take a hypothetical scenario: a man decides to spend a few months on a project to build something – to avoid excersising my imagination we’ll say a car – so he takes a loan of $270000 for materials & to cover his living expenses. during the course of his work, he finds that people are interested in watching him work, as word has got out that his car will be innovative & a hallmark of craftsmanship. so he charges admission fees, off-setting them precisely against the interest payments on the loan. at the end of the period, he sells the car for $300000, pays the loan back & pays ~$10000 tax on the profit & pockets the rest. then he does it again.

meanwhile his neigbour has taken a loan of $270000 to buy a second house. he rents it out, off-setting the revenue against the interest on the loan. at the end of the period, he sells the house for $300000, pays back the loan, pockets the whole of the $30000 & pays NO tax…
unfair, right?
such a person, making no productive input into the economy, can buy houses with no cost to himself & pay no tax on the profit. the man who made the car, adding value to the raw materials with his own labour, had to pay tax on his profit of $30000. note that the discordant point between these two scenarios is the fact that the second man has not had to pay tax on his profit. it’s not that profit is always calculated by subtracting expenses from revenues.

we need to establish very clearly in our own minds a sound grasp of just what it is we want & what the issue is before presenting ourselves as advocates & expecting the attention we are due. if we considered home ownership to be so important that the government should take special measures to support it, we might for instance argue that the government should pay 9.5% of the price of any house bought for the buyer to live in. but we would look ridiculous if we attempted to argue that this particular intervention was to be singled out as especially consistent with logical & moral justifications, (as opposed for instance, to the government paying 10.5% or 9.25%, or helping home-owners some other way, for instance by providing cheap loans).
there are of course other industries delivering commodities pertinent to our fundamental rights, & we’re evidently happy enough for those industries to operate according to normal business models.

according to sleepytreehugger:

Prices are so high … because land is one of the most inelastic commodities available, which is just what speculators love and is why it should be treated as distinct from other commodities. You can’t create any more of it or grow it yourself unlike say, food.

have a think about it & you’ll realize that this explains why prices are high*, not, in itself, why prices are rising. what do you suppose it is that the fixed nature of land is biting against? what provides the dynamism to the system? something is moving relative to the fixed thing to produce change.
(*of course in a static situation, there’s no way to know if house prices are “high”. they are simply what they have always been.
similarly whether the population growth is “rapid” or not is purely subjective, & any view that there must be a 1:1 correspondence between house prices & population is unfounded.)
sleepytreehugger complains that people can’t afford to buy houses without being able to write the loss off of their income tax, gearing up on their capital gains, or accessing a deposit free mortgage. so at least we can infer sleepytreehugger acknowledges a range of ways the government could help, but note that people can’t afford to buy a house without those things because the price is so high, not because those options are available to some people.

as far as the fiscal policy issue goes, capital gains tax is it. implementing it poses political problems though, not just with wealthy political backers, but with all the voters who are concerned about the value of their asset. enacting a cgt to take effect in 10 years time might be the way to go, but of course in all that time the chances are that a national party government will come in & scrap it before it ever takes effect. it’d certainly be gifting the nats that “point of difference” they’re always struggling for, & the government knows that the fact the arguments the nats use aren’t always accurate, won’t stop them being effective with the electorate.
capital gains tax also will not stop the gradual transfer of wealth to the wealthy (landowners) as long as the population continues to rise.

the US credit bubble doesn’t prove there is a natural limit on the price of houses of the type bjchip suggests: “A stupid price is one that cannot be afforded by the population that HAS to eventually buy the house if the builder is to make a buck” & although the limit of what the customer can pay is a limit, there’s no fundamental rule which says who “the customer” can be & that the occupant must be the owner.

bjchip says:

I actually have a real job

i’m sensitive to that & wasn’t referring to the time lag between our posts, but to your comment in the other thread which seemed to indicate you weren’t willing to talk to me. i’m glad i was wrong.

incidentally though i appreciate the explanation, i’m still in the dark about what ringfencing is. you say it’s not the same as abolishing the normal treatment of expenses for tax purposes in the case of residential property, so perhaps it implies extending tax benefits to homeowner households, allowing them to deduct mortgage interest from their taxable income. but this is a prescription you don’t appear to favour warmly.

ari says:

GST is regressive in the sense that it consumes a greater percentage of income for the poor than it does for the rich

i’m not seeing it, unless you can show that the rich spend a higher portion of their income on the things which are exempt from gst, housing for instance. otherwise i’d call it mildly progressive.

