policy outlined by RN is sensible and would do both.
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Euan McCann suggested recently that taxing foreigners too little on interest earned on money lent to NZers (because of things like the approved issuer levy) and NZers too much on money invested overseas pushed the exchange rate up. It is simple economics – whether you are left wing or right wing.
Big bruv is taking absolute crap about a capital gains tax, etc causing a reduction in rental accommodation. Landlords almost always buy older existing houses which doesn’t increase the supply of housing one jot. Tax landlords fairly (many now effectively pay negative tax) and the demand for existing houses will drop along with the price. Exisiting landlords won’t stop letting out their properties as some income is better than no income. If they sell them then someone else will purchase them and someone will still live in them. The supply of accommodation will be totally unaffected!
Similar nonsense was talked about before the return to income based rents for state houses. The doomsayers like big bruv said it would hurt the private rental market by undercutting it – forgetting that pretty much all the state houses were full so lowering their price would not and could not lessen demand for private rental properties.
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Zen Tiger
I would add a stamp duty that only applied on investment property to RN’s list. This and capital gains tax revenue off investment property would finance assistance to first home buyers. And yes it’s silly to offer rental property investors both a generous depreciation write-off and interest cost against rent income.
I would however consider a 2-3 year capital gains tax holiday for those who sold homes to their tenants/first home buyers. This would encourage transfer of ownership to tenants. This would take the steam out of the rising property values/speculation.
That said, because baby boomers are numerous and are living longer than previous genrations, a lot of housing is not available for sale, thus this problem will be with us for a two more decades. Rising migration only exacerbates it, it is not the cause.
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SPC said:- …we have a problem with deferred public sector investment catch-up – investment that the National administration of the 90’s should have done…
Investment in State Highways was increased from a real $m100 in 1989 to $m360 in 1999. This is a direct reversal of the decline in funding between 1975 and 1984 and was barely adequate to deal with the huge backlog of crash blackspots built up during those years. It also allowed a number of badly overdue urban improvements to be completed such as the removal of State Highway 1 from the main shopping street of Timaru (only 30 years after it was supposed to happen). Allowing for inflation most regions have actually received more highway investment under the 2nd & 3rd Labour govts than under the current govt. The West Coast actually did better under every previous Labour govt. Perhaps the govt hasn’t heard of the Great Alpine Fault or the fact that it is overdue for a magnitude 8 quake and therefore seismic retrofits are urgently needed on SH6 which is the only “lifeline” south of Hokitika.
It’s a pity that all infrastructure spending hasn’t been recorded with the same simplicity and detail provided in the Highway/Road/Land Transport Fund’s annual reports (since 1924). Who knows what happened to the amount of investment in other vital infrastructure in the last 40 years?
To get back to the original post, I think the following are important improvements to the original list:
1.-4. are good ideas, 6. is a bad idea.
5. building public appartments (not houses) with income related rents;
7. allow (or enforce) greater urban densities to encourage investing in mass transit systems in our cities.
How come transport planners were the only people who realised what would happen if we were all encouraged to live on quarter-acre sections back in the 1950s? Councils agravated the situation by changing their land zoning with absolutely no regard to the impact on planned or partly completed transport investment.
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Does anyone here think that putting petrol up 10 cents a litre is NOT inflationary? That single act will cause more inflation than many years of housing.So its not the housing market at all. Its government spending at record levels but WITHOUT an associated increase in productivity and outcomes. The state now outspends the private sector and it is disingenuous to blame housing.
If you were going to “sort out” housing issues , instead of complicating things with more mechanisms we should level the field by removing LAQC’s and negative gearing structures which distort the “real” return which property gives. With no tax deductibily investors will look at other avenues for investment as the average return of 5% on renters is not that flash.
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This has to be interpreted as Bollard’s message to the Govt to “do something” about fiscal policy / tax status of housing.
Obviously the Govt is reluctant to crash the housing market and possibly increase rents a year out from an election, so they will sit on their hands and hope it all gets better.
The list is pretty radical- but necessary. How about prohibitively taxing speculators (local and foreign) from buying existing houses- this is of little benfit to NZ. This would encourage them to get into new buildings instead, increasing supply.
Otherwise it’s lights out NZ- we will be a nation of renters with no jobs.
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To me the problem seems to be that the housing market doesn’t follow the rules of other markets. In most markets, if you increase prices (say by raising interest rates), there will be a drop off in demand.
However, with housing, people need somewhere to live, so increasing prices simply mean more people renting rather than buying, thus higher rental returns, thus more incentive to buy investment properties. Higher rents mean more incentive to buy a property to get away from paying rent, which means people are willing to pay more for a house, which means more incentive to buy investment properties, which means more people renting etc. etc. A nice vicious circle with multiple feedback loops.
The way out of this is to reduce real demand, therefore the government should encourage homelessness. They’ve been doing this in a messy sort of way for some time now and it seems to be having results, but pulling it together as a clear policy would work much better.
Making decent tents, old vans and sleeping bags available at subsidised prices would be one way to do it. WINZ could hand out cardboard boxes, tarps and maps with bridges and subways marked. Most OECD countries have numerous dossers in the inner city and squats or ‘informal’ settlements tucked away some where and it’s a shame to see NZ falling behind in this regard. Could the Green Party take a lead on this?
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Folks
I’ve seen the comments elsewhere, by people who SHOULD know better, that “Capital gains taxes don’t work because X has them and they still had a bubble”… which almost invariably can be traced to X having also dropped interest rates to effectively nil in the period leading to the bubble. There is no SINGLE tool that will prevent misuse of other economic features from queering the deal. The US has a Capital Gains tax but it also dropped interest rates to less than the actual rate of inflation. M3 is rising ballistically 11.6% over the last year… it is lying to everyone at this point.
http://www.shadowstats.com/cgi-bin/sgs/data
Then there’s the “It’ll kill the rental market” argument against removing the “investor incentives” which is not merely an error because BB said it’d happen. The problem is that prices are set at the margins. There are LOTS of houses and there are LOTS of people who’d be able to buy instead of rent if the prices were sane. The houses do not disintegrate because the rules changed to favour owners as opposed to landlords. Nor do people needing to find a place to live have any disincentive from buying.
As far as the “vicious cycle” is concerned, the issue is one of population growth and local rates of growth in specific parts of the country. The scenario short circuits if there is adequate land available to build on, because the cost of building hasn’t gone up anything like the cost of housing. The cost of LAND has gone up, but that gets handled by having decent fast trains into the cities and decent apartment blocks instead of standalone flats. I wouldn’t mind owning an apartment in the city instead of a McMansion in the distant suburbs. Not as good for raising the kids but in this country it is not that bad either.
There are people who have to lose out here, and that’s clear enough. The price HAS to drop.. and with prices set at the margins taking out the folks who don’t actually pay any interest on their loans, owing to the interest being tax deductible against an effective income tax approaching 90% would be a really BIG change in the dynamics. Offering us poor folks who don’t QUITE get there with what we’ve got the boost of allowing US to deduct the same way as the investor does is an acceptable compromise, but leaves the prices elevated somewhat.
The big losers if this all were to happen and the prices dropped, would not be owner-occupiers who are getting gutted by the OCR going up. They’re already in and living in the house and their situation is little changed. It won’t be the first home buyers either, they’ll vacate a rental and buy a house from the investor who got squeezed. The investors will, if they are not watching and selling out of their negative geared positions, get burned a bit but the real pain will be felt in the Real-Estate agencies and the Banks.
Notice how these are the same people who rubbish every suggestion offered except those that pump more money into the sector? They know the score. I think most of New Zealand knows the score here, that’s why people are investing in real-estate. It pays better than anything else, it’s subsidized by the rest of the tax base.
The real question is how Cullen et.al. can continue to justify their inaction on the problems they’ve created. I heard Bollard on the radio a couple of days ago commenting that he “didn’t understand” why NZ couldn’t have a Capital Gains tax. It took a moment for that to register with me. He IS the governor of the reserve bank after all. There has to be someone extremely powerful and extremely intransigent on this issue in government, and the only person I can see in that position is Cullen. Does someone at Westpac have something on him? I have no idea, but his office has acted, repeatedly, as a shill for the banks in Oz.
Thanks Russel… I noticed you issued a little press statement a while back too, and I meant to thank you for that as well.
respectfully
BJ
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Can we make something clear. We do have a capital gains tax already. Its been here for years. If you trade in property and make a profit when you sell, then the profit is counted as income and you get taxed accordingly.
I am amazed people still dont get this.
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BB said: Have you seriously thought through this little list of suggestions?, it seems to me that this comes straight from the red left of the Green party.
And how many investment properties do you own, BB? Maybe not as many as most of the Labour MPs, not to mention the National ones. This is why there is no action on this issue – the private financial isues of MPs. It’s nothing to do with “red left” – it’s just common sense to address the problem that investment in property speculation provides a much better return than investment in productive enterprise. Meanwhile, 350 Fisher & Paykel jobs go offshore.
Another good reason to vote Green!!!
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Voting Green would have kept those jobs in New Zealand, Toad?
That is a mighty long bow.
Please explain.
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Blue said: If you trade in property and make a profit when you sell, then the profit is counted as income and you get taxed accordingly.
No, most speculators don’t. If you declare to IRD that you’re operating a business trading in real estate then you are correct, Blue.
But if it is a “hobby”, and you just flick on one house each year and purchase another, it will be totally tax free. Very occasionally the IRD will do an audit and find someone has been avoiding tax becasue they have really been running a business, but usually they turn a blind eye.
The system is geared to promote avoidance.
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Gerrit said: Voting Green would have kept those jobs in New Zealand, Toad? … Please explain.
Gerrit, I would never guarantee that something would happen in a hypothetical situation, but I think the Greens do have some real solutions to the exchange rate issue, which is the primary reason for New Zealand companies moving their manufacturing offshore.
Sure, labour costs are an issue too, but Thai wage rates are actually increasing faster proportionately than New Zealand ones in recent years, so I think it is the exchange rate that is the last straw for businesses making this sort of decision.
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# Blue Says:
April 27th, 2007 at 3:27 pm
> Can we make something clear. We do have a capital gains tax already. Its been here for years. If you trade in property and make a profit when you sell, then the profit is counted as income and you get taxed accordingly.
only if trading in houses is the ‘primary purpose’ of what you are doing. If you buy a house to rent out, and aim to also make money out of capital gain when you sell it, then you can define the renting as the primary purpose of owning it and avoid paying tax on the capital gain, even if the capital gain is a large part of the profit you make.
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ahem..!..toad..
not to mention the fact that the green mps’ superannuation scheme has been to buy houses..
(how many do they have/own now..?..)
will they be able to swallow hard…?..and vote for a capital gains tax..?
you have to say..the turkey very rarely votes to be lunch..eh..?
this will/could be a real test of them ‘walking the walk”..
eh…?
and i must confess..
i too am keen to hear just what green party policy would have saved fisher & paykel some $15 million per year..?
and stopped them moving to thailand..
we sit/await with bated breath..
phil(whoar.co.nz)
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Toad
“And how many investment properties do you own, BB?”
You must be joking!…I have always steered well clear of rental housing as an investment.
Commercial real estate is the way Toad, for a very modest fee I would be happy to advise you.
