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The Enemy is Babyboomer Denial

While most New Zealanders agree that making New Zealand fair again is a priority – there is, amongst those reluctant to invest to make that happen, a common theme. It is best described as the denial of a portion of the babyboomers and older (those aged over 53). There is a cohort of this group who fall victim to intemperate and righteous indignation at the suggestion that they have had a free ride and that has driven in the rise in inequality.

There are several strands to the case against ‘babyboomer and older’ indulgence but arguably the most visible is the rise in property prices from 3 times the average wage in the 1970’s to now 8 times. For the layperson to get their head around the reasons why is no easy task but that of course is no excuse for denial. 

Now the concern is that correcting the decades-long property boom can either come via a shock – some economists have argued that a 40% drop in prices is needed if intergenerational and temporal inequity is to be addressed. Personally I think we can achieve the correction without such a shock, but I agree the gap must be closed. The tax rebellion we’ve launched as TOP’s flagship policy is such an orderly approach – it simply removes the loophole in the income tax regime that enables owners of exempt or low yielding assets to escape their tax obligations. The consequence of that three decades-long contrivance between governments and their babyboomer electors has been that wage earners have borne far too much of the income tax burden. My estimate is that income tax rates can be reduced by about a third if we remove the tax privilege afforded asset owners.

The approach I prefer will knock property price inflation on the head but not collapse prices and provide some time for incomes to rise and close the gap. The beneficiaries will be the generations younger than the babyboomers and anyone (old and young) who has found even their rent is chewing up so much of their income now, that their discretionary income is falling, and falling fast. To date, packages like Working for Families have been an attempt to recycle income to these folk – although of course that hasn’t solved the issue as the taxpayers that fund WFF are wage earners in the main, not owners of exempt and low-yielding assets.

One stark measures of how bad this issue has been and for how long, is the low savings rate New Zealand households have had during the babyboomers’ voting years. The graph illustrates that over the last 40 years, NZ households have had the lowest savings rate of comparable countries – in fact it’s been negative!

nz-savings.jpg

* for full details, http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-04/11.htm 

The reason we don’t save is obvious – we don’t need to. So long as the governments we have voted for, have sponsored interminable house price inflation by exempting home owners their fair share of tax, that asset has become the most desirable of all assets on offer. We have saved deposits (that have become smaller and smaller) and borrowed heavily (mainly borrowing foreigners’ savings via our banks) and leveraged like crazy into housing. The demand from for this get rich quick asset has been insatiable and of course the more we want to put into property, the further house prices rise beyond our income levels.

As we all know wage earners are just suckers. The real money is made from bidding against each other for houses. And the governments of these Establishment parties have loved it. The false prosperity all built on the back of inflated property values has expanded the property-owning elite to incorporate almost a whole generation, and until now the bulk of voters.

It is inter-generational theft, let there be no mistake. No saving necessary, shortages of capital for businesses that generate income and jobs, and a morbid dependency on foreign debt have been the outcome. The question is how to bring this helium balloon into land without a serious crash.

This is precisely what TOP’s flagship policy does. It simply shuts the loophole and phases that process in to minimise hurt. But from the squeals of indignation from some of the property owners you could be forgiven for thinking I’ve threatened to shoot their cats. The common misconceptions of those in denial include;

“It’s not my fault property prices have gone up”. Well sorry it is – you elected these Establishment party governments. As career politicians always say to me – “we just do what the people want”.

“I’ve worked bloody hard and saved for my house, not like all those layabouts still renting and spending all their money on cigarettes and booze”. Well hello – equating home ownership with “hard work” has to be the most hypocritical of all the objections. Try telling that to the families working 4 or 5 jobs just to pay the rent, or to the younger generation who will never buy now, and will also struggle with the rent. The reality is the bulk of today’s value of most people’s houses has come about through property price inflation – it has nothing to do with “hard work”. “Hard work” is what you get paid wages for or build businesses with.

“My home is my castle, it’s a sin to tax it”. Sure – so why do you pay rates?  The reality is taxes are collected as the price of a civil society, to underwrite fairness. Before World War One most taxes were property-based, overseas asset taxes are still significant – but here Roger Douglas wiped them out. That makes us an outlier – and the result is no savings, low investment, huge foreign debt, and an elite of asset owners stealing wealth from others..