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kahikatea, Actually tussock is pretty much correct. The margin of error is the range of error that is possible at the 95% confidence interval when using a sample of 500 to represent a whole population. It is of great importance when drawing “if an election was to occur tomorrow” conclusions.

Toad is correct that the trend is more important for smaller parties. Essentially that increases the sample size and reduces the real margin of error. The margin of error is nothing more than a measure of certainty, don’t make the mistake of thinking it has any more significance than that.

The relevant statistical mathematics predate political polls by many decades. The concept of the margin of error is easily appreciated when there are only two or three answers to a question and the percentage of respondents selecting each answer are large, hence political polls have always been very popular in two or three party states.

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tussock Says:
February 10th, 2008 at 4:30 pm

> And on the topics of polls, they usually run with a +-4% error bar. Going from 5 to 7 shows about a 60% likelihood of some increase, and a 40% chance of some decrease; ignoring for a moment the pushy nature of the questions and often deeply flawed assumptions in how they fix up the raw data.

Not true. The 4% error margin actually only means a range of plus or minus 4% for a party near 50% (the standard was invented for two-party systems). For a party polling at 7%, the effective margin is rather smaller than that. Otherwise you could look at the Kiwi Party, which is polling approximately 0%, and deduce that their real support is anything from 4% to -4%. The probability of them having 4% support when they’re polling zero is extremely low, and the idea of them actually having -4% support is logically impossible.

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And on the topics of polls, they usually run with a +-4% error bar. Going from 5 to 7 shows about a 60% likelihood of some increase, and a 40% chance of some decrease; ignoring for a moment the pushy nature of the questions and often deeply flawed assumptions in how they fix up the raw data.

Lies, damn lies, and statistics. Love particularly about how “National would be able to form a government on it’s own” in the last couple of TV polls, ignoring that it’s *very* unlikely given all the permutations of error bars, even if there were an election today without the somewhat balanced debates we see in the real leadup to an election, and you ignore the potential for tactical voting in electorates (like lefty voters putting Winston back in Tauranga).

Big Bro: Superb job of pushing your agenda dude, some of the better trolling I’ve seen.

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it reminds me of NCEA you get an A for climate change and sustainability (etc) but a D- for niche left-wing policy. The German Greens caste off from the “fundis” and their popularity rocketed; Ottawa rejected MMP after previewing from NZ’s experience (a shame for the Ottawa Greens.

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Andrew & Toad- GST is regressive in the sense that it consumes a greater percentage of income for the poor than it does for the rich. It’s not the worst tax out there, but by keeping the essentials GST-free we could really give struggling people a hand up without even touching welfare systems.

Big Bro- You have a really warped perception of our education system. Anecdotally, all of my teachers were incredibly hands-off during my education, and any “indoctrination” anyone received came from fellow students. Even the worst of my own teachers were very careful to make the value of thinking independently completely clear whenever someone seemed to latch onto an opinion, whether it was theirs or not.

If people are still coming out of school with a left-wing “bias”, I’d have to say that it’s sad when the right wing of politics is in a state where teaching the facts has a liberal bias

If anything, the problem is that we’re not presenting enough of this judgement-neutral information, and that we don’t do anywhere near enough to educate our children about the facts of ethics, politics, or parenthood.

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Big Bro,

You wrote: “There is a danger in teaching our kids how to think, original thought does not come from being taught how to think.”

Actually, I think you are wrong. There is a danger in teaching kids _what_ to think, not how to think. I’m sure thats what you actually meant. From observation of students doing higher degrees in science, one of the most common things they have difficulty with is in _how_ to think critically. A lot of students are very skilled in technical things such as computer programming and solving mathematical equations. However, they often have a lot of difficulty thinking critically; it often takes several years for them to get reasoanbly good at this skill.

I agree with a lot of the other stuff you wrote. I think that secondary school should not specialise too much. I would like to see kids finish school with a very solid foundation in the “basic” subjects such as maths, english, languages, history and science. Specialisation and technical training can wait to tertiary education, apprenticeships or whatever.

I don’t think your comments about history are very practical. You can teach the “facts”, but certain problems arise:

1) There are often conflicting reports of the “facts”; which do you believe?
2) There are often gaps in the facts, records are lost, things forgotten etc.