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BB said: Commercial real estate is the way Toad…
OK, BB, you’re right pragmatically in terms of maximising investment return short-term. But I’d rather invest in economic development, production and manufacturing, than in property. Guess that under the current regime, that’s good returns for you and bad for me, because I haven’t made any money out of what I’m doing.
But I think I can still maintain the moral high-ground, because I have at attempted (with little success) to support production over speculation. Be nice to have some more bucks, but shucks, I don’t.
Phil said: not to mention the fact that the green mps’ superannuation scheme has been to buy houses.
I’m sure the Green Futures Superannuation scheme would have no problem paying a CGT on the properties purchased, if and when they are eventually sold.
The whole idea of this scheme is to give Green MPs the ability to have accommodation close to Parliament without exorbitant expense. No MP personally benefits financially from it, other than if they choose to invest in it – at a risk – because the accommodation is only what is required in excess of their personal/family home to carry out their duties as an MP.
Roll on the Capital Gains Tax – hopefully everyone on this blog, BB included, will front up and pay their share.
Phil, I suspect every Green MP and Green Futures would support a Capital Gains Tax – they are currently indicating only that a decision on this issue is dependent upon democratically determined Green Party policy, but that they support investigation of this issue.
The Green Policy Committee, in consultation with the full membership of the Party, is working on this. My bet is that this will be policy, endorsed by the Greens Party at large, by the time of the next election.
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Toad
“Roll on the Capital Gains Tax – hopefully everyone on this blog, BB included, will front up and pay their share.”
MY SHARE!!!….I already pay more than my share thank you very much, I even pay an accountant a ridiculous amount of money to reduce “my share” even further.
How I wish Mr Lange had the courage of Sir Rodgers convictions.
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Blue asked – Does anyone here think that putting petrol up 10 cents a litre is NOT inflationary?
Not when it only applies to private vehicles in an economically insignificant part of the country. Auckland is the Head Office and import distribution “capital” of New Zealnd and simply gets its wealth by clipping the ticket on business transactions in the real wealth creating regions. Then they add insult to injury by claiming that the GST and PAYE paid by the head offices of these national retail chains is being paid by Aucklanders!!!
Perhaps if the govt didn’t pay bigger rental subsidies in Auckland than anywhere else businesses might move to places that have cheaper housing and solve Auckland’s traffic problems at no cost to anyone other than those who have “invested” in properties in Auckland.
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toad said..
“..Phil, I suspect every Green MP and Green Futures would support a Capital Gains Tax – they are currently indicating only that a decision on this issue is dependent upon democratically determined Green Party policy, but that they support investigation of this issue.
The Green Policy Committee, in consultation with the full membership of the Party, is working on this. My bet is that this will be policy, endorsed by the Greens Party at large, by the time of the next election..”
i think i mentioned before..the righties at sir humphrys have been debating this issue..
and more than a few of them are unequivacal that the status quo cannot remain….
that ‘something must be done’..
and that a cgt on other than the family home seems to be/is the way to go…(!)..
so..given this (apparant) ideological lock-step..
the wide-boys/girls/property developers should be starting to be a tad ‘nervous’..eh..?
cos’ they are right..(in more ways than one)..
in that this situation cannot be allowed to continue..
and that ‘a change is gonna come’..
phil(whoar.co.nz)
(there is also schadenfreude to be had from the screams of pain from the bb’s of this world..enjoy..!..)
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“But I’d rather invest in economic development, production and manufacturing, than in property (Frog).”
Exactly.
Disproportionate interest in investing in the housing market exists despite such questionable economic benefit to this country (yay for the Aussies tho thru their banks). This is another example of the glaringly obvious being entangled under layers of bullshit to the point of paralysis.
Why? because it is financially expedient for individuals in the short term and that is what our financial system is based upon, hence the conflict with longterm societal needs.
Isn’t the Governments role in an economy to smooth the ride and avoid the boom and bust roller coaster?
From the audio: (Listen to Checkpoint: new reports (3:04) and NZ Property Council (6:02). (streaming audio, RNZ)) “voluntary incentives” for developers are discussed, what crap! It is the developers job to seek profits and their interest in long-term planning outside its ability to add to short term profit is very limited, that is just the way it is. It is the role of national and local governments to ensure long-term societal needs are met.
Affordable housing within developments is essential to provide a balanced and functional community. This doesn’t mean lumping all the service workers together in a dirty apartment and wondering why their offspring nick your stuff.
Perhaps the Government (and the Greens) should lead by example and invest in NZ business initiatives, particularly businesses focussed on ‘the great climate opportunity’. Large scale broad investment would mitigate the risk for all, thats where I want my superfund (mmm… futurefund!) Then we may see the heat come off housing, and initiatives developed to ease the heat on climate.
These are my thoughts “for discussion” and I am open to better ideas and enlightenment. Surely the fundamental economic basis of selfish gain for the benefit of all is the greatest bit of spin in human history.
great work Russel, get in there and mix it up! and good on BB too. Lets crank the mixer!
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I have rental properties. I wont be selling them in the near or distant future. How will the CGT reduce the cost of housing?
The only way would be if the properties are owned (like mine are) by a business and that you needed to show the CGT as a liability in the accounts.
However to do that you would need to seperate the housing asset from all the other business assets (plant, machinery, tooling, factories, land, etc.) in the asset register.
Something I dont think is pratical from an accounting point of view. Especially as one rental house is used as offices and workspace by the rentor and not for accomadation.
Sure, a short term rental property owners would be paying the CGT but the IRD have the power now to tax on speculative income so why bring out another tax for the IRD to collect? Just enforce the rules the IRD have available to them.
I cant see how a CPT is going to work as the magic bullet.
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but watchers of agenda would have seen minister carter emphatically state that cgt was not anoption considered by labour..
so what will he /labour do..?
hold on to your seats now..!
details will be released of a ‘small’ experiment in shared-equity..
these details will be released..next year..!
(good to know he/they are so ‘on to it’..eh..?…)
so..once again..labour lets the greens down..?
phil(whoar.co.nz)
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Yes Phil
Which is part of the question that was in Bollard’s “I don’t understand” statement and is part of my response.
Shared equity is just another way to transfer our money to Australian banks. That’s part of the issue where I am sure BB and I agree I think, in that it is a horribly bad bad bad bad bad idea.
Did I say it was a bad idea? The perps ought to be put in prison.
For those who get the Dom Post, another of my letters was published today. I wonder if I could turn it into a paying job…. naaah…
Gerrit – The capital gains would reduce the incentive to “invest” because the current deduction of interest really only covers costs for the most part. The rental investors who are negatively geared (and there are no small number of these) are counting on that tax-free capital gain as the profit in their investment. CGT doesn’t work alone though it’d take SOME of the heat off. Is a CPT a typo?
The LAQC and the effective marginal tax rates are the other bits. In the end the prices have to come down and the way that happens is when people realize that the government is seriously removing the incentives to invest in houses and creating incentives to live in your own house.
respectfully
BJ
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BJ
yep typos, thick fingers trying to move to fast over the keyboard (plus lazyness not to do a thorough check before posting).
I dont really see a way to force house prices down, Yes put the interest rate up and put a number of investors to the wall because their gearing is too highly negative.
Those houses will go on the market and be snapped up for not much less then their market value. The other investors will simply sit tight.
I doubt if you can reduce new housing costs (being priced on a cost plus basis). Which means second hand housing will remain high as well. After all if you just spent $400,000 on a new house you wont be selling it for much less.
There is only one way to stop house pricing from rising and that is to balance demand with supply. Once that is in balance , the pricing will settle.
So we need the councils to free up more land (or allow better standard of high rise living then those tiny little apartments in faceless cubes.
Or stop purchasers from buying. Not sure if you can do the second but the first is highly doo able.
To make housing more affordable is to get the earning power of the populace up. Less taxes, higher productivity with a reduction of government non- productive employment, export incentive, reduced business compliance costs, etc.
That is why the upcoming budget is a make or break one for Cullen. He has got to get it right or more of our spending power will either flow to overseas investors as interest, or into the government coffers as extra tax (which no doubt he will try and give a portion back through WFF).
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Gerrit
House prices have gone down in the past – at least in real terms – so of course they can, and will, fall again. They only have to remain static in nominal terms for a few years to reduce in real terms.
A CGT would reduce the peaks and troughs of the housing cycle by reducing the demand by investors. As someone else said, only a small portion of the houses in the market are traded in any one year so it only takes a small change in demand to change prices. While you may be able to afford to hang onto your properties no matter what, some people will need to sell and if demand has dropped they will have to take what price they can get – even if that means making a loss.
On the issue of whether we have a CGT – it may have been the intention of the current tax law when originally introduced to tax most gains, but the poor wording and the precedent set by cases means that on speculators who have a history of buying and selling properties ever get caught.
Here is the actual wording of section CD 2(a) of the Income Tax Act 1994 which says gross income includes:
Any amount derived from the sale or other disposition of any land if the land was acquired for the purpose or intention, or for purposes or intentions including the purpose or intention, of selling or otherwise disposing of it.
You don’t hear tax experts like John Shewan of PWC pointing what a terrible piece of tax law this is as it is great for bringing in income from investors like BB looking for advice.
who need advice.
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Gerrit
I really do not agree with this overall. I agree that there is a supply problem with respect to the available land, but that is NOT driving the prices the way the speculative investing is driving the prices. Both factors are operating at the margin but one of them, the speculative investor, can be curbed.
The point is that there ARE enough accomodations in New Zealand for people to have homes. Some people who are renting would LIKE to own, but cannot, others have no hope at all. That is not likely to change, but the current situation skews the balance so that almost nobody has any hope at all.
The chief factor I refer to however, is the confiscatory marginal tax on people who are moving from 50K to 80K of income coupled with the LAQC. Every family in New Zealand that has a home and is anywhere in this bracket, is going to get advice from their accountant to buy a second home and rent it. The capital gain on the house is free money, and the cost of the house is covered by the reduction in tax… the policies work together to make the incentive nearly irresistable. NO other investment protects that income. NO other investment is so fully funded by all the other taxpayers. I am tempted to buy as a landlord. I could do it EASILY given the incentives in the current policies. To live in that same house however? Impossible. THAT IS SIMPLY WRONG!!!
The result is that there is a rather large proportion of the market that is not productive at all. The real-estate agent looks at me as though I’m from mars, to be buying a house to actually LIVE in… (only a small exaggeration, they present the “tenanted” aspect as a big plus, and after talking with an accountant who had the whole thing laid out like a rug I am quite sure I understand why)
The house supply is simply NOT so inadequate as all that. The supply of houses not owned by people who are investing for tax reasons however, is vanishingly small.
Take away the LAQC and inflict a Capital Gain on the seller with some warning period/grace period…. the CGT goes into place in 4 years, sell before then and it’s still the old rule, after that it is X%. The LAQC as applied to houses is being reduced by percentages each of the next 7 years and at the end of 7 years it will be gone.
Investors will want to divest. No more artificial advantage. Those houses will come on the market increasing supply of houses for sale (but not the overall supply of houses). This WILL affect prices.
The rental market will not tighten up excessively as a result because the houses are not REMOVED from the market, the money supply supporting the market IS reduced by the removal of the tax advantage. The moving trucks would probably be a bit busy in the process but it’d knock the price on its head somewhat.
