34 thoughts on “Russel Norman’s Budget speech

  1. Face it. Houses are over priced (partly) because 60% are owned as investments, not as homes. This has been supported by (a) A bubble caused by investors (b) A lack of a CGT and (c) LAQCs

    Bliss, you forgot about (d) which was the lack of supply of new dwellings. Consents for new dwellings peaked in early 2004

  2. The blatantly obvious is that the Government needs to get into the business of supplying state housing again. Subsidised to a level that it exerts a downwards pressure on house prices. The several Billions a year that was given in tax breaks, since 1984, to those who benefit most from our society, would build a lot of houses.

    The effect is to redirect spending away from housing, make overall prices cheaper and eventually get house prices to the level where affordable rents give landlords a return on capital as income.

    The next obvious one is to forbid foreign ownership of NZ land. Leasing gives NZ an income from the land and helps keep pricing within the limits of commercial return.

    One of the problems with starting a business that most small business face is due to the lack of venture capital.
    Initial start up capital for almost all small business comes from the owners equity in their house.

    As this is normally added to the mortgage, and used mostly to live on until the business makes a profit, it is not tax deductible.
    The only businesses where this initial capital is deductible, and big leverage is possible, are those involving land such as rental property and farming.

  3. I tend to agree with Bliss, the housing market tends to be predatory, landlords don’t usually build more houses do they? but the population grows and accommodation becomes more scarce, there fore a CGT if spent on housing will address that.

    As for a tax of one lousy percent on the top ten percent (mostly corporation executives) to rebuild Christchurch; Is that too much to ask?

    I think I know Key’s angle on that, should he go along with that he is afraid that he will be seen to be breaking his promise of tax breaks to his corporate mates. That’s the bottom line!!!!

  4. Face it. Houses are over priced (partly) because 60% are owned as investments, not as homes. This has been supported by (a) A bubble caused by investors (b) A lack of a CGT and (c) LAQCs.

    The writing is on the wall. A CGT is coming, and the days of writing off business losses against PAYE (one of the most inequitable aspects of our tax system) are numbered.

    Sell your investment properties, allow the renting level to drop to about 20% (where it should be) and invest in something productive that will actually help the nation’s economy!

    peace
    W

  5. My solution would be to build more state houses. Obviously target the new houses to tenants that most need them, but also let all working people apply for them as well. Set rents at a rate that recovers the cost of building and maintaining the house over the expected life time of the house.

    There are a number of issues with your proposal Samiuela. Firstly, there is already a significant waiting list for state houses, so even if your plan were able to start tomorrow, it would take a number of years to construct enough state houses in order to clear the existing backlog without even considering the additional people that need them. Secondly, you have the issue of what is “low income” – in places such as Auckland, you have households that are earning a relatively high income ($70k or $80k per annum before tax), that cannot afford to get a mortgage (banks wouldn’t lend to them because the mortgage repayments would be too high as a portion of their income) and could face the squeeze if rents were to increase. Unfortunately, people like this wouldn’t be eligible for state housing. Thirdly, for these people it would be like going from the frying pan into the fire – given the high rate of crime in state housing suburbs, instead of having your money taken from you by landlords, your money would be taken by thieves breaking into the house that you occupy.

    But even then a lot of people forget that you need a 3% per year capital gain just to offset inflation.

    photonz, that is if you are investing all your money in the rental property. Given that many landlords can get away with only a 10% deposit on a rental property, they would only need a 0.3% per annum capital gain to offset inflation on their investment. A 3% per annum capital gain would translate to a 30% return on their investment – now name me a stock that has provided 30% per annum returns to investors over the years.

    I think the reason landlords continue to invest in rental properties is in the hope that they will make money when they eventually sell the property.

    There are other reasons that you forget Samiuela. For instance, you can utilise leverage with rental property, which is something you cannot do with shares. As mentioned above, leverage can mean that a mediocre 3% return actually works out to be a 30% return on money invested. Then you had the psychological impact of the 1987 crash, which is probably going to take another decade before it finally wears off.

    Furthermore, you don’t need to sell a property to realise capital gains – here is a scenario for you

    Person X bought a house in Auckland in 1991 for $150,000, took out a floating mortgage and the rent covered the mortgage. In the 20 years since, the value of the property has increased to $500,000, and the capital component of the mortgage is reasonably low now (let us say $50,000). Because the banks are starting to lend again, Person X goes to the bank and seeks a new mortgage against the property; the banks are happy to oblige and provides Person X with an 80% mortgage. Person X has just gotten $350,000 without having to sell the property and doesn’t have to pay tax on it (and can of course deduct the interest payments because it is a rental property).

  6. Samiuela says “I think the reason landlords continue to invest in rental properties is in the hope that they will make money when they eventually sell the property.”

    Exactly. If you’re paying a 6-7% mortgage, and around 3% on maintenance, insurance, and rates – then there’s no money to be made on rents at 5-6%.

    The money is madde in tax write offs for some (but now not so worthwile because the top tax rate has dropped) and in capital gains. But even then a lot of people forget that you need a 3% per year capital gain just to offset inflation.

    Samiuela says “When one thinks about it, this has to be unsustainable.”