“I don’t earn anything from my house”. This is a popular reaction too, and simply reflects the reality that some people don’t know the difference between income and cash. Many non-cash forms of income are taxed, the one I always like to quote is the deemed income New Zealanders have to declare on their foreign shares (whether they received any cash or not). It is set at 5% pa. At issue here though is the failure for some to recognise that when they own a house they still get a benefit from it year in and year out – that is the roof over their heads. This is the same benefit a tenant buys each year and is taxable in the landlord’s hands. Why should bulk (or multiyear) buying of that benefit exempt the owner from income tax that landlords pay? For owners renting to themselves of course that benefit should be taxable in their hands – otherwise it’s clearly unfair. It’s akin to saying that if I owned a bank deposit rather than a house I shouldn’t pay tax on the interest. It is the benefit that’s being taxed, not the asset. Still struggling? Look up “imputed rent”, learn the difference between income and cash.

“You’ll never get elected Morgan, advocating this”. That may well be so, but surprise, surprise I’m not chasing a job. I’m interested only about getting New Zealand fair again, delivering at last to those who haven’t pigged out on the politically manufactured inflation of property values. And when I look at the numbers I see that 54% of voters now are younger than the youngest babyboomer, so the tide is turning. Whether it’s this election or a future one, it will turn. You cannot keep ripping off the earnings of others via a tax privilege of this magnitude. They will revolt. I’d like to see that change orderly rather than extreme.

We over 53’s are in danger of becoming remembered as the “Stealing Generation”. I will allude further on the full extent of this theft in future articles. But we have an opportunity now to turn a lot of that around, to front up and acknowledge what has happened is wrong and that we do have the fortitude to correct it. If we don’t do it, it will done for us as our voter numbers dwindle.

So the only issue worth discussion here is the speed of transition, how to achieve it so that we don’t get too many property speculators who refuse to adjust ending up joining those tenants already in the queues for hardship allowances down at WINZ.

Not transitioning however, is not an option – it’s the putting right that counts. That is one opportunity TOP offers – to nudge whichever Establishment party is the next government to start taking steps. And this is just one of our policies to make New Zealand fair, make New Zealand decent again.

 

 

Showing 52 reactions

  • Seann Paurini
    commented 2017-01-12 22:22:30 +1300
    Hi Alan, agreed. I can remember as a “mature” university student in the mid-90s (in my 20s) student politicians blaming the “boomers” for receiving a fully publicly funded tertiary education ("free education ") and I mean blaming – & that’s how its carried on in general, its a cynical tactic, an idea that isn’t true, not to mention the superficial generational divisions it maintains.
  • Alan Forster
    commented 2017-01-12 21:45:49 +1300
    Re: babyboomers as a way of discribing the proposed taxable group.
    I will reiterate that it is an inaccurate though catchy lable.
    The reason i have allready sugested changing it is
    1.accuracy and 2. it is alienating people un nrcessarily. ( people cannot help being in that group as it is purly when you happen to be born and has nothing to do with how you behaved financialy or with housing). Is there a very reputable statistic somewhere that uses this as a descriptor or something.
    Please team have a serious think about the language of this policy.
    You cant pass legislation targeting “baby boomers”. Can you.
  • Seann Paurini
    commented 2017-01-12 21:25:15 +1300
    I’m heading toward that group & I’m sick of being told that our generation had it easy – maybe a few of them did – but just like all generations there’s always a class system of poor, working class, middle-class, elite – let’s not forget that. There’s plenty of people in their 40s, 50’s upward in NZ who remain stuck in poverty no matter why they try to do to get out of it. I’d say there’s a section of a forgotten/invisible generation between age 35-50, who went through the despicable Rogernomics era suffering through it & still suffering today – we don’t fit neatly into any current favoured generation (e.g. 65 plus well off and under 30ish opportunists). Christ knows where we’ll end up.
  • john chambers
    commented 2017-01-12 09:24:35 +1300
    Was it not only a few years ago that our now PM was caught with his pants down when found to be ‘renting’ his own house from his wife and claiming a subsidy from the taxpayer! I would call it fraud – but nothing happened. As well as Murray McCully was furtive with the Saudi sheep meat subsidy, and we all know how Arabs do business – and nothing happened. I feel that TOP should have a wider umbrella and look at bringing to justice those that consider themselves above the law. Judith is another one.
  • Steve Cox
    commented 2017-01-11 15:53:59 +1300
    Hi John.
    Somewhere I’d heard that over 80% of our MP’s are property speculators (well they said investors but …).
    So I’ll agree with you although I would say instead that they’re at the front of the queue for the gravy train.
  • John Irving
    commented 2017-01-11 15:27:33 +1300
    Two thirds of NZ MPs own more than 2 houses (http://www.stuff.co.nz/national/politics/78875326/Our-121-MPs-have-interests-in-295-properties-between-them ). They are hardly likely to be the first turkeys to vote for Xmas!
  • Samuel Johnston
    commented 2017-01-11 15:01:10 +1300
    Great post. I think boomers like my parents will vote for TOP.
  • Caroline McGurk
    commented 2017-01-11 10:46:40 +1300
    White baby boomer greed and selfishness is destroying this country. Thank you for doing something about it, you have our vote.
  • Alan Forster
    commented 2017-01-11 09:32:45 +1300
    Any tax that is not proportional to " income" will not be fair.
    To that end, all fees, fines and taxes should be proportional to income otherwise there is no “fairness”.
    Owning a dwelling to purely live in
    is not an " income" is not for gain
    like speculation and investment buying or building of rentals.
    Houses are actualy ( in pysical reality ) devalueing as they slowly atrophy. It is a financial illusion only that they are appreciating.
    I claimed back a portion of my depreciation in tax when working from home. So IRD recognise that assets depreciate while the market says they are appreciating.
    It is the nubmers going up while the actual value is falling.