That would NOT address the systemic shortage owing to bringing in net migrants and natural population growth and the relative desireability of living close to your work (which is going to be near a city)… that has to be addressed by improving mass transit and increasing housing density and yes, adjusting the attitudes of some councils and finally by actually getting the country to real ZPG.
respectfully
BJ
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Durn it! I wrote a long response to you Gerrit and it just ain’t here.
Summary:
I don’t think you’re completely right. Yes, there are systemic problems with increasing population. The answers of better mass transit, denser housing and zero population increase are all valid ones in that regard because population pressures DO alter housing values.
The problem that we’re concerned with here is the massive government subsidization of the property investment sector. The middle class as it passes over the hump gets humped for an effective marginal tax that looks a lot like 80 or 90 cents on the dollar. You go to the accountants and they have preprinted brochures showing you how with negative gearing and the tax shelter provide by the LAQC for housing, you can have your investment property and the OTHER taxpayers pick up the tab, the money going to the banks in Oz. Seriously prepared handouts on how do do it. It’s damned tempting. I could EASILY afford to buy a house – provided I didn’t want to actually live in it. Rent it out and on the current policies it would be, to a very close approximation, free.
That Is Simply Wrong!!!!
The shortage isn’t in houses, it is in houses for sale. The houses are owned by landlords investing in rental accomodation and THAT IS ALL THERE IS! Yes there’s a lot of pent up demand because of the factors you are citing, but there’s also a complete unreality to the market that is due to the policies that the government is following.
If I am competing on an equal basis with the prospective landlord for the house, then I have a decent chance. I can’t compete if the tax base of New Zealand is funding that investor’s loan. Particularly if I am paying on MY marginal income, a rate of 80% but the guy with the 500K income is only paying 39%. There’s a certain level of “it’s not fair” that even I rebel against. I don’t expect it to be perfectly fair, but making ME pay for someone elses investment property? …and then add that subsidy to the profits of the banks in Oz and complain (again to me) about spending too much and the current account problems? Give me a fncking break!
respectfully
BJ
respectfully
BJ
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I blame it all on foreigners buying out our land, make them pay twice as much to buy anything and put the excess in a first home buyers scheme.
And most surely take land off people who are ruining it buy dumping rubbish or destroying it on other ways.
And i want a TAX FREE threshold, like they do in the great land of OZ.
And GST off healthy food, ” ” ” ” OZ.
OK l8rz
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“Everything is a bubble”
http://www.thestreet.com/_breitbart/funds/followmoney/10353243.html?cm_ven=BREITBART&cm_cat=Free&cm_pla=Feed&cm_ite=Feed&puc=breitbart
Bollard is “f@rting into the wind” as Eredwen is fond of saying.
With Cullen’s assistance things might be controlled somewhat, but Cullen appears to be a bought man.
respectfully
BJ
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At least we’re not in the sort of bubble territory the US is in. The problems we have can be fixed relatively easily if we can just catch the finance minister in a dark alley.
http://money.cnn.com/2007/04/27/real_estate/latest_home_vacancy_stats/index.htm?postversion=2007042711
The US did “a very bad thing” with interest rates to avoid being in a “worse recession” and to keep the Republicans in power, but like an overloaded plane you can only apply so much flap… when it’s time to pay the bills you have to keep going down at some rate or you stall and fall at a rate determined by gravity.
respectfully
BJ
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BJ,
I totally agree it is screwed up that is why I’m looking forward to Cullens budget.
The only way to get cheaper housing is to reduce the cost of land. (the physical building price is on a cost plus basis so the price of building is fairly well controlled – unless you can break into the cartel that is the building industry supppliers).
Now reduce the local body building fees (Auckland City want to increase their fees from $7000 for a single apartment to $40,000).
And we will get somewhere. Also increase the minimum aprtment size from 40 sq meters to at least 100. That way people can actually live in the shoebox rather then be shoehorned into it.
I can see more retirement style villages being erected for the young family (there is one being built out the back of Takanini right next to the rail line). However the pricing of the houses is such ($500,000) that they are out of reach again of the first home buyer.
ekstatek –
“I blame it all on foreigners buying out our land, make them pay twice as much to buy anything and put the excess in a first home buyers scheme.”
Not very pratical as the onus is on the seller to check the status of a purchaser. How will that be achieved?
No, you are better to hit the overseas investors and banks repatriating their dividends with a hefty levy. Give them the choice, either reinvest your money in New Zealand or face a 30% levy.
That levy, I suggest, would do more to curb excessive investment money streaming into New Zealand then any other proposal.
Either that or a 30% devaluation of the NZ dollar.
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“The shortage isn’t in houses, it is in houses for sale. The houses are owned by landlords investing in rental accommodation (BJ)”.
Yep.
The money is in capital gain, so to make the money you buy the house/property and sit on it. Making conditions favorable to investors (on the premise of providing rental accommodation) creates demand for property from investors, in the ensuring boom conditions become unfavorable for homeowners who are better off renting. Meanwhile the investors hunker down and try to ride it out while renting out the property to get their capital gain longterm, creating a supply shortage and keeping the price high.
This situation is supposedly for the benefit of people who need to rent houses? so I guess in this way it is working. But if it didn’t exist it would be easier to buy a house and not have to rent, and the market rent may be similar anyway.
Meanwhile it is not doing our economy any good. NZ would be better off without this government intervention.
I guess this highlights the dangers of government intervention, well meaning policy obliquely achieving its objective, but at what cost?
Just my assessment.
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Hi,
I don’t know what all the causes of the housing affordability crisis are, but can only relate my own personal experience, and what I think is the most realistic solution to the problem is.
I am married with two young children. Although I am on a moderately high income, I can simply not afford the cost of mortgage repayments (and I do not live extravagently … we eat kapa ika (tinned fish) stew most nights because it is cheaper than meat). The problem is that about 60 or 70% of my fortnightly pay would go on mortgage repayments, before I even thought about paying for electricity, food etc. Even if I could just make ends meet, what would happen when unexpected emergencies (which are usually costly) happened?
I can’t see any alternative than to rent for the rest of my life. Now, this in itself does not worry me too much. The difficulty is that rental accomodation tends to be short to medium term, and does not offer long term stability. Although landlords claim they want long term tenants, the reality is that it is common after a year or two for the landlord to change their plans for their rental property. Sometimes the rental property is sold, sometimes the landlord wants to move back into the property themselves. Whatever, it means I have to find a new rental property. With kids appproaching school age, I do not want to have to move them around from school to school every few years, simply because I can not find another affordable rental property in the same suburb.
The only practical solution I can see is for the government to build a lot more state houses, and set the rent so that the cost of building them is recovered over a 20 to 30 year period (on average … I like the idea of income related rents also). For tenants, this would probably be a lot cheaper (and more affordable) than getting a mortgage, simply because the cost to the government of building a lot of new houses would be less than individuals buying properties in a market where there is a shortage of houses. This solution would also offer stable, long-term accomodation to tenants. A side effect might be to take pressure of the housing market, and make private house ownership more affordable to those who want it.
One last thing … I strongly disagree with those people blaming the housing affordability crisis on immigrants. Firstly, many immigrants can not afford to buy houses either. Secondly, I think people that blame high house prices on immigrants are just looking for a justification for their personal xenophobia or racism.
Well, thats just my thoughts.
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[3]I think we need to factor marketing overseas. Build a development on a sandspit(?), or something like Pegasus Village and then go offshore and market it. There are a horrendous lot of people who can afford to buy property in NZ.
One of the thing that really hacks me off about this labour government; I believe they have sacrificed the things that made it so good to live in NZ for the short term effect created by building houses for new immigrants , and holiday houses for foriegn owners.
The Green Party has also failed as the current changes have all involved an erosion of Values. I think the three red mp’s wouldn’t know a green issue if they fell over it.
jh
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Who’s the 3rd “red” Green MP then, in your opinion?
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Are you saying there are only two?
jh
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locke/bradford/norman..obviously..
phil(whoar.co.nz)
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As Moore sees it, the composition of Greenpeace has changed dramatically since his heyday. He says the fall of communism brought an influx of anti-corporate extremism to the environmental movement because, “suddenly, the international peace movement had a lot less to do. Pro-Soviet groups in the West were discredited. Many of their members moved into the environmental movement, bringing with them their eco-Marxism and pro-Sandinista sentiments.
“A lot of those in the peace movement were anti-American and, to an extent, pro-Soviet. By virtue of their anti-Americanism, they tended to sometimes favor the communist approach. A lot of those people, a lot of those social activists, moved into the environmental movement once the peace movement was no longer relevant.” Social activists, he suggests, “are now using the rhetoric of environmentalism to promote other collectivist agendas, such as class struggle — which I personally believe is a legitimate area, but I don’t believe it’s legitimate to mix it up with environmentalism.” [Patric Moore]
Norman isn’t doing a bad job…on this post anyway.
jh
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jh said: I think the three red mp’s wouldn’t know a green issue if they fell over it.
Just because people have been involved with politics other than Green politics in the past doesn’t mean it is legitimate to say that. Sue Bradford, Keith Locke and Russel Norman make no secret of having been involved with socialist parties in the past. They have moved on – apparently jh and some others can’t.
For the record, the Green Party counts among its membership one former National Party MP and one regional spokesperson who is a former National Party member. Whatever side of the left-right spectrum we have come to Green issues from, Greens recognise that there are other spectra such as green-brown and libertarian-authoritarian – please don’t denigrate people as not being committed to Green issues (on any of those spectra), without citing some evidence.
From what I’ve seen, as someone who knows them all well, Sue Bradford, Keith Locke and Russel Norman all have a very deep commitment to the environment. The Green Party allocates MPs (and Russel as a non-MP Co-Leader) spokesperson roles. The three people you are talking about, jh, have major spokesperson roles that are more related to the Green principles of non-violence, social justice and/or appropriate decision-making, than that of ecological sustainability. That’s why you see most of the media work on environmental issue coming from Jeanette, Metiria, Sue K and Nandor.
It’s a matter of spokesperson allocation according to expertise, not a matter of the relative commitment of Green MPs and Co-Leaders to particular areas of policy. If they were not committed to upholding all Green policy they would not be reselected in electable position on the Green Party list. That decision on list ranking is made democratically by the entire membership of the Party – unlike any other political party.
So if you don’t think Sue or Keith or Russel are upholding Green principles, join the Party and have a say in the selection process. I’m confident that once you are involved and see the work they actually do in support of all Green principles and policies, you would no longer question their commitment to ecological sustainability.
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er, hello, russel is not an MP.
yet
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Nope, but jh mentioned 3 MPs, and Phil dragged Russel as well as Keith & Sue into the debate (as he would do). So just progressing the discussion on that basis.
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Toad
Come on!…I have heard Locke talk about many things and not once have I heard the man talk about anything to do with the environment.
The man is driven by a hatred of capitalism and in particular a hatred of America and her allies.
The Greens try and claim the morale high ground on many issues (and are often entitled to do so) so why not come clean on this as well, unless you are prepared to front on this issue then many of the voting public will continue to feel that Green issues are merely the Trojan horse that hides the true intentions of the party.
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I still think to Greens face a series issue in being perceived to be a watermelon party.
