What are our Political Parties doing about the housing Crisis? - TOP
The biggest issue in the Mount Albert by-election is also the biggest issue we face as a nation: housing affordability. While price growth may be slowing with the prospect of higher interest rates, there is no immediate prospect of them returning to affordable levels. Prices are still growing faster than incomes, and given our past record will no doubt take off again in the future.
Looking at the promises of different parties, only The Opportunities Party has a plan can guarantee housing affordability. Let’s take a brief look at their offerings.
National
Much like the Mount Albert by-election, on housing National has been missing in action. They have insisted the answer is simply a matter of building more houses. When they couldn’t increase the rate of building with the Special Housing Areas, they turned their attention to blaming local authorities. As time marches on and the problem gets worse, they have progressively been pinching other party’s policies, firstly getting Housing NZ to actively build more houses (Kiwibuild Lite), and most recently the Urban Development Authorities to support and coordinate major urban development projects. They are even starting to talk about compulsory land acquisition – a sure sign of desperation for a centre-right government.
Their goal is ultimately to reduce house price inflation to single figures – which means affordability will keep getting worse, not better – since income growth is in very low single digits. National has no idea, has presided over the worst burst of house price to income growth, and is like a possum in the headlights.
Labour
Labour also suffers from National’s delusion that our housing woes are just a matter of building more houses; except they have the added delusion that they can do it better than the private sector. The first question facing Kiwibuild is whether their ‘at cost’ houses will reduce house prices, or just put money in the pockets of the people lucky enough to buy them. The second question is whether they will really build more houses, or just crowd out private sector building. The third question is whether they will have the guts to build medium-density development in Auckland, risking the ire from local NIMBY voters. More likely they will follow the current government’s preference for sprawl.
The last and most important question is why the whole Kiwibuild thing is needed in the first place. Labour claims there is market failure, but the market is just doing what the tax system incentivises; land banking. Land banking will continue as long as developers can make more money sitting on land doing nothing than taking all the risk of building. Labour also claims that they can do things at scale that the private sector can’t; have they heard of Fletchers? That monolith was created the last time Labour built houses, do we really need a repeat of that?
Labour at least admits that speculation bidding up the prices of houses is a problem. In response they want to ban foreign speculators. This is a fair enough move, if they can pull it off under our trade agreements. However, the fact is that we can’t lay all the blame for speculation at the feet of foreigners. Auckland had unaffordable housing for many years before foreign speculators came on the scene, so it is just wishful thinking that this alone would solve the problem.
The Greens
At least the Greens accept that our tax system is a problem, in addition to the lack of supply. Sadly, there proposed response – a capital gains tax – has failed in controlling house prices overseas for three reasons:
Firstly it exempts the ‘family home’. Given that this makes up a large percentage of house purchases, it won’t act as a disincentive for bidding up the price of housing. Exemptions also cause all sorts of problems in the working of the tax system, as we can see overseas. The fact is that rich people can afford an accountant, so they are much better at exploiting exemptions than you or I. As the previous Prime Minister John Key said, a capital gains tax would only work if it included the family home, and no Establishment political party is prepared to do that.
Secondly, capital gain is only one of the tax loopholes that encourages overinvestment in housing. The others are excessive use of write-offs and the tax loophole on imputed rental – the value that an owner-occupier gets by living in their own house rent free. Closing one loophole doesn’t prevent speculation.
Finally a capital gains tax is horrifically inefficient. The tax is levied on the sale of an asset, so it provides a strong disincentive to sell any asset – whether that be a business or a home. This reduces the efficient working of the economy.
So in summary, the Establishment Parties and their career politicians are all bereft of ideas of how to confront the cause of the affordability problem. They fear homeowners would stuff their political prospects that they opt for cowardice in the face of this fire. Privately they tell us they’re political pragmatists, that the problem is too big to solve.
The Opportunities Party
Our policy is to make sure all assets (minus debt) are liable for at least as much tax as if that money were in a bank deposit. We would gradually introduce the tax so that house prices were kept stable. By ensuring it is treated the same as any other asset this will kill off speculation in housing. Housing will become again an asset that provides shelter from the storm, rather than shelter from tax.
But we would not collect even one more dollar in tax. Any tax raised would all be given back in cuts in tax rates, By using the money to reduce income tax, inequality would be reduced, with 80% of people better off. Anyone who is land-banking will get a tax bill, so they will have a strong incentive to get building houses. Meanwhile investment will be directed to businesses (including building new houses), rather than speculating on existing housing, so our stagnant incomes would rise, finally able to catch up to our house prices. It would take time – our analysis suggests about 15 years - before housing affordability would be restored nationwide (with ‘affordability’ defined as prices three times annual income). That isn’t bad considering this housing crisis has been 30 years in the making. And for tenants, they would see an end to rent rises gutting their discretionary income.