    So in all this 1st world prosperity why cant we get a young couple with jobs and a kid an affordable mortage ?
    1. Wages have been supressed for decades.
    2. Investors since 2008 wfc have moved to property for more security.
    3. The squeez on tax havens and trusts, has those people turning to land banking ( houses rentals comercial).
    4. Imigration brings competition.
    It is going to seem unfair to a local who has lived and worked and been taxed here to bid or compete against a new comer who has not done those things. Priority must be towards those allready here regardless of the wealth a foriener may bring. Untill settled here and contributing fully they are guests.
    Citizenship is a technical lable that has no real meaning other than a rights certificate. It is not measure of contribution. Even if wealthy, the money can sit here in a foriegn owned bank. There is no compulsory spend required to contribute a wealth into the community.

    Laws and regulations should be used to control fairness not taxes.
    Taxing that is thought unfair will be worked around ( avoided) or overturned in the next election cycle.
    Seems to upon reading others comments that we are not correcly identifying the privillaged group
    with " babyboomer" catchy though it is. The real target for any claw back is the corporate and wealthy (some of whom are bb,s) who use any and every way of taking more than their fair share and especialy multiple dwelling owners.
    The governments job is to regulate activity so that it is " fair for as many as possible. The neolib way is first in takes what they can and sucessive governments have supported that attitude.
  • David George
    commented 2017-01-11 07:18:29 +1300
    TOP will work if Gen X and Y get out to vote- but will they bother? I went to university four times and passed once! My late teens and 20’s were terrible years- no fun at all. Rob Muldoon sunk our pensions into the consolidated fund in the 80’s and went on a spending spree. Then went bust on Bastille day 14th July 1984.

    I would be really interested to know- what specific Douglas policies set the housing boom in motion. Are there other variables?

    My view is that Rogernomics and Ruthenasia saved our economy and gave us a softer landing in 2008. It exposed the investment companies. This happened to the BNZ, Rural Bank, DFC and others in 1984.

    The housing bubble is an issue- but does TOP actually have the right answers…? I am holding my $20 in my little hot hand- and waiting to see if TOP has a wide range of workable policies to create ‘the level playing field’ promised in the 80’s.