It would seem that is has in actual fact become a refuge for the left of left thinkers. This may be all well and good but with the major red and blue parties coming out with Green policies, the Greens may find themselves losing voters.
Interesting times. Not helped by the dogged and uncompromising attitude show in the s59 debate, where the Blues have taken the initiative and the Greens look like?
The pendulum is about the swing from the left to the right, where to the Greens, when their environmental policies really do need to be aired on the treasury benches of government. Not looking across from the desolate opposition benches.
The Blues overtures in a compromise and workable solution in the s59 debate show a way that the Greens can have a stake in the rightish government.
However with Locke, Bradford and co in tow, I dont think so.
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of course another member of that old-school-left/alliance-party-refugee grouping is catherine delahunty..(next on the green party list..)
all things being equal she could well be in parliament next time..
(and delahunty could well make/be an effective ‘attack-dog’ mp in parliament..
think..the greens’ trevor mallard..
i could see her scaring some of the more submissive national mps rigid..)
and she is perhaps the most die-hard old school lefty of them all..
(maybe kneck and kneck with locke..
in the ‘redder shade of green’ stakes..)
but of course big bruv and gerrit are talking absolute drivel..
when they extrapolate out from those facts..
for a start those three individuals are not ‘the party’..
much like national..and much more so than labour..the greens are a broad church..
from old school/carnivorous lefties..
to sensitive new-age vegans..(ahem..!..that’s not me..the vegan part yes..)
and (using meat as the ‘arc’)..swinging through khandallah-residing..”..i only eat ‘organic’ meat..darling.”..
given all that..and the other undeniable fact of many/most ‘green-concerns’ becoming more mainstream by the day..
you’d have to say big bruv and gerrit are just doing a bit more of their usual trolling..
eh..?
phil(whoar.co.nz)
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and given ‘panty-slut-boy’s published/alleged predilictions..
maybe he would also derive/get a certain ‘frisson’..
from a delahunty in full flight..
eh..?
phil(whoar.co.nz)
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airing a concern about the Green party is trolling …….
maybe it is better not to belong to, or vote Green…..
eh..?
to change the environment one needs to be close to the treasury benches….
no…?
but if the Blues have the same environmental policies as the Greens they wont need us…..
simple…?
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Big Bruv said: I have heard Locke talk about many things and not once have I heard the man talk about anything to do with the environment.
Um, what about Auckland transport issues, including the electrification of the Auckland rail network? This is one of the most important environmental issues of the moment, and Keith is the Green MP fronting it.
By the way, the Greens’ Auckland rail electification petition closes tomorrow – download it from here if you haven’t signed it already.
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Gerrit said: but if the Blues have the same environmental policies as the Greens they wont need us…
But, Gerrit, they don’t have and won’t have the same environmental policues as the Greens. It’s only since the departure of Don Brash that they have a leadership that actually acknowledges climate change as a reality. Unlike the Greens, the Nats don’t have just slogans and no actual policy to address climate change. This little gem still appears proudly on their website:
National’s policy on Climate Change is about ensuring New Zealand’s jobs and growth are not sacrificed on the basis of equivocal science or commitments that have New Zealand carrying an unfair share of the burden arising from climate change. National wants a more balanced approach that New Zealand contributes constructively to a global response to climate change but not at the expense of jobs and growth.
In other words, do nothing, because the Great God of economic growth is more important.
Anyway, even if the Nats do clean their environmetal policy up, they would still need the Greens to govern on current polling, because ACT’s not getting any traction in the polls and any other potential Government partners they have like UFNZ or NZF appear to be going down the gurgler.
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Toad,
So a working relationship with National is not ruled out?
How do the left of lefters feel about that?
Will this cause a conflict in the party?
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Never the less the Green Party’s policy mix is peppered with extreme positions while being blind to what is going on at the local level. Big on “Spy bases”, but the demise of the Kiwi batch goes right under the radar. The unrepresentative nature of the party zealots shines through as incumbents try to push through their pet hobby horses. The zealots wrongly think that they will talk everybody around but by loading their polcies with the sensible ones, they put a spanner in the works.
[I heard Meteria Turei say on Radio NZ that she met Sue Bradford through Unemployed Workers Union.???]
jh
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oh gerrit..are we seeing for the first time the hint of yours’ and bb’s agendas in spending so much time here..?
“..so a working relationship with National is not ruled out..?..”
how fey/disingenuous of you..?
what..attempt to sew dissent first..?..then..
spring your ‘cunning -plan’..eh..?
ya gotta laugh..!
phil(whoar.co.nz)
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Hi jh,
I have quite a different view than that expressed in your comment:
“Never the less the Green Party’s policy mix is peppered with extreme positions while being blind to what is going on at the local level. Big on “Spy bases?, but the demise of the Kiwi batch goes right under the radar.”
In my following of this issue (which is very dear to my heart) the Green Party is the only political party in NZ that has been commenting on and drawing attention to the demise of the Kiwi bach and the impact of that on our values and lifestyles.
This has typically been argued through from the effects of the open Dawe policy by the Overseas Investment Coommission (headed by Stephen Dawe) towards foreign purchasers buying up our best coastal properties (and high country retreats as well) and pushing the prices out of reach of most New Zealanders.
The proposed solution has been local ownership only restrictions – or at least, rights to property ownership only for those with residence rights. All others can lease if they like. This is, to my knowledge, the standard approach in most parts of the world. In countries that have allowed a fully “open” property market to international buyers there has typically been rampant inflation of choice property locations to the detriment of the majority of the resident population. Not quite ghettoised in our own land but certainly price-excluded from our best coastal properties.
I’ve just spent a gorgeous weekend at Mangakuri – a relatively unspoilt bach settlement on the east coast of the North Island (east of Waipawa in Central Hawkes Bay folks) for the glorious price of $60 per night. That is about to go up relatively sharply in the near future as $1 million bach sales in the area have encouraged the local council to hike their rates bill to $3,000 per annum – more than is paid in rates in the more expensive suburbs of Napier.
And on the bits of coast where non-residents have bought land with control over beach access they typically close that off from the public – despite in many cases a long history of public access.
And yet our media beats up on fears about Maori gaining customary rights over the foreshore and seabed out of some fear that they may restrict access or charge for it, which seems a misplaced fear in any case, and yet never even reports when access has been denied by foreign owners.
My own bach at Tangoio Beach (north of Napier) was bulldozed last year under pressure from the council – with no compensation and little justification – apart from a very spurious coastal hazard zone report which, if taken seriously, would beg the question as to why four of the baches at the eastern end of the beach were not already inundated or washed out to sea given that the “Present Hazard Line” ran on the landward side of their baches.
That’s my rant on the issue …
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jh said: … the Green Party’s policy mix is peppered with extreme positions while being blind to what is going on at the local level. Big on “Spy bases?, but the demise of the Kiwi batch goes right under the radar.
Not at all. The Green’s trade and foreign investment policy would reserving land ownership for New Zealand citizens and permanent residents. Foreigners buying up coastal properties for holiday homes is the primary cause of the demise of the Kiwi bach.
And this media release from Jeanette is far from indicative of the demise of the Kiwi bach going under the Greens’ radar.
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Hi Phil,
Apologies for late response re your post above… I’ve been away at said bach.
“ahem..!..toad..
not to mention the fact that the green mps’ superannuation scheme has been to buy houses..”
My understanding (and it is a bit dated) is that the Green MPs “Green Futures” fund bought two houses in Wellington to rent to Green MPs so they would have accomodation close to Parliament when they were in town. As I understand it the remainder of the fund is invested in a whole range of sustainable and responsible businesses.
I don’t know what the Fund’s disclosure/privacy rules are (indeed the issue may have been addressed already in one of the other posts above that I haven’t read yet – but just pointing out that you might be jumping the gun on this one.
A CGT only applies when a property is sold – so as long as the nGreen Party has a parliamentary presence I suspect the Green Futures Fund will hold on to the houses and avoid any tax (if one were introduced).
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Just picking up on Kiwi`s rant and I think that over the years the OIC has a lot to answer for. I am a subscriber to the Campaign Against Foriegn Control (CAFCA) so I get a lot of information on this issue. Over the the past decade the amount foreign investment on the domestic property market has been huge, it`s has been open slather and as a result Kiwi`s can`t afford to buy property now.
I think that the solution is an old one from the days of Joseph Savage,Put another player into the market. I would be very happy to pay tax for a government initiative to provide reasonably priced housing for the lower paid earners.
Having said that I don`t think that we should go back to the state house mentality that could create future slums. Rather the government provide housing on a ‘ rent to own ‘ basis. That way dwelers of such properties become stakeholders and have more responsibility.
This then would put a break on the property market as there would be a lot less demand for accommodation. But again there has to be the ;-
POLITICAL WILL to impliment these policies.
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Thinking pure economics here, definite some illiteracy here:
“a capital gains tax excluding the family home” would be deflationary.
“reforming the tax system to stop tax advantages coming from investment properties” Meaningless twaddle unless there is detail
“limiting the sale of land to New Zealand residents and citizens only” Negative equity for thousands of New Zealanders with mortgages, this would devastate many many people as their homes would suddenly be worth tens to hundreds of thousands of dollars less than they are now.
“increasing banks capital adequacy ratios for housing loans” How and Why? How the hell do you know what is appropriate?
“building more public housing with income related rents” This would be inflationary, so completely contradictory to the other policies.
“requiring developers to provide a proportion of affordable housing in larger developments” Whatever that means, this is deflationary and because it will be defined arbitrarily (what does “affordable” and “larger” mean) will have loopholes and be a burden on government administration and compliance.
“investing in mass transit systems in our cities to allow greater urban densities” Inflationary again, and a nonsense given that the volumes of people travelling on single point to point trips are so low it will cost a fortune in subsidies to serve a tiny minority of commuters. Also assumes people want to live in high density housing.
The reality is that the government has run a loose fiscal policy and looser monetary policy than the past, and the Greens “big government” approach to just about everything (the answer is almost always to tax what you dont like and subsidise what you do) will exacerbate that. Interest rates need to rise significantly, and government spending (central and local) needs to be brought under control.
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“reforming the tax system to stop tax advantages coming from investment properties? Meaningless twaddle unless there is detail
+++++++
removing many of the (generous) rebates for owners of rental property?
——-
“limiting the sale of land to New Zealand residents and citizens only? Negative equity for thousands of New Zealanders with mortgages, this would devastate many many people as their homes would suddenly be worth tens to hundreds of thousands of dollars less than they are now.
+++++++++++
A similar effect to the removal of subsidies to farmers by Rodger Douglas?
———–
“investing in mass transit systems in our cities to allow greater urban densities? Inflationary again, and a nonsense given that the volumes of people travelling on single point to point trips are so low it will cost a fortune in subsidies to serve a tiny minority of commuters. Also assumes people want to live in high density housing.
++++++++
I don’t particularily want to live in a traffic clogged Christchurch, Tokyo’s streets are quieter. Given that so many developers are the types who don’t believe in global warming or oil field depletion, we can’t expect many novel eco freindly houses being built.
I don’t believe that market forces can produce the most optimal outcome for urban infrastructure
jh
————–
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Sorry Liberty, you’re on my turf now and if you’d read a tenth of what I’ve posted you’d not have started in with “meaningless twaddle”. I’ve spent time discussing it with Cullen’s office and I know whereof I speak.