The solution is not difficult, what is missing is an ounce of leadership from the Establishment parties. TOP has a realistic plan for change, all other parties are gutless.
-
JOhn Pearce commented 2017-03-14 18:46:05 +1300Only thing missing is regulating the amount of lending to the house purchasing sector. When too much money floods the housing market, it drives up prices. Aussie banks have been major contributors to the NZ house price inflation. But seems little chance of any party taking on the Banks. -
Oliver Krollmann commented 2017-03-06 13:24:31 +1300Just saw Gareth’s Facebook post where he said they got 4.63% of the vote in Mt Albert, in a by-election plagued by voter apathy, since the outcome almost didn’t matter at all.
Personally I was hoping for a slightly better result, particularly because so many voters stayed at home, so the ones who went should have been the engaged ones … but by the looks of it TOP are quite happy with the result.
It’ll be an interesting election year, I hope. If only it could be done without hoardings … -
Gordon Ngai commented 2017-03-02 15:47:03 +1300In most democratic election, around 30% voters are committed to the right and 30% to the left. The rest of 40% voters are classified as swing voters. These are the people who like some policies of each party but also dislike some policies of each party. When it come to decision time, the dominant emotion at that time will be the deciding factor how they are going to vote.
-
Steve Cox commented 2017-03-02 12:55:23 +1300Hi Oliver
Roughly a 5% share. But with a low turnout and no National candidate it is hard to say how many were TOP voters or if they were National voters who voted because they always vote. An added distortion is that there was no party vote, just the electorate vote. As we see in a lot of electorates one party will win the electorate but a different one wins the party vote.
Gareth and Geoff will have a better feel from their canvassing as to how they’re going policy and mood-wise.
AS Gordon says; people make decisions based on emotions. So it is how policies are presented that is important (highlight the 8% tax cut and generalise the TOP1 tax), and how you attack other parties. -
Gordon Ngai commented 2017-03-02 12:05:55 +1300Hi Oliver,
The result of Mt Albert by-election is not a surprise. It is neither encouraging nor a setback. This is a wakeup call. If we continue the current approach on campaigning, this is the likely result of the Sep election.
The current approach emphasis on the importance of policy without, at the same time, appealing to the feeling and emotion of the people.
People make decisions based on feeling and emotion. In a democratic system, politicians have to be humble and believe in the wisdom of the people. -
Oliver Krollmann commented 2017-03-02 10:14:48 +1300Hi TOP Team, I was wondering if you would consider posting your reaction to and comment on the results of the Mt Albert by-election? It’s not what we were hoping for, I know that, but it’d be good to get an idea how you view the result. Is it encouraging TOP to continue? Is it a setback? Please do let us know, thanks.
-
Gordon Ngai commented 2017-03-01 10:51:39 +1300Hi Steve,
You have a very important point here – what is the role of the local councils?
In Australia, the state governments are responsible for hospital services while the central government is responsible for the GP service. This creates incentives for both to outsource the cost to the other side.
Our local councils’ roles are relatively limited. In my experience, you devolve the control power to the level that can make a difference. With UBI, the whole area on role of local councils requires re-thinking. -
Steve Cox commented 2017-03-01 07:49:50 +1300Hi Gordon
Like most countries we have central and local governments. Central governments like to dump responsibilities onto local governments leaving the local gov’t to pay the costs – think policing swimming pool fencing, micro-chipped dogs, water fluoridation, etc.
So if central government owns all land, but local gov’t has the role of providing roading, lighting, sewerage then funding issues are going to arise if central gov’t has the power to change the land’s designation from, say, rural to residential. If the power to change designation belongs to the local gov’t then we are back to part of Auckland’s current problem that the council isn’t re-designating enough land.
This is probably one of those areas where TOP has raised the issue about devolution of power. What’s the answer? Until the subject of state ownership of all land is on the table it is just an intellectual exercise. -
Gordon Ngai commented 2017-03-01 03:12:13 +1300Hi Steve,
I am not sure I understand your questions completely.
To solve the infrastructure issue, the HK MTR self financing model will be the answer and it works like this. First the Govt will sell a piece of un-developed rural land to the SOE MTR at market rural price. Then MTR will negotiate with private sector developer to build houses and shopping mall there with some sort of profit sharing and ownership. Both will then raise fund from banks based on the project proposal. The private developer will also raise fund by pre-sell of the property. The project will be self financing from the consumers of the project. Imagine to build a town 30 min train journey from Auckland CPD. The value of the land will increase due to the existence of a MTR extension.