    We own four residential properties. This is supposed to be our nest-egg. Kiwisaver came too late for me. We live frugally and plan to pass on our equity to the next generation when we kick the bucket.
  • Raymond Spring
    commented 2017-01-10 20:53:22 +1300
    At church a couple of weeks ago I chatted to a 15 year old boy. I told him how happy and pleased I am that I have an old age pension. He agreed it was a GOOD THING to have a pension. I then thanked him for paying for my pension. He firmly told me he was not paying for my pension. So I mentioned that Govt borrow to pay my pension and he will get the bill for the borrowing in 25 years time, plus any interest. I hope he continues dozing and ignores the problem.
    Oh, I also told him, no pension for your and pay for your own university course.
  • Tony Lee
    commented 2017-01-10 17:29:36 +1300
    Fully agree with the property tax policy. Me: baby-boomer, 100% equity, middle income earner.
  • Josko Sestan
    commented 2017-01-09 13:35:30 +1300
    Beautifully put Cimino Cole, not sure that Greth will get the momentum needed to get this across the line, but that it has been instigated is a important thing, we need to lobby the Government with this, they have not been to obdurate with their views of what is important. Let’s get the message out there and save many the grief of the inevitable.
  • Cimino Cole
    commented 2017-01-09 08:10:00 +1300
    I totally support the fundamental change to the part property plays in creating wealth, and intergenerational wealth, that the Opportunities Party is seeking to bring about with this policy.

    Because the change needed is so profound, it needs to be the subject of a non-partisan commission of inquiry, and one that involves a citizens commission. What I don’t have a good feel for is how the proposed property tax stacks up against alternative interventions examined or implemented elsewhere.

    As a soon-to-be-70-year-old hand-to-mouth partial property-holder, this tax would probably hurt me. But that is far from unfair, compared to the situation so many younger people are in.

    If the Opportunities Party registers, I will certainly be voting for it.
  • Earl Mardle
    commented 2017-01-08 20:42:14 +1300
    Thanks Steve Cox. Your point 5 is cogent because older people are going to be in the higher asset value/lower income bracket as they, like me have paid off our mortgages to keep our cost of living down for the time when our income follows suit. I saw somewhere that Gareth was proposing some kind of reverse mortgage where the state/banks lend the money to pay the tax to be taken out of the washup when we die. That might address fairness but certainly wont help with cashflows and will tend to shift the ownership to those who can afford to buy houses sold under duress, ie, the already wealthy. Or will family have first shot at book value?

    My other big problem with all this is that property values are ’deemed" to be $X and returns are “imputed” to be $Y. But until the market speaks these figures cannot be relied upon and will be a source of potential corruption as the government finds itself continually short of cash and “values” get goosed to make up the shortfall. If an actual landlord buys and rents a property, the return is whatever the market provides, including “P” factories, absconding tenants, empty properties and other pressures that push down returns, but home owners will be deemed to be perfect businesses with 100% occupancy at ideal rates.

    Point 2 is not wholly valid, I have seen property owners who rent, downmarket for example to maximise their returns, and that may turn out to be a better commercial decision. Point 3 – my issue is that, regardless of HOW the TOP tax is treated, it should be the same for both rentiers and owners.

    All this also assumes rising or stable property values but there has to be a correction at some stage and as prices fall, deemed values will have to follow. That is going to mess with revenue and be a serious social problem as well unless the system responds rapidly. As you say, the devil is in the details and there are not nearly enough details for a supposedly thought-through policy.
  • Steve Cox
    commented 2017-01-08 12:16:29 +1300
    Hi Earl
    I’ve been crunching some numbers to try and get a feel for what it will all mean, and … (nothing jumps out at me).

    Firstly if you are renting your home you are going to be better off because you’ll get the 8% tax cut without (maybe) any change in the rent you pay.

    Secondly any owner of a rental property also owns their own home. So they are a home owner as well as a rental property owner. They’ll pay the TOP Tax on their home.

    Thirdly how the 1.5% TOP Tax is treated income tax-wise is also going to be relevant. Will it just be a cost like Rates, or will businesses be able to treat it as income tax paid. the second method would definitely be an advantage to rental owners.

    Fourthly the relationship of income to net home value will determine whether you’re better off, or not. in supplying some numbers Gareth used averages according to income i.e. higher earners had a higher net asset value, and as long as you are an average sort of person you’ll come out on top. It is when you’re not average: – high asset value / low income (e.g. retirees) are worse off. Low asset value / high income are going to be much better off.