Even if you have a perfect record (which you never do), the next question one wants to ask is “why did this happen”? As soon as you ask this question, you often get tangled up in politics and conflicting views of things.

In fact, I think one of the weaknesses of the media is that they are quite good at reporting what is happening, but not why things are happening. For example, when there was the last coup in Fiji, the media reported what happened quite well, but I really wanted to know “why is this happening” … that was not well discussed by the media.

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StephenR, I think it was similarity of personality rather than similarity of politics that made them admire each other.

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Sleepy

You can reach me at my usual address….

Strangely enough I don’t care to create a website.

#bjchip

#at

#computer

#dot

#org

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Andrew

i’m curious to know why you consider prices stupid & not sane given that the population is rising rapidly, which obviously forces prices up.

the population isn’t rising at the rate of house prices… well who said it had to? the fact is though that there is an extremely strong & necessary correlation between the two

Yes… there might be if there was a shred of evidence that the population was rising rapidly… but that doesn’t come close to true in the face of a 1.6% avg population increase compared to 12% or more housing price increases… AND a building industry that is flat out building houses and has been since the day I got here.

but he got mad & refused to talk to me.

I did? No… I actually have a real job and your response at 3:38 this afternoon went unseen by me until a few minutes ago… and I responded in detail. You really should be a little more patient. This isn’t a CHAT room

The CGT is an alternate solution to the problem that the LAQC poses… possibly a better one, but my long correspondence with Dr Cullen leaves me convinced that he is deranged on the subject as is his National Party counterpart. There will be no Capital Gains Tax as they and their wealthy mates and the bankers who buy their lunches would have to disgorge some of the money stream they are sitting on. I was offered ONLY the ringfence of the LAQC by Dr Cullen. That’s the only card still in play as far as the government is concerned.

You say that there is no natural limit on prices, and yet the experience of the US is that there most certainly IS a limit. Basically there are 3 types of loan in the US… The first is a conventional loan. The buyer is able to pay interest and principle out of his/her current income stream. That remains true even if the house value falls, the buyer has the option of keeping right on making that nut and living in the house.until the price rises again. It always does in time… but it could be a long time if the purchase price paid didn’t reflect realistic market values. The second is an interest only mortgage. The owner doesn’t really have the income to get any equity in the house given the price and the interest rate, but he can afford to rent it from the bank and refi or sell when the value has increased to where he can get some money out. This is OK as long as the bank isn’t looking for principle back and interest is paid, even it values fall, but the owner is in a bad position if they do, no refi, no relief, no equity. These guys can walk away and do. The third is a variation of number 2 except the owner can’t pay anything but the teaser rate at the start of the loan. That owner HAS to refinance at the end of the teaser period and if the price has gone down he can’t refi and can’t sell the house. He’s gone. The fact that mortgage interest is entirely deductible on a first house made this easier for some people to get into deep trouble. The speculators weren’t deducting mortgage though, unless they could make it back in rent they can’t. .

- sorry.. I digress – I should have been talking about the limit on the price of houses being the customer’s ability to pay. You do accept that the customer has to have the ability to pay, yes?

So who are (or should be) your potential customers. Citizens and residents of NZ ( except that that isn’t true either and is another aspect of the problem ) and the median wage or 2x that wage is not going to support a half-million for a house without the support of a winning lotto ticket. Accepting that not everybody can afford a house is easy. Accepting that people on a median income aren’t the target buyer is easy. How about someone on 2x the median? That’s a pretty good target demographic for our buyers. You can argue it up and down some but someone on 2x the median isn’t that uncommon a person. Pretty decent target market.

That person however, cannot afford a house. So how high do we have to go to be able to make the payments. 3x? More? How many people are there who make that sort of money? Not a lot. Not as many as there are houses by ANY means.

But the price is still up there. You think it is natural. I am telling you it is government interference.

I don’t think NZ is possessed of the US “easy money” sort of problem. The banks aren’t handing out that sort of loan, but the government is doing something just as bad with the LAQC.

I explained this on the other thread, but I will pose the same question here.

The LAQC takes my tax money and transfers it to the bank of the housing speculator even as that speculator is bidding the price of the house I want to buy out of reach.

Explain how this is a moral thing to do. How on EARTH can taking money from people who have less and handing it to people who have more and by the way locking the not quite so well off folks out of houses they might otherwise be able to afford, be the right thing to do?