The question on iwi – these type of issues will be debated in the formation of the constitution by the democratic process. -
Steve Cox commented 2017-02-27 19:08:11 +1300Hi Gordon
Just to be a devils advocate, what happens when Nick Smith solves the Auckland housing crisis?
He’ll release lots of bare land and declare it to be Residential.
Then its all Auckland Council’s fault for not building the infrastructure needed.
Singapore is a small country and there is not this split in responsibilities.
Although if central government were to finance the infrastructure I’m sure the council would be happy (as long as they got the money they wanted, not what Nick Smith thought it might cost).
And on to Iwi. Would they sell all their land and just become another tenant? If they did would they want special tenancy rights?
A lot of good ideas have come through these TOP threads and would be improvements on what we have but are possibly a step too far and wouldn’t be enacted. -
Oliver Krollmann commented 2017-02-27 18:52:58 +1300Gordon, I would definitely be open to that idea. It has always struck me as odd that we can actually buy and own land, as it is just a basic resource like water or air.
I would even go one step further and prevent such a leasehold from being inheritable. After all the “owners” of a converted freehold had died, the land and any property on it should go back into the pool of unassigned land and be available for someone else to lease. This would remove any incentive to bank land or property for speculation or amassing wealth and passing it on through the generations.
And yes, I am a freehold home owner. -
Gordon Ngai commented 2017-02-27 16:49:44 +1300If we are serious about land banking, the easiest way is to embrace the Maori value that no one can own land. Mother earth is for everyone. You can have the use of land i.e. leasehold not freehold. Land value will then reflect just like option – its time value for specific use. This is how Singapore can make housing affordable. It will also give the future generation a choice on how to use the land and revenue for the future Government of the day. You may think it is impossible to implement in NZ since we already have freehold land. No, in fact it is quite simple to implement. If the written constitution have majority support for this, we can pass a law to assume agreement by owner to convert to leasehold for say 50 or 100 years. Those who do not agree can object and keep it as freehold but need to pay say 30% freehold tax per year. This will stop land banking.
-
Steve Cox commented 2017-02-26 08:27:55 +1300Hi John
Thanks for pointing out Georgism to me
Now for the soon to arrive UBI announcement -
John Robson commented 2017-02-25 19:01:42 +1300Hi Steve,
Re five new taxes:
Not strictly accurate… as NZ already has…
1. Capital Gains Tax:
Current NZ tax law requires tax to be paid on capital gains
The recently introduced ‘Bright Line’ Test was designed to address the most egregious evasion…
We could do it better…
As they do in other countries…
2. Asset Tax:
Every (almost) property owner in NZ already pays an asset tax
You know it as rates…
But the basis is inconsistent across the county – and often regressive…
We could do it better…
As they do in other countries…
3. Land tax:
It already exists in NZ
It is either a part of or all of the basis for rating…
It is regarded by some as the least distorting of all taxes – check out Georgism
Given the significant role increasing land value plays in driving up ’property prices…
We could do it better…
As they do in other countries…
4. Undeveloped land tax:
As per 3. – we already tax undeveloped land
We just need to recognise the cost externalities it imposes
And put a weighting on it
We could do it better…
As they do in other countries…
5. Uninhabited Dwelling Tax
As per 2. – we already tax uninhabited dwellings
We just need to recognise the cost externalities they impose
And put a weighting on it
We could do it better…
As they do in other countries…
Re CGT:
The simplistic ideal is that all income is taxed equally – to avoid distortion
But there are times when we choose to change behaviour by taxing differentially
In most countries that have a CGT there is some concession for the family home
Because the family home is not just a financial asset
But for other residential property, the tax is higher than income tax
The fact that the US is a shambles is simply an anecdotal argument
Other countries do it better… in my view.
Re Unimproved Land Tax:
Local government holds all the records already
Check out your local Council’s rating database.
The only issue is the ‘rate’
Re Uninhabited Dwelling Tax:
This is simply a variation on an asset tax
Think imputed rental or deemed return
As with unimproved land tax, all the information exists for its implementation
Although it would require integrating Central Government and Local Government records
No inspectors required
Re revenue neutral:
My personal view is that overall tax take needs to increase
So, for me, revenue neutral is a cop out
I would like to see the wealthy pay more tax
I would like to see higher income earners pay more tax
I would like to see a zero rate band for low income earners
I would like to see… a fairer NZ.