    Fifthly – remember this TOP Tax is on the net value of your home. On that portion you’ll be paying 1.5% but on the rest you’ll be paying a mortgage at 6%.

    Sixth is how the clever dicks react to this. I can see two people agreeing to sell their home to the other and renting it back at a modest (low) rental. Then all the costs you mention could be claimed. My proviso here would be: – don’t get caught by IRD.

    Conclusion: – I don’t think there is a fairness issue but the devil will be in the detail, and individual circumstances. Gareth would have to negotiate with other political parties and they’ll want to tweak things to satisfy their constituents.
  • Earl Mardle
    commented 2017-01-08 09:01:21 +1300
    OK, lets go with the fairness thing. Lets say that we accept that a home is an asset and that all assets are obliged to produce an income and the owner of the asset should be taxed on the return. I don’t agree with most of that but its Gareth’s position so lets let him have it for now.

    Question: How is it fair that if I set out to earn a profit from owning property I am entitled to deduct from the income, rates, insurances, interest on debt, depreciation of any furniture and furnishing, repairs and maintenance and the costs of preparing my tax return but if I simply live in the property I have to pay all those costs out of tax-paid income? I am easy whether Gareth is proposing to allow me all those deductions or remove them from commercial rentiers, I would bet that freeing more property for sale to the rest of us would happen by the second of those two. After all, the renters have paid those costs out of their own tax-paid income yet the rentier gets to deduct them from their own taxable income, something is wrong there. Maybe renters should get the deduction.

    But, under no circumstance, is it “fair” that the owner of one property gets a different deal from the owner of another property. Gareth does not, as far as i can see, include in his policy any point about how this unfairness will be resolved. Please explain.
  • David George
    commented 2017-01-08 07:04:15 +1300
    Maybe we should make everyone pay for the 30 m of road going past their house. And get them to fill in the potholes. People have the perception that taxes are crap and the government rips us off. We do benefit from enormous economies of scale. We do not get democracy every three years- we should actually practise it every day.
  • Geoff Lye
    commented 2017-01-07 23:04:53 +1300
    As is landbanking.
  • Geoff Lye
    commented 2017-01-07 23:04:16 +1300
    Property speculation I agree is a major problem.
  • Steven Peters
    commented 2017-01-07 20:16:21 +1300
    Geoff Lye That’s a whole different issue, and is not going to make much of a dent in the unfairness that characterises our real estate ‘industry’. it certainly isn’t going to close any tax loopholes that need to be closed in the property market goldrush.
  • Geoff Lye
    commented 2017-01-07 17:46:30 +1300
    To be honest I think a comprehensive financial transaction tax on all transactions is the better way to go .

    It catches everything whether buyer or seller it can be set at a very low rate.

    Maybe a thing maybe caught twice as both parties pay a % but at least everyone would-be paying whether it was a family trust or a private individual or company.