Property investment is favoured by policy. Cullen’s office confirms that it is intentional. The result in terms of the LAQC deductions, the deductibility of interest in particular and the hump in the effective marginal tax on people in the mid to upper middle incomes means that I, by not investing in a house to rent to someone else, am subsidizing someone else to own a house for the purpose of renting. That is not imaginary. You can go into any accountant in the country tomorrow and confirm it. They’ll explain how to break down your expenses and depreciations so that the 20K of income that was going to the tax man comes back to you to send to the bank in Australia and your deed is right here.
Then go to the Real-Estate agent. He’s advertising houses that are already tenanted.
The mortgage interest increase is being written down against income that was being taxed at effectively close to 90 % . Tell me again about the “meaningless twaddle”??? I know this stuff because I am living it. I am struggling hard to find ways to afford a house… on current rules it is on a knife-edge whether I can afford one to live in… but if I were to rent it out I could EASILY afford it. I’d have money left over. Now I will say again what I said above.
THAT IS SIMPLY WRONG!!!
As for wiping out a bunch of people who are currently “speculating” in the housing market, as encouraged by current policy, I have to hope that any change will be slow enough and telegraphed thoroughly enough, that they can beat a retreat without getting ruined… but I don’t have a LOT of sympathy. Not when they are profiting at my expense as they currently are.
As for wanting to live in high-density housing, that is not as hard a road as you seem to think. I’ve seen some damned nice apartments in NYC, 13 floors up and no view to speak of but the whole city for a playground? Yeah, I like that lifestyle… open 24×7, but it isn’t quite so good for young children.
The mass transit is for fools like me who have a few of those and want the family closer to the country than the city, which means the dreaded ‘burbs. Because if the rail is electrified out to Waikanae I can live in Waikanae… effectively opening up more property to people who want/need to work in the city.
Someplace along the line you got the wrong foot forward here. Building more housing that costs less HAS to pull the market down. How do you figure else? That the government spent the money?
They’d be spending it on construction HERE – not on houses already tenanted being swapped back and forth for tax advantages and the financial benefit of the Australian banks. Yes, it’d keep the pressure on the construction industry, but they’d be building houses people could afford to live in instead of McMansions.
respectfully
BJ
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“I don’t believe that market forces can produce the most optimal outcome for urban infrastructure(jh)”.
True that!
“The reality is that the government has run a loose fiscal policy and looser monetary policy than the past, Interest rates need to rise significantly, and government spending (central and local) needs to be brought under control.”
Some points here, Yet The Nats, UF and Act all wanted their tax cuts on top of all this spending, some illiteracy there? Much of that spending needs to be redirected towards preparing for an as yet unforeseen (by Govt) future. Eg returning to rail freight.
Also, property investment subsidies are Government spending and how will rising interest rates curb speculative investment in the NZ dollar? People have money to invest, but it needs to be redirected toward more useful avenues. Property investment is a good example of what government incentives can encourage (time to let that one go to the market tho).
Economics has a role, but is claiming more powers than it can deliver, market forces are only one tool and that tool needs to be put in perspective so we can use the other tools in the box.
However the effects of environmental refugees from all walks of life, eg Northern europe and asia will make any efforts to achieve anything impossible.
People need to plan for the future, and people need to be empowered to seek that future.
Home ownership, at a reasonable price that still allows financial flexibility is part of this empowerment.
I just heard of the new Govt plan to help people buy houses, great, lets put more heat on the fire! What are they doing!
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You are guite right McTap, the Govt plan to help people buy houses will succeed in pushing prices up even higher.
Why oh why does the Government not see it is effectively subsidising landlords to buy houses that should be bought by first home buyers?
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I’m thinking that the correction, when it comes, will look something like the stock market crash of the 80s. Wiping out the illusory savings of a large segment of the middle class.
There is a difference : if you own stock that was worth $100k and then a few months later it’s worth $20k, well, you’ve still got $20k. But if you’re holding a $300k mortgage on a $350k house that turns out, a few months later, to be worth $200K…
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Alistiar,
If you can afford to keep paying the morgage it is not a problem. It is after all just a paper valuation.
Sit tight and wait for the upswing. Usually about 4-7 years between crests.
The only downside to the drop in valuation is the ability to borrow against the assest on the part your morgage has already repaid.
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[From John Maudlins Newsletter]
I had several people send me a copy of Jeremy Grantham’s latest client letter. Long-time readers are familiar with Grantham, as I have quoted from his wisdom more than a few times. Grantham is chairman of Grantham Mayo Van Otterloo, which manages around $150 billion. He is famous for his value orientation and research.
I quoted this bit from Barrons about four years ago:
“My colleague Ben Inker has looked at every bubble for which we have data. His research goes back years and years and includes stocks, bonds, commodities and currencies. We found 28 bubbles. We define a bubble as a 40-year event in which statistics went well beyond the norm, a two-standard-deviation event. Every one of the 28 went back to trend, no exceptions, no new eras, not a single one that we can find in history.”
The Street.com excerpted some of the more salient quotes from Grantham’s recent newsletter. From their site:
“While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent. One, unsurprisingly, is legendary value investor Jeremy Grantham – the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham … has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
“‘Everything is in bubble territory,’ he says. ‘Everything. The bursting of this bubble will be across all countries and all assets.’
“‘From Indian antiquities to modern Chinese art,’ he wrote in a letter to clients this week following a six-week world tour, ‘from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!’
“‘Everyone, everywhere is reinforcing one another,’ he wrote. ‘Wherever you travel you will hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets must keep rising,’ and ‘private equity will continue to drive the markets.’
“As Grantham points out, a bubble needs two things: excellent fundamentals and easy money. ‘The mechanism is surprisingly simple,’ he wrote. ‘Perfect conditions create very strong ‘animal spirits,’ reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism.’
“And it becomes self-sustaining. ‘The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you.’”
An Exponential Phase of the Bubble
So, does he counsel you to run for the hills? No. Their study of bubbles suggests there is a short but dramatic “exponential” phase before the bubble bursts. He writes:
“My colleagues suggest that this global bubble has not yet had this phase and perhaps they are right. … In which case, pessimists or conservatives will take considerably more pain.”
So what is fueling the stock market if it is not a rising economy? Let’s look at a few possible reasons.
First, we are seeing large amounts of stock being taken out of public hands and going into private hands. Lombard Street Research reports that net retirement of stock in nonfinancial US companies reached 5.2% of GDP in the last quarter of 2006, and about 6.5% of their market value. About 85% of that was financed by debt of some kind, either through buy-backs, takeovers, or private equity (the latter of which is highly leveraged).
Second, money supply does matter. We are seeing the broad money supply indicators (M-2 and M-3) rise not only in the US but all over the world. This is not a central bank pumping function but a market-driven phenomenon, as leverage is increasing the capital deployed in today’s markets. The central banks of the world have largely lost the ability to control the money supply, other than by the narrowest of measures, which are increasingly less meaningful. We are not seeing the rapid increase in money supply show up in inflation or loss of buying power but rather as inflation in asset prices of every kind, as Grantham notes.
Finally, rising prices create their own kind of self-fulfilling momentum. As more and more people throw caution to the wind and jump into the market, hoping to capture some of the profits they see their friends making so effortlessly, you finally get down to the last bear standing. Mr. Market will do whatever it takes to prove the most people wrong. And one of his favorite things to do is to create momentum markets which defy the logic of the underlying fundamentals. It then ends in tears.
Housing Numbers Continue to Deteriorate
As I have written since last fall, I still expect to see a slowdown or recession in the US this year as a result of the housing market slowdown. There is nothing in the data that came out this week to change that view. I think the probability of a recession is now over 50%.
Total home sales are at their lowest level in almost four years. New home sales are close to a seven-year low. Prices are falling in many areas where there was a bubble in prices. Even though we have seen a significant decline in new home construction, the number of homes for sale continues to rise. Look at this chart from http://www.dismal.com.
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McTap Says:
April 30th, 2007 at 10:33 pm
“I don’t believe that market forces can produce the most optimal outcome for urban infrastructure(jh)?.
——-
Governments (beaurocrats) can’t be relied on either, but chances are somone in the community has a better vision than someone else.
jh
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JH,
That is the statement that BJ linked to in an earlier post.
You know the easiest way to make money. See a bubble situation like the housing market, talk it up that it is about to burst, when it does and prices drop, those unfortunates unable to service their morgage will be forced to sell at a cheap rate. Guess who buys?
Yep your man predicting the bubble. That is why the rich entrust him with their money. Bottom feeders are what they are called. But it is free market at its very best so I’m rearranging my finances to free up equiti in my properties and when the bubble burst, be ready to swoop on some juicy cheap properties that will swing up in price again 4-7 years from now.
And so a new buble is created. Ready to be burst again.
God, you just got to love it. How does the Dire Straight song go? “Money for nothing”.
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Gerrit
If money is taken out of the market due to Cap Gains and speculation investment due to leveling of the LAQC and Tax issues, the advantages of swooping may be somewhat reduced from previous performances… It is however, likely that your view will turn out correct as correct action by this gummint appears to be a very a very safe thing to bet against.
respectfully
BJ
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A capital gains tax wont effect rental investors unless they sell. Most of them hold onto their existing properties and borrow against the equity gain to finance their next one. With a capital gains tax excluding the family home, all investors will need to do is move in if they have to off-load one.
When they introduce equity sharing or any other method to help finance first home owners into housing, all it will do is drive up prices making housing more unaffordable unless you have existing equity. I wonder if those big aussie banks will want to pay CGT on their equity share?
Getting rid of tax advantages on negatively geared investments will force landlords to put rentals prices up to make these investments profitable.
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Agreed Bj,
See if JH sells his house he bought for $300K, when the bubble burst, at say $200K and I buy it. Hold it for 4-7 years and sell at $260K I will have made the $60K. Now I dont mind paying the rightful taxes on the $60K amortised over 4-7 years. Still be in the money.
JH wont loose $100K unless he has to sell (you’d be better off working to or three jobs to keep the morgage payments up to date and wait for the cycle to start again) and even then will only loose his deposit and interest plus capital paid in the morgage. His loses might not be high at all. They wont be $300K unless he has paid the morgage off.
If he has paid the morgage off he wont be able to borrow much against the value of the house, but he is not in a position where he has to sell.
Bearing in mind that if he does sell his totally freehold house for say $260K having paid $300K for it, the likelyhood that the property he is buying has also decreased in value so he is in an actually better position.
The big losers in the housing bubble burst are the lenders. That is why they fight tooth and nail to think of getting government money into the market by way of putting some of the surplus into this equiti share scheme.
Which is very dangerous as the government how has motivation to keep house pricing up (to protect the peoples investment) by limiting land available for new housing.
The only way to reduce house pricing is to reduce demand (shooting a few million people should do that) or increasing housing numbers (something the government equiti scheme is not encouraging)
This housing is a real conundrum and my way to overcome it is to prevent funds gained from the ever increasing interest rate from leaving the country. Has to be reinvested into New Zealand. That will slow the overseas money supply, drop the dollar value as a tradeble commodity to help exporters and productive industries, create a larger investment pool of money to fund infastructure, etc.