Re Local Government changes:
One of the major challenges facing Councils is funding infrastructure for growth – thereby making more land available
The current rules are a shambles
Councils are not able to recover all their costs
Hence debt – which is financed by increasing rates
The situation is too often exacerbated by the craven stupidity and/or ignorance of too many City Councillors but that is another story.
The infrastructure funding impact on debt/rates is well known.
Central Government is saying free up land (i.e. build infrastructure) while at the same time saying keep debt down.
But Central Government rules make this impossible!
It is actually easily fixed.
Re tenancy and rental legislation:
The models are available from other countries.
Gareth/TOP has no hesitation in copying aspects of the Finnish education model
Perhaps we might copy aspects of the German housing model
Happy to discuss details in some other forum…
Re “… drifted away…”:
No need to apologise.
An intelligent observer sees the interconnectivity of issues
To apologise for evidencing intellect is bowing to an all-too prevalent aspect of NZ’s cultural cringe
Kia kaha -
Steve Cox commented 2017-02-25 17:19:16 +1300Hi John
Five new taxes? Good luck with that. This is just the realist / pessimist in me talking. If your Capital Gains Tax is the same as my Income Tax then I’ll agree. I just have a great dislike of a CGT because it will have its own rate. If you look at the US they have a CGT of 15%. So for the wealthy they arrange for all their income to be a capital gain and not ordinary income – so Mitt Romney and Warren Buffett, amongst many others, only pay 15%.
The Unimproved Land and Uninhabited Dwelling Taxes. The definition and enforcement of them would be a nightmare. Are Jack & Jill who are working towards their first home and have bought the bare section liable for the Unimproved Land Tax? Is a landlord who is asking for a top rent on a property and can’t get a tenant at that amount liable for the Uninhabited Dwelling Tax? Do we have inspectors driving around looking for what might be Uninhabited Dwellings?
Asset Tax (TOP1?) and a Land Tax. Not opposed but how do they work? Are they revenue neutral taxes?
Local Government changes – is this allowing Councils to borrow more money? Which means higher rates in the future to pay off the debt.
Australia and Canada as just two examples have your restrictions on off-shore investment. So i’m not sure where the assertion in the OP above comes from that trade agreements may prevent it. The government has never (that I know of) used that as an excuse not to do it.
Improved tenancy and rental legislation. Yes, I’m all in favour here. Again though the devil will be in the detail. Tenancy rights need to go both ways though. Greater security of tenure if you are a good tenant, but much easier to kick out if you are running a P-Lab, wrecking the property, etc. A rental WOF though I’m ambivalent about. It would create thousands of jobs for inspectors to issue them though.
How about a landlord providing a self assessment report? Have a standardised report that the landlord completes and supplies to his new tenant. In the event of any dispute that report is the bottom line. If it said underfloor insulation and there isn’t any – landlord loses. A problem with this way and the WOF way is with things like damp and mould. Landlord is accused of cleaning it up before the tenant moved in. The tenant is accused of not airing or keeping the room warm.
Sorry, I’ve drifted away from TOP1 just a little bit. -
Oliver Krollmann commented 2017-02-25 16:19:37 +1300John & Steve, you’re offering a comprehensive list of measures and ideas, many of which I agree with completely or at least to some extent. Some of these solutions have already been mentioned elsewhere here on the TOP website or in other sources, so people are in fact thinking about and discussing them. Hopefully the suitable and feasible ones will find their way into future legislation.
Good discussion, I’m enjoying the exchange of ideas. And I hope I was helpful with my math examples, to understand the numbers a bit better. Of course, nothing is set in stone there, either. -
John Robson commented 2017-02-25 14:07:41 +1300Hi Oliver,
Re paying tax on rental income:
For a property investor, costs like mortgage payments are tax deductible.
They pay tax on net income.
If well managed, a ‘capital gain’ portfolio will minimise taxable profit.
Indeed because losses are not ring-fenced, there are actual tax advantages for wealthy high-income investors’ property portfolios showing losses.
In summary, the answer given in the FAQs is simplistic – and reveals a lack of understanding of how the property investment game is currently ‘played’. The asset tax will have little or no impact on the ‘smart’ (but IMHO morally bankrupt) property investor
Re “…if you read…”:
Oliver, as I’ve stated before I have read all the policy documents and all the associated FAQ’s and related posts.
I have also read most of the Facebook postings but the quality and tone of many posts, including, sometimes, those of Gareth, I find less edifying. I have also read (or previously read) many of the referenced sources – and a larger number of relevant other sources.
Re paying the $115 per week:
There is little quality data on wealth crossed with income avalable in New Zealand.