    Nail on the head again. Long term, rents have to largely stay relative to wage increases. There’s obviously other presures like inmmigration, the last decades rush for the middle class to grab themselves a rental property, the bubble that led to even more desperation to jump on the ladder / inflate the bubble further.

    But people can only afford so much rent. And if wages don’t keep up, people have to find ways to lessen the percentage of their wages that go on rents – more people will live in the same house, they will commute from further out, and migrate to cheaper towns.

    You say they govt should be able to provide cheaper housing than the private sector – maybe, maybe not. The private sector is currently providing rental houses, effectively BELOW cost, because they don’t make their money from renting – they make their money on tax write offs, or they can afford to get it from capital gains in ten or twenty or thirty years time.

  7. I’ve always wondered about the point Photonz raises. He is right that rental returns are about 5 or 6% (or at least that would be what my landlord would be getting). I think the reason landlords continue to invest in rental properties is in the hope that they will make money when they eventually sell the property. When one thinks about it, this has to be unsustainable. Sooner or later house prices will reach a point where no one can afford them (whether there is a need for housing or not), and they will have to stop increasing.

    Still, this doesn’t mean the government cannot do things more cheaply than private investors. For a start the government can borrow money more cheaply than private investors, or they can raise money through taxation. Secondly, it can “build in bulk”, and presumably save costs in the process (though care needs to be taken to avoid creating housing areas which become slums in the future). By doing this the government surely has to be able to provide affordable housing for people who cannot afford to purchase their own house, yet are earning too much to be eligible for a state house at present?

  8. So then the whole “lucrative” rental investment market is really just a scam to offset one’s tax liability with rental loses?

  9. samiuela says
    “My solution would be to build more state houses…..Set rents at a rate that recovers the cost of building and maintaining the house over the expected life time of the house.”

    That would substantially INCREASE rents. Currently rental returns are in the order of 5-6% of the cost of a house.

    So that doean’t come close to covering interest, maintenance, rates insurance etc, let alone the capital cost of the house.

    So to cover actual costs, rents really need to be about double what they are now – and more than that if interest rates go up.

    That’s not to say more state houses shouldn’t be built for other reasons – it’s just that you’ll have to massively hike rents if you want to cover costs.

  10. John-ston,

    My solution would be to build more state houses. Obviously target the new houses to tenants that most need them, but also let all working people apply for them as well. Set rents at a rate that recovers the cost of building and maintaining the house over the expected life time of the house.

  11. Something I would like to ask everyone here – in the event that “tightening the screws” on landlords result in a hike in rents, what do you propose to ensure that the suffering of the tenants is not increased?

  12. When you say 40% of people pay no tax what do you mean, 40% of taxpayers, 40% of workers with families …

  13. samiuela – if Ruseell was serious about broadening the tax base he would suggesct doing something about the 40% who because of the likes of WFF currently pay NO TAX.

    It’s clear that Grreens want a very small part of the population to pay all the tax. And most to make no contribution to the country.

  14. SPC says ” it won’t be long before they accept the validity of water charging etc as well ”

    Our locl farmers on a small holding pay $32,000 per year for water for their house, to wash their milking shed and drinking water for their cows – (NOT counting irrigation). They pay an additional $29,000 in rates to get the same services as the playfarm beside them that pays $2000.

    How much more than $61,000 per year should they pay for their water and services?

  15. Photonz,

    Irrespective of what Russell said, or meant to say, what is wrong with increasing the progressiveness of the taxation system (which is what you’re concerned about)?

    Personally I have no problem with paying a higher percentage of tax because I earn a higher than average pay. Put simply, I can afford to pay more, whereas someone on half my pay cannot.

  16. And photonz – you keep claiming that some people get an increased WFF tax credit

    Can you cite anywhere in the budget where the government made such an increase. The budget only announces a reduced threshold and increased rate of abatement.

    The Herald and other media reported the amounts for next year (these incorporate CPI changes projected that are in built with the scheme).

  17. Did you read or listen to his speech?

    Treasury now advocates a CGT to broaden the tax base, it won’t be long before they accept the validity of water charging etc as well – good ideas eventually overcome self-interested resistance lobbying/inertia.

    And what’s your problem of using enhanced revenues to develop an income tax free threshold (as Australia has) – do you have a problem with tax reforms that reduce tax on the poor, but not the broadening of the base (GST increase and reduced tax avoidance by landlords) to reduce the top rate for higher income earners? What’s that about – broadening the tax base should benefit all income tax payers not just some.

  18. SPC – it’s obvious that when Russell talks of broadening the tax base, he’s meaning those who pay the most paying more and those who pay the least paying less. – that’s Green policy – a small number of people paying all the tax

  19. The term broadening the tax base has been used for decades now.

    It was used in connection with establishing GST, it is used in connection with a land tax, a CGT, a FTT and charging for the use of resources from carbon to water.

    It’s generally advocated because it’s seen as less distorting than simply taxing worker or company income and a way of enabling a lowering of income tax rates.

    Because Mr Norman used the term you think it means something different, that says more about you than it does him for using it.