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Hmmm… my response to LibertyScott has gone missing. It isn’t clear what’s going on Frog. I don’t think I put in anything that should’ve got that moderated. Can I have a clue about what it is that got it sinbinned please? -or does the SW flag it without identifying why?
Thanks
BJ
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Bjchip:
trouble you with a question? (not a snipe, just genuinely uniformed but interested)
“The mortgage interest increase is being written down against income that was being taxed at effectively close to 90 % ”
Why are the effective marginal tax rates on this group so high?? The income tax rate is 39% for $60,000+…what adds the remainder?
Are we talking something to do with losing Working for families benefits… or what else?
(Wish I was in this income category and hence knew such things)…
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Tom
You pretty much got it in one.
The Working For Families is not the only benefit that gets phased out. There are housing and other benefits. The rate changes differently for people with different numbers of children and the 90% effective was calculated a couple of years ago, before Working For Families which is actually supposed to smooth it out a little bit.
However, the fact remains that if you make a decent living at 55K you’re not going to get linear improvements with any pay raise until you reach up into 6 figures. The odd thing is that Sweden, which is NOT known for having low taxes, went through the exercise to smooth out the schemes. Their top rate is around 58% for their top earners IIRC. I noticed when I was looking at their schemes that BOOKS were GST free there. Not a bad idea.
I don’t demand perfect smoothness but what we’ve got right now is downright nuts. Cullen has no intention of changing it for the better and Key apparently wants to make it worse, as Working For Families stretching out a bit means SOME reduction in the hump.
respectfully
B J
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OnceBitten says removing tax advantage of negative gearing will force landlords to put their rents. Well, unless all the thousands of landlords can get together and form a cartel, any landlord raising the rent significantly will just cause their tenant to leave and they will end up with an even lower return!
When house prices have gone backwards before or when Muldoon put restrictions on the tax benefits, did rents rise – I don’t think so. Pull the other one OnceBitten.
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Gerrit
I was thinking about that notion of yours, to keep the increased profit from interest increases in the country. Sounds interesting.
Of course I immediately focused on the Australian banks making housing loans here and reaping those profits.
I reckon that getting anything done will involve identification and neutralization of their agents in Cullen’s office however. I don’t know what Cullen is actually up to, but if he keeps running true it will involve further massive transfers of NZ wealth to Australian banks.
respectfully
BJ
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AJM I disagree.
The main factors which determine the cost of supplying rental accommodation are:
- the market value of the houses
- maintenance costs, rates and insurance
- the rate of return required by landlords, given that houses are risky assets. This includes the capital gains expected by them.
- taxation.
The cost of supplying rental accommodation and the demand for it interact to determine rents.
Increasing the cost of supply with no change in the demand for rental accommodation will lead to rent increases.
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Agreed BJ,
You get the feeling New Zealand is being raped by the OZ banks. Bit of a long bow probably to say Cullen is in cahouts with them, but he has given them the key to the door and turned a blind eye.
He has a serious problem though, with an huge surplus he cant pass back to the people without causing inflation, cant lower taxes as it is against Labour party policy, cant reduce the size of goverment expenditure as he would loose Labour votes, cant cut back on overly generous WFF and student loan policies, etc.
On top of which he has a very conservative Reserve Bank Governor with limited power to do anything except put the OCR up and cause even more money to flow across the Tasman from the home and business owner. All for no real reason, except to kill New Zealand’s export markets.
By limiting the amount of money able to be transferred back overseas we would sort out the real keen investors who want to see their money and New Zealand prosper and those who are only here for the short term gain.
Cant honestly see any other answer.
Except to continue without change and see New Zealand loose dominion.
That suggested monetary union (which Cullen seems top be in favour of)with Australia being the start. Something we must never allow to happen unless we want to be a state of Australia with about the same standing in their parliamant as Tasmania has (not very much at all).
While we continue to focus on the housing debate, the bigger picture gets overlooked. A conspirasist may draw some interesting conclusions.
Housing is but part of the problem.
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OnceBitten
If I move out of my rental into a house I finally managed to buy, that is one unit of rental demand decrease. That’s a point I think you need to add into your equations. If demand IS constant than you’re likely correct, but there’s a lot of rental “demand” right now that is really displaced purchase demand.
Gerrit
I don’t usually assign to conspiracy what I can easily attribute to stupidity.
However, Cullen’s office is clearly attached to some vision that is not shared by you and me and the rest of the country as a whole. The man is NOT stupid. Wrong IMHO, but he has to have some reason for persisting in this error in the face of all the evidence that it is an error and pressure on his office to alter his policies. I often black-box things to see how they actually work and who profits. I think that if you were to run a really deep check of who works in that office and who Cullen talks with on a daily basis you’d find some Australian “white-ants” in the woodwork. He may not even realize he’s being manipulated. Smart people are not immune to such things.
respectfully
BJ
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The problem is the supply of housing, investers are competing with occupiers driving up prices.
What we need is more housing erring on the oversupply side.
With out a greater supply of housing, Cullens equity sharing scheme will just empower people to pay higher prices.
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OnceBitten,
Absolutely true but the private sector and the councils favours an udersupply to keep the prices high for higher returns and greater rate takings.
They control the land released for housing.
Now the government could step in and build a heap of State Houses. But that would flood money into the land owners, building supply and construction industries (and onto their workers, shareholders, etc.) leading to inflation.
Inflation causes the Reserve Bank to hike up the OCR flooding more overseas money into New Zealand for what is now internationally the highest retrns available.
Meaning more of you money flowing overseas in the way of higher interest payments.
And our productivity and export industries taking another hit.
As I said housing is but a small cog in a very large wheel of problems (or fortune if you have money to invest).
A real pickle for sure. Wonder what Cullen has in mind to literaly put a spoke in the wheel.
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Higher capital gains tax should be levied more on overseas investors and a tax on the developers who are making a killing on domestic property market. Why should young Kiwi’s be penalised?
At the moment I am house minding, I’m sure that I have got archival material on this issue going back ten years or more in ‘Foreign Watchog’ magazine.
This phenomina known as the ‘property market’ bubble had been predicted back then and comes as no suprise. Dr Rosenberg and Murray Horten have written many a treatise predicting the escalation of the prices on the domestic property market.
Please feel free to search Campaign Against Foriegn Control. I might add that Dr. Rosenberg was a lecturer of economics at the Canterbury University for a number of years.
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“A capital gains tax wont effect rental investors unless they sell.”
Not necessarily. You can charge tax on change in valuation rather than waiting until people sell. It’s what Cullen plans to do for overseas investments, for example.
But like pm67 above, I think a simple land valuation tax is better. There’s good reason why Adam Smith liked it. None of this fancy-schmancy trying to keep track of what’s a primary home and what’s a holiday home and what’s an investment property: any complication is just an excuse for accountants to find loopholes. Just a flat 1% of RV per year in tax.
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How in the hell can it be legal in ANY interpretation of the Treaty, to sell land to foreigners?
respectfully
BJ
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icehawk,
When the government is already sitting on a 9-12 billion dollar surplus what would the extra tax be spent on that does not cause inflation?
Basing the tax on rated value is not going to drop house prices. It will be in the interest of councils and the government to have high rated house prices to maintain their revenue streams.
This whole dialog is about making housing more affordable so many more people can participate in home ownership. Adding a yearly tax based on rated value is not going to do that. In fact it is more likely to be seen as a barrier (an extra cost on top of land rates, etc.) for people moving into home ownership.
Would you extend the tax on rated value to commercial and industrial property?
You would be sending many farmers (whose residential house sits on his commercial land) a tax bill for $100K every year. Same for factory owners with commercial property valued at many millions of dollars.
Not exactly a workable solution.
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Jeez guys, I think you have forgotten at one time you were all foreigners. Do you ever have any other solutions apart from tax and ban? Pretty limited thinking I reckon. Foreigners arent buying our residential houses in great numbers anyway.I understand its negligble. And developers pay tax , some of you guys opinions are totally naive and economically embarrassing. No-one seems to pick up on headlines like today where Auckland council announces a rise in building consent fees. Hello, may be theres a link to council costs and policy and how that hurts house affordability. Also if you are taxing everyone so highly how can anyone save. Petrol just went up 10 cents a litre but oh no, thats not criticised but dont you think this increased costs affects howpeople can save?
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Totally agree Blue,
Less taxes, especially seeing the size of the surplus. Sooner or later that money has to be spent. Watch inflation rise when it is.
Unless Cullen puts it into a fund from which the interest would pay for infastructure and have no charge on the tax payer for building that infastructure.
That would sense and as long as you kept topping up the nest egg, future generations could be taxed a whole lot less.
Freeing up peoples money to invest into local productive enterprises, with an export potential attached.
Making New Zealand a first world country again instead of this just better then third world status we currently enjoy.
BJ,
“How in the hell can it be legal in ANY interpretation of the Treaty, to sell land to foreigners?”
Are you saying that all purchases for ownership of land is null and void because of the treaty?
Once I have bought a property cant I sell it to whom ever offers me the best price? Or can I only sell to the local iwi?
I dont quite understand where you are coming from. Surely that horse has long bolted?
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Gerrit
Nope, Just that the way I read the treaty there’s an argument that the crown-agent buys the land for sale to residents, not to just anyone.
Also I was really just musing out loud. I am wondering if someone other than Cullen and company might have a lever they could yank on.
You’ve gotta believe that if it were hauled up as a court case to the treaty commission the foreign sales would stop rather quickly.
Gotta look at when I had that brainstorm too. What hour of the morning was it? Not a very large one
Maybe it doesn’t amount to anything at all.
respectfully
BJ
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Gerrit asked: what would the extra tax be spent on that does not cause inflation?
Gerrit, the idea of a capital gains tax and otehr pigovian taxes is to change people’s behaviour – not to raise additional revenue. The Greens support tax-shifting, not increased taxes. I’ve argued this before on the eco-tax issue.
Sure, a capital gainst tax will raise some additional revenue – probably about $600 – $700m if capital gains are taxed on the same basis as income and if the family home were exempt. But that doesn’t have to be spent by Government – it can be offset against company tax and/or personal income reductions which will further encourage productive investment.
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That surplus is liquidity taken out of the market. The more taken out, the lower the inflation (which is after all about the supply of money). It it were set against the NZ National Debt it wouldn’t look like a whole lot, would it?
I don’t fault Cullen for running a surplus, I fault him for running a housing speculation support scheme.
respectfully
BJ
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toad,
Yep, can appriciate the tax offsets. Good idea. Any chance it be in the Cullen budget?
Still against imposing taxes for punative reasons when a alternative is not available.
BJ,
Surely the NZ National Debt is mostly private debt (money mostly gone into housing?) not a public debt which the government has to hedge against with surplusses.
Maybe the odd 777 bought by Air New Zealalnd and owned by the people of New Zealand through the tax payer baleout.
The capital gain on the tax payer baleout must be worth a bundle if the government was to sell its share in Air New Zealand today.
Would the Greens support the privatisation of Air New Zealand and thus free up capital for infastructure works such as the electrification of the Auckland rail corridors?
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Gerrit asked: Would the Greens support the privatisation of Air New Zealand
No. At least not a full privatisation. Green Policy is to “retain a strategic public stake in Air New Zealand so that our country has a national carrier that will serve its best interests.”