A fact acknowledged by Gareth – and readily confirmed by Stats NZ.
That being said, Gareth recognises that, unlike you, a significant number will struggle to find the $115 per week.
Hence the concession to allow the asset tax charge to accrue in certain situations.
One of the reasons I’m asking to see Gareth’s/TOP’s model is to see how big they believe this issue is.
Re my solutions:
In no particular order…
SUPPLY
o Unimproved Land Tax
o Land Tax
o Uninhabited dwelling tax
o Central Government building programme – the PWA is IMHO a valid option
o Amend Local Government funding rules – including infrastructure funding
o Amend Local Government financial prudence rules
o Amend Local Government planning rules
DEMAND
o Asset Tax
o Capital Gains Tax
o Ring-fencing of losses on residential property investment
o Increased LVRs on residential property investment
o Restrictions on off-shore investment in residential property – new build only
o Create new (higher risk) Reserve Bank asset class for residential investment property mortgages
o Improved tenancy legislation – e.g. guarantee of tenure
o Improved rental legislation – e.g property W.o.F.
o Give the FMA some real funding and real teeth
Oliver, obviously there are other areas where actions may impact on the housing market (e.g. Central Government migration settings), but the above short-list would, I suggest, with the correct settings and dynamic management, go a long way to acheiving a fairer New Zealand. -
Steve Cox commented 2017-02-25 12:58:36 +1300Hi John and Oliver
I’m back! The nice people digging up the street yesterday to do repairs also cut the phone lines. No internet for 24 hours – I’ve suffered I tell. I’ve suffered.
You’ve asked for some suggested solutions Oliver. How about: –
1. When a property is bought you must specify what your intent is (to simplify it for this discussion lets just have home or business). That intent is recorded by LINZ.
2. Extend the current two year bright-line test to “since forever”.
3. When a business property is sold a withholding tax is deducted at 33% on the gross profit (sale price minus purchase price). Sort out your actual tax situation when your tax return is prepared.
4. Limit the security that can be offered on a business property to that property alone. One property – one or more mortgages. No one mortgage – multiple properties. And no personal guarantees either.
5. Threaten to extend No.4 to making the bank’s only recoverable asset the property itself. So as happens in the USA a property owner can drop off the keys at the bank and walk away.
6. Introduce TOP1, not so much for the TOP reasons but as an encouragement to people to right-size their home. Mum and dad don’t need a four bedroom home once the kids have finally left. Downsize to two bedrooms and let a family buy the four bedrooms.
7. Make TOP1 assessable on the gross value of business properties, but only net value on homes. But this one depends on how the whole TOP1 tax fits into the income tax rules.
As I pointed out further down this thread there is no way NZ is going to get back to an affordability level of three times income unless property values drop, probably significantly. The above won’t do that on its own. We probably need another 2008 type event (without bailouts). -
Steve Cox commented 2017-02-25 12:18:10 +1300Hi James.
Re your point 5. I live in Christchurch and own a house here. Because I don’t want to move to a job advertised in Dunedin doesn’t mean that unemployment will be higher. The distribution of unemployment may change (Christchurch higher, Dunedin lower) but tying total unemployment to home ownership is I think a claim too far.
I would look at the other factors you allude to. How about high home ownership has happened because of greater wealth. That wealth was generated by good wages. Factory owners want a lower wage bill so move their factories to cheaper countries. Therefore, greater unemployment, not so much because the home-owner won’t sell their home and move; it’s that they don’t want to move to a third world country. -
Oliver Krollmann commented 2017-02-25 10:00:39 +1300Thanks for the link to the FAQ 26, John. It’s one of the early answers, so I choose to stick with the later blog post I mentioned below, because it allows us to calculate examples more precisely. For someone with a higher income and an average tax rate of 25%, an 8% tax rate cut amounts to roughly a third, so that’s still in line with the FAQ. For low-income earners, the 8% tax rate cut will mean an even higher percentage of tax savings, as you noticed.
As for the residential property investors, if you read the TOP 1 policy document and related posts you’ll notice that they are unlikely to have to pay asset tax because they’re already paying tax on their rental income. Only if they didn’t use their property to generate sufficient income (for example land banking or letting houses sit empty to speculate or not earning enough rent), then they would have to pay asset tax, too.
As a home owner I would probably not have to struggle to find the $115 per week, because I’d be receiving income tax cuts on my salary and other investment returns I’m already paying tax for. These cuts should more than compensate for the asset tax – unless I’m one of the 20% who can afford it.