    Make no allowances for inter company trades etc every one pays that way a very low,rate can be set .
  • Steve Cox
    commented 2017-01-07 14:07:08 +1300
    Hi Gordon
    May I summarise your comments into two things: –
    1) Ideological purity is more important than efficiency and fairness.
    2) We have had a succession of timid, sycophantic governments that will give foreigners things those foreigners will not give us.
  • Steven Peters
    commented 2017-01-07 11:40:55 +1300
    If TOP go for a Universal Tax of 1.5% on equity, there will need to be a rebate available to low income earners who do not have the income to pay equity tax on their own homes. This is the case with the Rates Rebate, a cost which Gareth cites as a close comparison tax. i would also suggest a two tiered tax – on a owner occupied dwelling 1% on equity up to say 500k, rising to 1.5% over 500k . for all other property equity 1.5%.
    the wealthy will try and avoid tax on multiple property ownership and equity by using professional accounting and legal gymnasts to organise it, as they do now. They will also sell their own family house and rent expensive homes. Alternatively they could relocate overseas as their primary place of residence.
  • John Robson
    commented 2017-01-07 11:20:49 +1300
    Steve – I suggest ‘Prick’.
  • Steve Cox
    commented 2017-01-07 10:54:35 +1300
    Steven Peters.
    You say ‘investors’ (LOL) – I couldn’t agree more.
    I’ve been trying to come up with a word to describe these people who are NOT investors. Speculators is probably a little too harsh. A word that is a gentle put-down without being pejorative. A word they would use themselves.
    A person who buys a section, builds a house on it, and even then if they rent it out, they are an investor. They’ve made something. The person who just buys an existing property to earn rent and a capital gain is a ?
  • Oliver Krollmann
    commented 2017-01-07 09:12:55 +1300
    It’s happening in my neighbourhood right now. A house that was built four to five years ago for approximately $500k (home and land package) is now on the market for $647k, and the seller (a family with three young kids) is looking to build a bigger house on a bigger lot nearby. In another five years they might do it again, then in the $850 to $1m price range, as house prices keep rising, and every time they would pocket a $150k to $200k tax-free profit, at the expense of others who choose to pay the higher price. Getting rich by buying houses off each other? That’s why a policy like TOP 1 must not exempt the family home.
    Of course there is another option – common sense. We could just lose our obsession with property, stop forking out big bucks for houses that aren’t worth it in areas that are already overpopulated, and ignore all the media hype talking about a housing crisis. We the people actually have all the power. Scale back the demand by just not buying. It’s still a choice – nobody is forcing us to.
    But then it’s just too tempting to make a buck, isn’t it? If the Joneses next door do it, why shouldn’t we, too? Right?
  • Geoff Lye
    commented 2017-01-07 08:42:09 +1300
    I agree something has to be done about housing speculation. I am not sure that this policy on a first home is the right one after thinking about it. But as Gareth says something has to be done about spreading the tax collection more evenly.
  • Gordon Ngai
    commented 2017-01-07 06:12:04 +1300
    I am disappointed with this article. Gareth’s team should be able to identify the real issues instead of putting the blame on the baby boomer.

    The real issues for the high property price are speculation, poor government policies and the banking system.

    Speculation
    It is one of the basic human needs to have shelter. No one will question why other basic human need such as water supply is controlled by the Government and not subject to speculation. But why do we allow speculation on housing? Many countries have policy and laws to control speculation on housing e.g 15% extra tax when you buy a second home or if you are not local. Singapore Government controls the Singapore housing market and has a national policy of providing affordable housing to its citizen.

    Poor Government Policies
    Our Governments in the last 30 years have no comprehensive public transport policy. The lack of public transport like underground railway and high speed train forces citizen to buy limited supply of houses within a small area of the city. This together with the removal of National Award system push people away from their home town and compete in buying houses in big cities where there are jobs opportunity. (You may ask – where is the money coming from to develop public transport? Hong Kong MTR self financing development is a successful example for funding public transport.)

    Banking System
    Those of us that had mortgage 30 years ago would know that you could only borrow up to 50% of value of your home at that time. With the relaxation of the lending level to 100% , it creates demand and push up the housing prices. This is what we call asset inflation. Our modern banking system allows banks to lend $10 when they have only $1. This increase in demand for homing loan put more profit to the Australian banks.

    A baby boomer who lives in his only house has gained nothing when the property price raises. He still lives in the same old house that he needs to find money to repair.

    We need new government policies that protect the citizen. Do you know that our Hydroelectricity only cost 4c to produce a kilowatt and yet we are paying 46c ? Do you know the impact on you when ACC change to accrual accounting?

    We need to bring people together to create a better society for all. Please stop creating more division.
  • Steven Peters
    commented 2017-01-06 20:36:53 +1300
    This is very refreshing material Gareth – saying the property nouveau riche
    are wearing stolen clothes. My particular gripe is with those ‘investors’ (LOL) heavily who buy up multiple properties to exploit others housing needs and the tax loophole. Its mercenary. It does concern me though there isn’t an equity allowance for ones own home of say 100k, and/or an income floor beneath which a’ household’ is not taxed. For example, many beneficiaries and low income earners (15k or 30k p.a. respectively), have inherited or bought their own house or flat when they were able prior to being on a benefit. It seems unfair to expect this group to pay tax when they are already in difficult straights in terms of economic survival.