We saw what happenned when it was sold off last time. The Government had to buy it back or it would have gone broke. The share price dropped from $2.40 when it was privatised to 57c in 2001.
The problem is that it is very difficult to make a profit out of airlines, and New Zealand, being isolated and with a small population, is not the most favourable or competitive destination in the world. There is simply no way we can get the competition between airlines in New Zealand that exists in Europe, North America or Asia. Air NZ has close to a monopoly on domestic travel between all centres other than the Auckland-Wellington-Chrischurch routes (and now has no competition on Wellington -Christchurch). Another good lesson to be learned (NZ Rail and Telecom NZ are also examples) is that privatising monopolies or near-monopolies results only in high cost and poor service to users.
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Fair call Toad,
I’m against full state ownership and any fully state owned enterprise becoming a monopoly (like the Cook straight ferries – part of the rail network – were before Bluebridge set up shop).
Could and has stifled real competion in the past leading to inefficiencies (remember the huge numbers of extra staff employed by the railways?) plus possibly neptism and corruption.
The ownership split between state and private will keep those enterprises were competion is unlikely (electrical generating and distribution networks come to mind) on a sound commercial footing and I guess is the best of both worlds.
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Gerrit
The government sells bonds of some sort and borrows money. It does so all the time.
http://www.treasury.govt.nz/nzefo/2005/publicdebt.asp
There’s plenty of it out there to pay off and much of it belongs to other people and paying it off would not be inflationary at all. At least not in New Zealand.
respectfully
BJ
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Thanks for that link BJ,
It’s going to take me a while to digest the information!!
Cheers
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It occurs to me that this big foriegn invasion started with the Americas cup plus the internet and then Lord of The Rings. Right in the middle came the Foreshore and Seabed dispute, that became the major issue (remember Don Brash and Orewa?).
The Greens believe that we must be held to the Maori version of the Treaty, including recognising Tinorangitiratanga over forests and fisheries. That is why the Green Party wouldn’t have its eye on the ball.
jh
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Houses are too expensive in a moderately populated country with abundant pine forests?
I wonder how much of that cost is taxation considering GST, Income Tax, FBT, Petrol Tax, PT, Corporate Tax, Building consent levies and other local body charges.
So do we need more taxes such as CGT to further raise costs?
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I encourage you all to read the attached article. Its a pretty fair summation of how Investors work. From what i have read here, its pretty apparent some of you dontv really know. so I hope this helps with some of the thinking.
http://www.nzherald.co.nz/topic/story.cfm?_id=292&objectid=10437675
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oops try
http://www.nzherald.co.nz/index.cfm?objectid=10437675
work interupting my blogging!
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Brethren Farmer asked: So do we need more taxes such as CGT to further raise costs?
As I’ve said before, the Greens are into tax-shifting, not raising taxes overall. Although the Green don’t have apolicy on this yet, a Capital Gains Tax, if it were to be introduced, would be offset by tax reductions elsewhere – my pick would be personal and corporate income tax.
PS: Brethren Farmer – are you a farmer who is a Brethren, or do you farm Brethren? The latter is a somewhat scary thought.
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Frog, Why do you find farming Brethren scary? Is it because they are barn raised and not free range? They are less poluting than other livestock, will eat just about anything and don’t even require a radio in the milking shed.
But seriously instead of shifting existing taxes into a million and one other taxes for every ecomomic, social and enviromental issue, why not simplify the current taxation system.
http://www.ddp.co.nz/index.php?option=com_content&task=view&id=12&Itemid=47
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Toad-you dont change peoples behaviour by punishing them. They just find another way around it. Where did you get the figure $600-700 million raised by a CGT (which we already have) or are you just making it up?
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Icehawk, so every year you would have us pay a valuation fee and then 1% of the value. Tell me, how does my pensioner mum (income 13,000 pa) pay 1% of $900,000 on the Devonport house she has lived in for 45 years?
Answer, she cant so she would have to sell. Well done, your policy puts old people out on the street.
Perhaps you need to consider cause and effect a bit more. Doh.
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Kahikitea,
most do think they can avoid the CGT when they sell renters by claiming change of circumstances-thats true. The thing is that the IRD take a lot of convincing. With the removal of the requirement for workers to do tax returns the IRD has put extra resources into auditing these people. Remember the Queenstown southland blitz? They took an extar $200 mio in tax by doing this. Its not as easy as most think and remember everyone gets audited every seven years. There aint no place to hide.
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Think “pod people” and you understand why it sounds scary
respectfully
BJ
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Brethren Farmer
I think you’d find that the taxes and fees are not the hammer that is pounding the home ownership aspirations of the average Kiwi. We’ve been over this above and I think you need to examine why investment for rental purposes is so common and so important to a middle class trying to avoid taxes and clawbacks of benefits.
Blue
Andrew King is far from a disinterested advisor. He is protecting his turf and his profits by sowing disinformation for your benefit. I know the actual lay of the land because I am involved in it. I know what the accountants can do for me and I know what a rental investment can do for my bottom line. It is very nearly money for nothing. I not only don’t mind making a frigging loss I WANT to make a frigging loss, because I get it back on the tax and benefit side of the LAQC (which Mr King NEVER mentions) and it is offloaded onto the taxpayers. You have to look at what he’s saying and why. His interest is in having property go up… perpetually. Damned right he sees nothing wrong with the market.
I could, tomorrow, go out and buy almost any house I want. I’d have to rent it to someone else, but I could buy it and over time I would reap a capital gain reward. Might take it out when it is time for me to retire. That reward is mine. No capital gain tax, no income tax. Compared to any other investment where I pay tax and lose benefits on my income going in, that can be a MASSIVE advantage, depending on the tax bracket I am in.
I haven’t read your link about simplifying taxes, I will get to it later, but I hold at present that the current set of tax brackets is incomplete (there should be more) and the effective tax (after benefit clawback) is not smooth enough. This IS part of the problem. Some of the “targeted” tax benefits are nice to get, but I’d rather always hit higher effective rates as I got more income than lower ones. Right now it is like a demented roller coaster.
I am no fan of the current government. I just reckon it is better than National would’ve been.
respectfully
BJ
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BJ did you not think I carefully read every word above?
Find the time to read the link though it could be the answer ‘taxpayers’ have been looking for. May the forth be with you.
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Two words – “Black Market”
respectfully
BJ
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How do you figure Black Market? We don’t have one now with higher tax rates so how would a 1% tax create a Black Market?
a. Every hour of the day money is withdrawn from savings accounts, cheque accounts, insurance companies, business and investment organisations, and financial institutions of all kinds. Indeed, ALL monetary transactions are withdrawn from some type of bank or financial institution that holds money in trust.
b. The Electronic Settlement Accounts System Report 2004, issued by the Reserve Bank of New Zealand, states that an average of $35.4 BILLION is transacted through the banking system EVERY WORKING DAY in ordinary business trading.
c. Just one simple and moderate Transaction Tax of ONE PERCENT (1%) on all monies withdrawn, will provide the New Zealand Treasury with annual revenue of approximately $92.04 BILLION. This is calculated on 260 working days at the average of $35.4 BILLION providing a total transacted amount of $9204 BILLION per annum. This how we arrive at the figure of $92.04 BILLION in revenue generation per annum at just 1%.
d. It currently costs approximately $54 Billion to run the Country.
http://www.ddp.co.nz/index.php?option=com_content&task=view&id=12&Itemid=47
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Cash is king is what I think BJ is saying.
Barter card type arrangments would not be covered (asset transfers without a capital lubricant).
Another problem is policing the value of a capital transaction. With cash in hand I might buy a car with a $100 cheque to show transfer of property ownership and slip another $10,000 cash to the seller without the 1% tax being payable by the seller.
Who will argue that the $100 was not true value?
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Barter card type arrangments would not be covered and wouldn’t have to be. As far as buying something with a part payment of cash, that cash would have to be withdrawn sometime so would face 1% tax then. Note the rate was based on current money transacted through the banking system. Cash based avoidance of GST is probably higher now.
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The Green proposals are nonsense, because they are based on a complete misdiagnosis of the problem.
The rental investor phenomenon is a *symptom* of rising house prices, not the cause. House prices have risen rapidly for no other reason than a supply and demand imbalance, caused by state restrictions on development. The state is the problem here, not private investors.
General house prices are determined by the anticipated rental income, which in turn is simply a function of supply and demand. The solution is simply to remove many of the restrictions on development, thus allowing the supply of housing to increase.
Obviously that’s not an acceptable *political* solution, which inevitably requires further state interference, restrictions and regulations in a futile attempt to solve a problem of its own making.
– “1. a capital gains tax excluding the family home”
Since this doesn’t in any way tackle the supply and demand imbalance, this will be completely ineffectual.
The UK, for example, has just such a tax. Has it worked there to moderate house prices? Of course not. You need to explain why you think the NZ experience would be any different?
– “2. reforming the tax system to stop tax advantages coming from investment properties; ”
Again, since investors are primarily a symptom, not the cause of rising prices, this is at best a pointless exercise. Worse, since the root of the problem is a relative shortage of accomodation, higher investment in this sector (provided the regulations are removed, such that it leads to increased supply) is in fact precisely what is required and what these proposed tax changes would discourage.
– “3. limiting the sale of land to New Zealand residents and citizens only; ”
You mean “Restricting the freedom of people to sell their own property to whoever they wish.” Careful, your jackboots are showing again.
- “4. increasing banks capital adequacy ratios for housing loans;”
Again, more state bullying in a futile attempt to fix a problem which the state caused in the first place.
- “5. building more public housing with income related rents;”
That’s priceless.
It was the state which caused the problem by restricting the ability of the private sector to build enough new houses (the natural response to rising prices). And the proposed solution? More *state* housing development instead, to make up for the shortage. Presumably the state won’t be bound by all the regulations it imposes on the private sector.
Given the thriving private rental sector in New Zealand there is absolutely no need for *any* public housing whatsoever. Subsidised state housing is simply another example of political patronage to win power.
- “6. requiring developers to provide a proportion of affordable housing in larger developments;”
And just what is it that makes these houses “affordable”?
Presumably they are simply smaller than the rest, or inferior in some other way? Or are they simply subsidised by purchasers of the surrounding properties? In which case, what’s to stop someone buying such a property and selling it on at its true market price? (the answer, I’m sure, is still more state regulation).
- “7. investing in mass transit systems in our cities to allow greater urban densities.”
That, or more roads.
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I think you miss the point BF,
Cash is already in circulation, you dont need to draw it out of the bank.
Unless you do a complete re-issue of new bank notes it will stay in circulation as well. Hence the black market.
In fact you could end up with a whole new currency completely different to the New Zealand official one. Maybe AUS dollars? As long as both parties recognised the value of the capital then a transaction for asset swaps could easily occur outside the official currency.
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Mouldwarp Says:
May 5th, 2007 at 2:11 pm
House prices have risen rapidly for no other reason than a supply and demand imbalance, caused by state restrictions on development.
—-
What has caused the cities to burst at the seems in the past few years? Immigration. Developers market overseas and then want to plug into the exsisting infrastructure for next to nothing [My guess is that developers put people on the city councils and that a lot of councils are bent. A real estate agent told me that "it is a known fact in industry circles that the Queenstown Lakes District Council is bent"].
jh
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Big call JH.