I had a look at the Wikipedia articles you suggested, and I see your point that wealth taxes have their disadvantages, no doubt about that. You were saying earlier that you support an asset tax, but you’re also asking for a suite of changes accompanying that asset tax, to address the housing affordability issue. What’s your suggested solution? -
John Robson commented 2017-02-24 19:11:25 +1300Hi Oliver,
Re cutting tax by one third:
http://www.top.org.nz/26_how_do_i_calculate_how_i_m_effected
Re 4.5% mortgage vs 1.5% asset tax:
Think like an residential property investor – your costs (mortgage, rates, etc.) are paid by your tenant.
An asset tax on a leveraged property will add little to the overall costs.
Try this (simplified) example:
$400,000 property – 20% equity – mortgage of $320,000 – interest @ 5%
Mortgage requires $320,000 × 5% / 52 weeks = $308 per week rent
Asset tax requires $80,000 × 1.5% / 52 weeks = $23 per week
The asset tax will not discourage the investor – particularly if they are seeking return via (untaxed) capital gain.
They will seek to recover costs from their tenant.
Compare with a residential property owner – your costs (mortgage, rates, etc.) are paid by you.
Assuming you are in an identical position to the investor – you have to find $23 per week – after tax.
If you own the property mortgage-free – you have to find $115 per week – after tax.
Asset tax appears to have a bigger impact on the owner than it has on the investor.
Asset tax appears to favour higher levels of leverage by the investor.
Re “…convincing…”
Go outside at 6:00 and look north.
Stand there for 12 hours.
You will be convinced that the Sun goes round the Earth.
Re asset taxes:
They are not new.
If you really want to understand them, Google is your friend – I suggest that you start with ‘Wealth Taxes’ on Wikipedia and then spend a month or more (as I have done) to understand them, their use in various tax systems, and their impact.
In the last three months, I have been unable to find any emprical evidence that supports Gareth’s/TOP’s contention that a simple asset tax will address housing affordability.
Oliver, I want to see a fairer (and smarter and greener) New Zealand.
But I’m not prepared to suspend my critical faculties when offered a solution.
Particularly a solution of the simple ‘silver-bullet’ kind.
And as I have said before, the well-intentioned desire to ‘do something’ runs the risk of…
1. We need to do something
2. This (Gareth’s/TOP’s asset tax) is something
3. We need to do this
As Saint Bernard of Clairvaux might have said if he were here today – the road to hell is paved with good intentions. -
Oliver Krollmann commented 2017-02-24 18:01:05 +1300A land-value tax on unimproved value would not consider debt or capital gains, both of which are covered when taxing equity.
-
Samuel Johnston commented 2017-02-24 17:29:40 +1300Would someone care to explain the difference between TOP’s equity tax on property and the land-value tax? I always had a hunch that a tax on the unimproved value of land would be the way to solve land price issues. (And not just on non-resident property investers, per John Key’s suggestion last year, but on all land, including the family home.)
-
James McGilvary commented 2017-02-24 16:00:39 +1300why is migration blamed for our housing price hike when it is only one of many contributing factors. Why is net migration never mentioned? Back in 2004 when Aussie cut off social security for kiwis living over there, and the fact we have relative political stability and economic growth means more kiwi’s are returning from Australia couppled with record low kiwi’s departing for Aussie. Seams to me the extra migrants wouldn’t be as big of an isue if Aussie was still providing for us. The second point is why is home ownership so Important? Never ever own the home you live in.
1:As investments go, it’s not always a great deal, If you bought a house for, say, $200,000 thirty years ago, it would be worth $468,375.09 today. While that gain feels impressive, that appreciation is based solely on inflation – which means that, in theory, the same appreciation would have happened with any asset.
2: The mortgage interest deduction doesn’t make up for the fact that you’re still paying a lot of interest.
3. Homes often tempt people borrow more than they can afford
4.Owning a house subject to a mortgage drives up debt to income ratios. I owe a significant amount in student loans. That already affects my perceived ability to pay when figuring my credit. A mortgage dramatically increases that ratio. Interestingly, my monthly rental payment is actually more than my potential monthly mortgage payment – but on paper, my rent is not a debt, it’s an expense. The two may be treated very differently, depending on the circumstances.
5. A mortgage is typically 20 or 30 years while, at any given time, the current administration has only three. Also, economists Andrew Oswald and David Blanchflower found that rates of high homeownership lead to higher rates of unemployment in both the U.S. and Europe because, among other issues, owning a home may keep people from moving to areas with good jobs and creates “negative externalities.”
6. Houses take a lot of your money. There’s a reason that many folks refer to their homes as money pits: you often put a lot of money that you’ll never see again into a home.