Remember that guy on the 2x income? He CAN afford to buy the house IF he uses an LAQC and rents it to someone else.

Cause he’s using MY money to do it.

And it is going to Oz.

And our skilled workforce heard it should “follow the money”.

respectfully
BJ

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andrew

I would retain LACQ only for those building new houses. We may need more houses and building houses is a business activity – but buying existing houses and turning a tax free profit because there is no CGT (and doing so while limiting ones income tax liability is enabled by bad government policy and that should end).

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Only a premium on the mortgage cost will allow the OCR to come down. If it does not, then incomes to business and wage owners will stay depressed.

If Bollard dropped the OCR from 8.25 to 7.25%, because of a 12.5% GST on the mortgage (the bank taking a 1% or over premium on a 7.25% OCR), then the actual mortgage cost to those renewing their loan, or borrowing to buy, or on the floating rate, would not change or change little. Instead of a 9.25% loan with the OCR at 8.25%, it might be 8.25% on a 7.25% OCR (12.5% on say a bank lending at 8.25% would be about 1.2%).

The important thing to the RB is maintaining the anti-inflation pressure, if it can do so with a lower OCR, this will be good for the wider economy. If we can reduce our OCR down to the Australian level, exporting products from here to Oz will be more profitable and thus higher wages here will result. It’s from wages that people meet their mortage committments.

If we do not make a change while we have a tax surplus to guarantee everyone will be better off, when will we?

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bjchip

bjchip”As a first home buyer looking at the stupid prices already rampant, any such tax on my first mortgage looks to ME like an invitation to leave the country”

Then you should re-read what I posted on the issue, because you do not understand it.

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andrew

Prices are so high not due to population pressures, but because land is one of the most inelastic commodities available, which is just what speculators love and is why it should be treated as distinct from other commodities. You can’t create any more of it or grow it yourself unlike say, food. Especially when its seen as an investment, which takes even more supply out of the market, creating further tension between supply and demand.

“I hate to disillusion you, but the price of a house doesn’t care who it is who will be paying it – a homeowner or landlord. there is no natural limit on prices of the type you suggest”

Sorry this is EXACTLY the problem with the LAQC. People couldn’t afford to buy houses without being able to write the loss off of their income tax, gearing up on their capital gains, OR accessing a deposit free mortgage.

Bjchip

Could I have your e-mail address? I have a proposal to put before you.
Cheers

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the other thread where bjchip & i & others discussed it is here: http://blog.greens.org.nz/index.php/2008/01/24/how-to-deal-with-a-recession/

i predicted there that once the dust cleared away, capital gains tax would be seen to be the tax issue left in the spotlight…

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for the sake of any newcomers, bjchip & i are already halfway through this debate in another thread. i had challenged him there to explain his point of view but he got mad & refused to talk to me. thus my comment above was facetious.
now onto this post, i think we’re getting somewhere.
first you have finally clarified that your problem is with a business being able to deduct expenses from income for tax purposes while a householder can’t, NOT with any fancy stuff about distributing losses in the year they occur as you first appeared to indicate & not really anything to do with any fancy acronyms like lacq as this is simply the standard practice for any business in any industry to be able to deduct its expenses from its income for tax purposes and not for households to do the same.
so you are asking for a special treatment for the property market. & we can stop saying lacq lacq lacq over & over again. we’re just talking about standard business accounting. no need for terminology chosen to make it seem strange or esoteric.

why the special treatment for the property market? well, because you say houses are not businesses, they are places where people live. o.k. reminds me of that old slogan “the business of education is education, not business”. kind of meaningless when you take it apart – it doesn’t really inform the debate. we could as easily say “the business of manufacturing, distributing & retailing widgets is manufacturing, distributing & retailing widgets, not business”
suppose i were to say “food is not business, it’s stuff people eat!”? do you now feel upset that a professional baker can claim flour, man-hours, energy for the ovens etc as expenses while a householder making bread in their own home can’t? food is surely every bit as fundamental a need and right as housing… no, more so. & yet normal business practice of deducting expenses puts the business aspect first & completely ignores the eater, eh?

the population isn’t rising at the rate of house prices… well who said it had to? the fact is though that there is an extremely strong & necessary correlation between the two. i’ve acknowledged many things can influence the house price, we discussed in the other thread the view that the determining factor is the legal restraints upon development, which strive for instance to preserve nice neighbourhoods & to prevent too much urban sprawl among other environmental aims. don brash considers this the only factor to have an effect – a view i regard as being as extreme as yours, & selective through wilful ignorance. i’ve even acknowledged that a legislative change such as the type you advocate can have an effect, but only a once off hit to the market, not an ongoing thing like population growth.