So the demand (irrespective if it is immigration) has caused house prices to rise.
Answer, build more houses.
Simple really. Halting immigration is not going to solve it. The people are already here.
So free up the land. No amount of CGT is going to do anything.
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bjchip Says:
April 30th, 2007 at 9:13 pm
As for wanting to live in high-density housing, that is not as hard a road as you seem to think. I’ve seen some damned nice apartments in NYC, 13 floors up and no view to speak of but the whole city for a playground? Yeah, I like that lifestyle… open 24×7, but it isn’t quite so good for young children.
—–
With regard to the older parts of our cities, I think the problem is the culture in the building industry. Builders are rugged individualist (“don’t mess with me get out of my face”) types and they are pitted against weak wristed beaurcrats, who opted for a safe job. We don’t have the culture of the older countries where families have lived for centuries, consequently, you “do up” the house in front and build an “executive townhouse” down the back. The result is an ugly maze of paling fences.
jh
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And when more houses are built, developers will build more and send agents overseas to fill them. Any one who has their eyes on a nice house in Nelson (for example) has to bid against people from countries where house prices are much higher.
I’m not claiming to understand what is behind the present hike inhouse prices, but I’m sure immigration doesn’t help. Once immigration was slow and steady, now it is an export industry, and a career choice for ex politicians.
jh
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I don’t agree with all the proposed Green solutions to the current high house prices but the fact is that home ownership has been dropping because of landlords buying existing housing stock spurred on by tax advantages. Landlords must be banking on tax free capital gains or it just wouldn’t be economic to purchase real estate. Yes, house prices have risen for other reasons too but the tax situation has made things worse.
Capital gains tax in Australia is inflation adjusted while other taxation isn’t so capital gains still get treated better than other forms of income. The house price cycle may well have been lessened because of the capital gains tax. Cycles will always occur but a CGT should lessen the peaks and maybe the troughs.
There are many seminars, books, real estate advisors, etc out there all pushing the message that the tax system helps landlords get ahead. Don’t tell this has had no effect on demand by investors!
The current tax provisions taxing capital gains are almost unenforceable as the IRD has to prove a person purchased a property with the purpose of reselling it. Landlords will always claim they intended to purchase and hold for the long term – and if they do sell that circumstances changed.
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I’ve heard plenty of nonsense here, but I’ve observed the truth first hand. This isn’t just theoretical for me.
No, it isn’t just one thing. There is an element of council over-restriction involved, but it isn’t just that. there is an element of population increase in it, but it isn’t just that either.
No No No No No….
The issue however, is what parts of this are in the control of the government, and the OCR is only one of the things that the government can control. It can also control the application of the CGT, the rate of immigration, the tax perks given to landlords and the overall tax structure. Most of these things are things that we Greens would like them to actually work with to measurably diminish the prices of houses.
Which are damned cheap to build if you have the land to do it. The “cheaper” stuff is perfectly good, and I am not looking for 200+ square meters of space.
Speculative investment in Real-Estate is real. It is serious and it pushes the prices up quite effectively, because prices are set at the margins. It is also the easiest thing to address because it is already subject to government encouragement. The government needs to stop that. It also needs to work the immigration issue and the land availability issue and the mass transit issue and all the rest… but the issue of what it is doing to ENCOURAGE speculation in Real Estate and putting an end to that, is just as real and less inflationary to address than most of the others.
respectfully
BJ
Any one of you claiming that this is a result of “just one thing” is the problem should have no trouble finding the material for a granite countertop between your ears.
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Possibly part of the problem is/are the media, when it comes to house prices. The poncy presenters are hardly from Aranui or South Auckland, and they would be more likely to be in bed with the property industry interests, than otherwise. In addition, good news sells products. Property as an issue is approached like Lotto, we’re all getting rich…yaah!.
The government seems to govern through the media, in so far as if the media is not raising something as an issue it is right off the governments radar, and that applies to issues that are over the publics head.
jh
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A Nation of Landlords
http://nbr.infometrics.co.nz/a-nation-of-landlords_928.html
Fear, Greed, Property and Tax
http://nbr.infometrics.co.nz/fear–greed–property-and-tax_881.html
http://www.tv3.co.nz/News/NewsDisplay/tabid/209/articleID/24985/Default.aspx
jh
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Mouldwarp said: House prices have risen rapidly for no other reason than a supply and demand imbalance, caused by state restrictions on development.
Oh, Mouldy one, if only it were as simple as this, but it is not. This statement isn’t even correct. If it were, there would be untold thousands of homeless, on the basis that there would be too few houses to go around.
However, the reality is that there are very few homeless, and those who are homeless either by choice or because they are on a benefit or a very low income. Almost all New Zealanders can find somewhere to rent, albeit no necessarily a property that ideally meets their needs.
And, yes, admittedly some can only afford to rent with state assistance through the Accommodation Supplement, but this is effectively a massive state subsidy to landlords (and, ultimately, to banks), and is therefore another driver of housing cost increases. Which it shouldn’t be, but I’m not sure how to deal with that one short of heavy-handed regulation of residential rent during the transition. Abolishing the Accommodation Supplement would, at least in the short term until the market adjusted, cause significant homelessness.
There would still be enough houses to go around though, just people on benefits and low incomes wouldn’t be able to afford to rent them until landlords realised that a tenanted house at a lower rent is a better option than paying the mortgage on an empty house.
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BJ,
I probably know more about the property market than Andrew King (and your accountant from the sound of it). IMHO whilst he may have some bias, he tells it like it is.
AJM, The IRD has to prove…person had intention of reselling it” Wrong, its the other way around. The person has to prove hardship so they can sell without being taxed as income. And its not easy. I know a few who have tried and failed and been taxed accordingly. You guys are underestimating how vigilant and determined the IRD actually is. Which is a good thing. I agree with you all that speculators do more harm than good.
JH, your comments abourt Councils being corrupt is just silly. Google some info about what price Auckland charges for Reserve Contributions (and others). They were recently talking of charging between $45,000 to $80,000 for EACH unit.
So tell me how this doesnt affect home affordibility? The cost just gets passed on, and so it should too.
My view is get rid of the LAQC structure and remove the distortion to the yeild that the Tax deductibility allows.
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toad,
We’re talking about the economic concept of *relative* scarcity, not an absolute scarcity: Nobody ever expected to see families sleeping in tents because there were not enough houses.
If you want to see house prices stabilise, or even fall, then you should announce a policy of making it very easy to develop land. Result? Suddenly there is more land available than there are buyers. At a stroke, the relative scarcity is flipped.
Then there is the question of slashing the state bureacracy involved in the entire building process, so that houses could be built for tens of thousands of dollars less.
Of course, all this is anathema to the Green party. They want tight restrictions on development and *more* control over the house construction industry.
At least, then, have the wit and honesty to recognise and accept the inevitable consequences of your policies.
The last thing you should be doing is announcing a collection of policies which entirely overlook the 800lb gorilla that the Green party brought into the room, and which instead seek to blame private investors – who are guilty merely of responding to these perverse incentives – and which increase still further the state’s powers of monitoring, interfering and controlling people’s lives.
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Mouldwarp, If house prices are high because of a supply/demand imbalance why are the realtor and bluebook always chocabloc with houses for sale? Because perception is more important than reality. The housing “investment” market only works if everybody believes there is a perpetual shortage of supply. Half the land in our towns and cities is unused as a legacy of the old town planning size limits. But there are so many myths being perpetuated by real estate agents and mortgage brokers that most home investors are afraid to realise the true value of the properties they are buying. After all, its not in the best interest of real estate agents or mortgage brokers to increase the housing stock to the point where the market is satisfied and prices settle where home ownership becaomes affordable to all.
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Blue
I don’t think you know enough about it OR me to make that statement, but feel free to believe you are smarter than I am. I don’t mind taking advantage of other people’s misconceptions.
You go visit pretty much ANY accountant. Explain you have an income in the 70-80K range and ask him about housing investment.
It does NOT work for people who are already on a 6 figure income and it does NOT work for people who are making less than 50K and there are a lot of ways that people structure their lives and their incomes in this country to arrange those conditions as well, but when you hit that sweet spot in the income tax and benefits regime and a lot of people do, the “losing” investment property still wins.
In that income range you will find that people will be almost compelled to enter the market as landlords. Even if they have NO desire or talent for that position and hire other people to manage the properties… it is that big an advantage.
Mouldwarp … I pointed out the foolishness of trying to nail this to one single cause someplace above. There IS a natural shortage of land in all big cities. This has little to do with policies and much more to do with people liking environments rich in entertainments and distractions. The policies you are pointing at are, of course, not “green” either. We don’t control those citiy councils any more than we control parliament. They do contribute to the problem, but so do all the other things that are wrong with government policy in this area.
I can add one more to the list. There is an acute shortage of builders.
I’ve identified several potential building sites, a source for a loan, a design and suppliers of materials. There isn’t a builder within 100K of here that isn’t booked through 2008 or 2009. The amount of work I could do myself but cannot touch because I am not a “registered builder”, is immense (about the only thing I haven’t done is plumbing, I could contract the cement work and pick up some “casual labourers” to help me put some of it together. Except I can’t.
The building trades appear to have leveraged the “leaky homes” issue into a form of monopoly.
I don’t think that was a Green policy move either. I am sure you will blame us for it though.
At least have the wit to realize that we aren’t what you think. Your perception may have something to do with the reception you get here.
—————-
There are a LOT of houses changing hands with prices going perpetually up. This cannot last. The things that are driving most of the sales aren’t artificial shortages, but insane government favoritism shown to rental investors. Expecting the guy who heads the property investment association to own up to the fact that he’s got a privileged position and it needs some adjusting is magical thinking at best. Expecting any truth from him at all is pretty optimistic, but there is so much wrong with this market that almost ANY statement about what is wrong with it is likely to be correct.
BJ
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BJ,
Perhaps one aspect that has been overlooked is what the rents would be if the LAQC status for landlards was removed. If the landlord worked out his return on investment at say 10% (should be nearer 20%) he would have to double his rent. We then get in a situation who blinks first. The renter who faces eviction and has no other house to go to or the landlord who has a morgage to service.
Which is how it should be , the market will then decide what a rental property is really worth.
Consequences may be interesting!
I dont think the LACQ will be removed as most rental houses are owned by companies and any losses that company makes qualifies for tax credits against more productive income (be that personal or another company).
Now you could run the property owning company at a loss on purpose (by charging it huge management fees for example) in order to minimse tax liabilites for a productive company.
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Gerrit
I have to say that I am not “looking forward” to the interesting times that must be ahead of us, but I see no way at all to avoid them. The current set of ideas and expectations and price escalations has no way to continue. LAQC for housing, if it is to go, has to go with respect to new purchases first. This dips these “rental investors” out of the property market and offers some relief on the prices front. It takes the shine off those investments pretty quick. For the rest, phasing in the removal would have to be gradual and I reckon that there’d be no shortage of work for the moving companies.
I reckon it is almost as good to simply allow people to deduct mortgage interest for their primary residence. It puts money into the market though, and that is the ONE thing this market doesn’t need.
respectfully
BJ
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