7.You can’t deduct a loss on the sale of your home. If I lose money on stocks, I can net those losses against other gains. If I lose money in my business, I can deduct those losses or use them to offset other gains, but it doesn’t work that way when it comes to housing. You can never claim a capital loss on the sale of a personal residence.
I’m not saying that owning a home is a bad thing, I just happen to like renting more. Maintenance is no longer my problem. I’m also not advising folks to eschew real estate: it can be a good investment for some, rentals can be a good financial move. What I am saying is that we shouldn’t buy into the idea that owning a home is for everyone.
It would be a mistake to assume that countries with high incidents of home ownership are synonymous with a strong economy: Russia, Italy, Greece and Spain – countries with struggling economies – have significantly higher home ownership rates than us. Conversely, some countries with traditionally strong economies like Germany, Switzerland and Japan, have lower home ownership rates than us. -
Oliver Krollmann commented 2017-02-24 12:17:24 +1300I’m not aware of a post that describes a 1/3 tax cut, apologies. My math is based on the following earlier blog post, which stated in its opening sentence:
“Take 8% of your gross income, and that’s your tax cut. Take 1.5% of the equity in your house and that’s the additional tax to pay.”
http://www.top.org.nz/top_s_policy_to_make_new_zealand_fair_again_some_numbers
If by leverage you mean debt (which would lower your equity), I think it would be foolish to pay something like 4.5% mortgage interest rate to a bank, to save paying 1.5% asset tax to the government.
I cannot honestly say that I’m sure that this tax policy will help, but I find the numbers and logic behind it convincing. I don’t know if it has been implemented anywhere in the world in exactly the same fashion – if it was, that could certainly be used as an example and proof if it works or not, and I’d very much like to hear about it. In case it is indeed a completely new concept, there’s of course uncertainty if it will achieve what TOP claims (and you’re right, additional policies are needed to make it a complete framework – but that’s where TOP’s future coalition partner would come into play, to negotiate that, if TOP made it into government). However, we haven’t made progress and got this far by shying away from trying new things. In my humble opinion the TOP policy 1 is worth implementing, because it clearly and decisively addresses tax loopholes that have contributed to our insane obsession with buying and selling property from and to each other. As I said before, I’m seeing it happening in my neighbourhood at the moment, and it’s sad to see that all we focus on is how we can profit from the current situation and thus add fuel to the fire. -
John Robson commented 2017-02-24 11:00:08 +1300Hi Oliver,
Re tax cut vs. GST cut example:
Thanks for explanation of your 8% calculation – but it is not what Gareth/TOP used.
They suggested a 1/3 tax cut – hence my second calculation.
Your ‘8%’ example is an effective tax cut of 56% – which, ceteris paribus, would require an asset tax of over 2.5%.
Re CGT vs Asset Tax example:
Your reply relies on the (previously unstated) assumption that the owner’s equity for the period of their ownership is 100%.
One of the key attractions for the property ‘investor’ is the concept of leverage – so the investor is unlikely to own 100% of the property.
I suggest that you redo your calculations at various levels of leverage to get a better undertanding of the ineffectiveness of an asset tax in deterring speculation.
Re “Don’t be too fixated…”
You have now resorted to using a strawman argument.
I have neither asserted nor implied that speculation is to blame “for everything that is wrong under the sun”.
And just to be clear – I support an asset tax.
Re “…if you take the time to download…”
I have.
I have also downloaded and read more widely – after all, few polemicists (as I would suggest Gareth is) will offer links to sources which challenge his claims and assertions.
This has taken some time – which is why I haven’t entered into the discussion in any meaningful way until now – because I like to enter discussions as an informed participant.
I suggest you should do the same
Oliver, my point is simple.
Do you really believe that the asset tax as proposed by Gareth will deliver what he claims?
If so, please refer me to somewhere on planet Earth where this has been effective.
I contend that the emprical evidence supports my contention that there needs to be a suite of changes – and not just to the tax system – to address the housing affordability issue.
Gareth should be honest enough to admit this.
Conversely, if he genuinely believes that his model proves otherwise – he should make his model public.
In the spirit of open and honest debate. -
Oliver Krollmann commented 2017-02-24 09:14:21 +1300Sorry if I didn’t explain my math better. In NZ you pay 10.5% income tax on your first $14,000, then 17.5% income tax up to $48,000. So it’s very well possible to have both these rates cut by 8% (not 8% of the income tax you pay), making it 2.5% on the first $14,000 and 9.5% after that. Assuming a yearly income of $30,000 this would mean $350 tax on the first $14,000 and $1,520 on the remaining $16,000, making it a total of $1,870, which is $2,400 less than the current $4,270. Or even easier: 8% of $30,000 = $2,400. So the statement that income tax cuts don’t matter much to low-income earners is not true. I’m pretty sure $46 more per week will mean quite a lot to this group.