  20. When you say 40% of people pay no tax what do you mean, 40% of taxpayers, 40% of workers with families …

  21. BJ says “Photonz, that is bullshit and you know it.”

    No – it’s quite correct. Under WFF 40% of people effectively pay ZERO tax.

    Russell wants those that pay the most, to pay even more, and those who pay the least, to pay even less.

    That’s not broadening the tax base – it’s narrowing it even further.

    The top 10% already pay 40% of all income tax.

    The top 20% pay 60% of all income tax.

    http://www.treasury.govt.nz/budget/2009/taxpayers/b09-taxpayers.pdf

    It’s blatently obvious that when Russell say “broaden”, he means “narrow”.

  22. whenever he says “broaden the tax base”, he really means narrow it (to the top earners).

    Photonz, that is bullshit and you know it. The wealthy have been sneaking this perk and that exemption into the tax system continually for decades, with the result that they have managed to shift more of the burden on the middle class in terms of tax and on the lower class in terms of reduced services… for decades. Actually twisting a screw or two tighter to get a bit more REVENUE out of the tax system is the one thing that National and ACT have refused to consider from the outset. It can’t all be done through revenue, and it can’t all be done through cuts. Which means that National AND Labour both deserve to be fired from the same cannon, but your characterization of this particular phrase from Russell is simply wrong.

    BJ

  23. Just go read the budget statement photonz

    The only change is a reduction in the threshold and an increase in the abatement – no one gets more, but some are forecast to get more via the CPI adjustment. No one gets more in real terms and some get less in real terms.

  24. 280,000 low and middle income families get MORE under WFF.

    Toad asks
    “Where does it say that?”

    The NZ Herald – quote
    “Of the 397,000 families affected by the 2012 changes, about 278,000 families earning less than $70,000 a year will receive more money.”

    “Over 87,400 earning between $10,000-$20,000 a year, more than 60,000 earning between $20,000 to $30,000, and over 37,500 earning between $30,000-$40,000 will pocket more money.”

    Some earning $40-60,000 will have small decreases, but 80% of those who get a decrease in WFF earn more than $60,000 i.e. Someone with 4 kids on $90,000 will lose $7.76 per week, and someone on $65,000 will lose a maximum of $5.74 per week.

    In the budget WFF money is cut from those on higher incomes, and given to those on low incomes – and this is slammed by the Greens as favouring the rich – duh!!!

  25. Catherine Delahunty just referred to it in Parliament as the “Ken Ring Budget”. Good speech Catherine, highlighting the plight of the most vulnerable for whom yet again a Budget delivers nothing..

  26. We’re going to pay to rebuild Christchurch, the only questions are how and who pays what. The Greens commissioned a survey that showed there was a lot of support for a levy that asked more of those who have more. The alternative is National’s plan to put more of the pain on those much less able to bear it.

  27. I do love the way that Russel claims that the majority of taxpayers are happy to pay a new levy for rebuilding Christchurch.
    When you look at it you find that only a quarter of the taxpayers will have to pay anything.
    Naturally the other three quarters are happy.
    Why don’t you propose that all retired politicians should have to pay tax on their superannuation?
    I’m sure 99% of tapayers would be in favour of that.

  28. ‘the ken ring budget’…

    ..one based on unproveable predictions/assumptions..

    (that from a commenter to nat-rad..

    ..it’s quits clever/funny..eh..?..)

    phil(whoar.co.nz)

  29. @photonz1 11:42 PM

    3/ He slams changes to working for families – yet 280,000 low and midle income families get MORE.

    Where does it say that? Families earning more than $35K, which is the vast majority of families, get less.

  30. No one gets more from WFF under the changes, the “increases” are simply the forecast CPI adjustments.

    The threshold is lowered (37 to 35,000) and the abatement goes from 20 to 25 cents, so it’s impossible for anyone to get more in real terms.

    In fact the changes made seemed designed, from the forecast cost figures, to cap the total cost at present levels – except instead of simply not passing on CPI increases, doing it this way instead.

    I’ll leave it to the Green establishment to explain why you are obviously wrong on the levy issue.

  31. A few [problesm with Russells speech –

    1/ whenever he says “broaden the tax base”, he really means narrow it (to the top earners).

    2/ The things he hopes to achieve with capital gains tax are things we need to achieve. But a capital gains tax can have the opposite effect.

    i.e. if landlords can’t make money on capital gains, they will have to massively hike rents to make houses pay. As you own home won’t be taxed, people will invest more into their own homes, pushing prices up. GCT has not stopped this happening in Aus – so why would it have the opposite effect here?

    3/ He slams changes to working for families – yet 280,000 low and midle income families get MORE.

    While someone on a 90,000 salary with four kids loses $7 a week. Under Russells earthquake levy, they’d lose $20 per week.

    And while were on that, Russells figures for collecting $1b per year from those on $48,000 and above don’t stack up. There’s around 750,000 workers earning more than that. So they’d need to pay ON AVERAGE over $1000/year ($20/week) to total $1b per year.

    Yet Russell says you’d need to be on around $100,000 to pay this much.
    So the AVERAGE worker paying an earhtquake levy would need to earn over 100,000 – but only 3% earn this much.

Comments are closed.