& i hate to disillusion you, but the price of a house doesn’t care who it is who will be paying it – a homeowner or landlord. there is no natural limit on prices of the type you suggest ” A stupid price is one that cannot be afforded by the population that HAS to eventually buy the house if the builder is to make a buck. ” for the same reason developers can get away with poor quality houses. the market is buoyant & takes what it can get, for the price at which it can get it.

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andrew Says:
quoting someone, not andrew’s personal comment:

regressive how?

Andrew, you are correct. GST, in its current form, is not regressive. The reason is because financial services and residential rents, which are what most low income people spend most of their income on, are GST exempt.

The real rort in terms of tax is not GST – it is the absence of a Capital Gains Tax that Big Bro, BJ, and others have discussed above – without a CGT, there is not the level playing field that most of us who put an economic analysis above a vested interest would support.

Reason: Most Labour and National MPs have substantial property interests – and a Capital Gains Tax is personally threatening to them.

I think there might be a Green MP or two has significant property interests too, but at least they are prepared to put their hand up and pay their fair share, rather than take the free ride the absence of a CGT and th LAQC regime offers..

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Big bro said: If they want to play the property market then they should be exposed to the same risks as everybody else in business, I should not be there to subsidise the sods.

Hey, BB, something else we agree on. We’re getting there. Might have you voting Green at the next election, but you have to work through your bizzare assertion that taxation is theft.

Taxation is for the common good – you and I might both disagree with what the revenue derived from it is spent on, but that is an issue of accountability of public expenditure to the public themselves, which I agree could be improved on.

Budget “secrecy”and Budget “urgency” are things I have always detested – a Government Appropriation Bill should be subjected to the same Select Committee scrutiny, with the opportunity for public submissions, as any other Bill.

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LAQC – Loss Attribution Qualifying Corporation. A means by which a person can set up a “small business” to purchase a house, rent it out, get the expenses (and the mortgage interest is an expense) deducted from ALL their income (whether it comes from the rent or not), and if they are reasonably slick about their accounting, not have to pay CGT when they sell it in the future. In some cases and for some people, the effect is that the house is almost free because of the tax impact.

The problem with the LAQC being applied to houses is that houses are NOT businesses first, they are places where people live. The LAQC puts the business aspect first and completely ignores the owner occupant.

The population is NOT rising anywhere near the rate at which the prices of property rise. Look again at the double digit increases of the past 5 years.

When I arrived 4 years ago were about 4 million people. If the population had risen at the same rate as house prices there’d be a minimum of 5.85 million people here today… actual is 4257000. Now I don’t really believe that 257000 more people equates to a 10% annual growth rate.

http://www.stats.govt.nz/populationclock.htm

Second part of the answer. A stupid price is one that cannot be afforded by the population that HAS to eventually buy the house if the builder is to make a buck. The population of NZ cannot afford half-million dollar houses. It could afford 300K houses but those are NOT being built.

Third part of the answer. The cost of building a house. You can buy a kit for a pretty nice place for < 100K . Adding the construction costs for the slab and assembly still gives you less than 200K , quite a bit less if you have a hand in it yourself.

Fourth part of the answer. The quality of the products on offer as existing houses. Houses with scant insulation, 3 bedrooms, inadequate wiring, single glazed south-facing windows, no flyscreens ( good indoor outdoor flow! ) and no central heat on a postage stamp of property are going for $350K and up 40 Kilometers and more from Wellington.

If you add in the requirement for a decent public school for your kids it gets more expensive yet. I have to consider the price of private educations for my kids vs places to live.

Stupid prices. I saw them in the USA as I was leaving. I know what they look like. I know who profits. I won’t pay them.

BB…. this is an area where I KNOW we are going to agree.

BJ

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interesting comments bjchip.
i’m curious to know why you consider prices stupid & not sane given that the population is rising rapidly, which obviously forces prices up.
also can you explain what you mean by “ringfenced” & what you consider wrong with lacq?
this is all new to me…

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