As for the capital gains tax, assuming a house originally worth $500,000 5 years ago, $150,000 capital gains in 5 years (linear) and no mortgage, you would pay a TOP asset tax of 1.5% per year on an average of $575,000, making it $43,125 in asset tax. That’s actually more than a flat 25% CGT on just the capital gains, so it should be just as effective to discourage speculation.
Don’t be too fixated on blaming speculation for everything that’s wrong under the sun and making CGT the panacea. TOP have made it clear that their intention is to tax all incomes fairly, and their idea of taxing equity (not just asset value, it’s asset value minus debt) automatically includes all future capital gains, as shown above.
As for the evidence, TOP have made it clear from the beginning that all their policies will be evidence-based. If you take the time to download and read the policy documents and related blog posts, you’ll find numerous sources and references that their policies are based on. You can of course question the validity of these, and provide evidence to the contrary, but claiming that no evidence was provided is unfair. -
John Robson commented 2017-02-23 23:19:05 +1300Hi Steve,
Thanks for posting your calc’s.
I agree with your conclusion that, on the face of it, Gareth’s/TOP’s numbers don’t stack up.
Hence my request for him to show us his model.
But, like US citizens waiting for Trump to make public his tax returns, I’m not holding my breath.
Just one point:
If you buy a house with the intention of making a capital gain, then, under current law, those gains are taxable, whenever they are realised.
However, the tax that is due can be simply evaded (and I use the word ‘evaded’ deliberately) by simply lying about your intent.
Not that honest Kiwis would ever do that…. -
John Robson commented 2017-02-23 22:56:02 +1300Hi Oliver,
Re tax cut vs. GST cut example:
Current income tax on $30,000 is circa $4,270:
> 8% reduction = $342.
> 1/3 reduction (as proposed by TOP) = $1,423.
Where do you get $2,400?
Re CGT vs Asset Tax example:
Capital gain of $150,000 over 5 years on $500,000 property:
Assume 1.5% asset tax (and linear gain).
> tax on gain = $6,750
Assume 25% CGT (as they have in Germany).
> tax on gain = $37,500
Which do you think would be more effective (or more accurately – less ineffective) at discouraging speculation?
Re “as house prices stabilise over time…”:
TOP have given NO evidence that their asset tax would be effective in stabilising house prices.
Oliver, my last point is important.
I repeat, Gareth and/or TOP have offered NO evidence to support their assertion that a simple asset tax would address housing affordability in fifteen years.
And back to Germany – with hedonic property price increases of close to 20% over the last three years – 20 times the rate of inflation – it is a bit rich (pardon the pun) of Gareth to cite Germany as an example of a country successfully managing residential property affordability.
As I’ve stated elsehere – I’m in favour of fairness – and I do as I say – refusing to ‘invest’ in residential property (other than to house my family).
But, it is my considered view, to get fairness will take much more than an asset tax – and to pretend otherwise is to be as brainless and/or gutless as the rest of the poitical establishment. -
Steve Cox commented 2017-02-23 20:30:04 +1300Oliver (you again! me again!)
I’m not talking about a capital gains tax. Currently if you buy a house for rental and sell it within two years you pay tax on the profit. If you wait two years and one day before selling then all that profit is tax free.
Put the cost of that house in the bank and earn interest with tax being deducted; buy shares and get dividends that have been taxed, or buy a house and pay no tax on the profit when you sell. By taxing businesses for all their profits the distortion that encourages property speculation (and upward price movements) is significantly lessened.
TOP can still do its thing as a longer term measure, but we also have to fix today’s problem.
My GST comment was a question about why tax cuts always revolve around income. If you aren’t earning much income tax cuts don’t deliver much (sarcastically – 8% of zero is zero). But everyone buys groceries.
I should go looking through some of the older threads for numbers I worked out, but here’s some rough ones. Fifteen years to get housing affordability back to 3 times income from 8 times. Say the family income is $100,000 and the house is $800,000. That’s eight times.
So in 15 years time that house may be worth $900,000 (a little bit of price growth and some building material inflation). So to have got back to 3 times then the income has to be $300,000. That’s a pay rise of $13,000 every year!!!!!!!
Lots of exclamation marks because I just don’t see that happening. Prices are going to have to correct downwards.
And there are employers out there who are going to refuse to give any sort of pay rise. “You just got an 8% tax cut. You don’t need a pay rise as well”.