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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

  • Gold Money
    commented 2017-01-06 14:14:51 +1300
    Government policy created the environment for this misallocation of capital. Our economists learnt the same dogma, regardless of whether they currently subscribe to Labour or National policies. Let credit be created to inflate housing prices and bump GDP. Banks love it. Property owners love it. Government loves it. RBNZ enables it with monetary policy.
  • Oliver Krollmann
    commented 2017-01-06 13:33:18 +1300
    Let’s look at it this way:
    1. A tax system is unfair because it favours a particular type of investment.
    2. People make (consciously or unconsciously) smart decisions to benefit from the imbalance and be better off. Nothing wrong with that, since the opportunity is there, and it’s legal and encouraged.
    3. Someone discovers and describes the imbalance, and suggests a gradual approach to restore balance and fairness.
    4. The “better-off” people argue that returning the unfair system to a fair state is unfair to them, so it can’t be fair to do so.
    5. So where does that leave us, and our sense of fairness?
    Imagine for a minute that slavery had never been abolished, because it would have been unfair to plantation owners to take the free labour away from them, that they’ve based their business plans and decisions on. Sounds like an extreme comparison? Maybe … but the planters invested in slaves to benefit from the free labour they provided, and took it for granted (rather than hiring labour and paying a fair wage to the workers), because it was legal and the better deal, even so it was unfair. Today, with our much more evolved sense of equality and human rights, nobody would argue that it was the morally wrong thing to do.
    Yes, many of us (including me) have worked towards being able to live debt-free in our own homes at some point – because it was the smart choice and allowed us to be better off in the end, so we did the right thing, didn’t we, even so it was at the expense of others. We rightfully and lawfully took advantage of an unfair opportunity that created and continuously fuelled a powerful imbalance in the property market, counted on it and became dependent on it. So how can it be fair to punish us for our smart decisions and take our unfair advantage away from us? Hmmm.
    It really comes down to everyone’s sense of fairness, to be able and willing to recognise the potential of a policy like TOP 1. We should all admit that exploiting tax loopholes like the one tackled here may be legal and smart from a personal point of view, but not legitimate and justifiable from a public point of view. So those of us who – directly or indirectly, knowingly or subconsciously, by our own decision or by just doing as we’re told or as we’re expected to – benefitted from an unfair system cannot really argue that taking that unfairness away in a gradual and managed process is unfair. We just have to accept that the times of plenty might come to an end and adjust our investment strategy to work in a fair system. We were smart before to take advantage of an opportunity, we can be smart again.
    Fair enough?
  • Oliver Krollmann
    followed this page 2017-01-06 12:13:54 +1300
  • Gold Money
    commented 2017-01-06 11:52:31 +1300
    Monetary policy also has something to do with this. Low interest rates incentivize borrowing not saving. Fiscal policy has taxed interest earnt on deposits but left the property alone. This is a recipe for put all your eggs into the property basket. Governments like this. Makes GDP look good. Couple that with rampant immigration, supply issues. In New Zealand, we basically sell houses to each other and export animal products. All that capital that could have gone into entrepreneurs and startups. And that is the way the banks prefer it. Australia – 85% of lending to housing (90% of that 85% goes on existing houses). Is it any wonder prices are high? We love the artificial highs. Disappointing isn’t it!
  • Gold Money
    commented 2017-01-06 11:28:54 +1300
    Thank you Gareth, for tackling these issues. It is unfair. Question is, how to make it fair? Property tax, capital gains tax, GST?
  • David George
    commented 2017-01-05 17:20:32 +1300
    I think the answer lies in the area of productivity… safe opportunities for investment are limited. Frankly, in the western world the majority have fairly palatial lifestyles, compared to 60 years ago. The Chinese, in particular have flooded the world market with cheap consumer items- with now- only a repair and replacement market. The digital revolution- another major pointer- so where is ‘the smart money’ to go?
  • Steve Cox
    commented 2017-01-05 14:10:50 +1300
    This isn’t so much a baby boomer attitude as a have vs have-not thing. Regardless of your age this is being judged more on a NIMBY basis.

    Personally I’ll be worse off under this proposal, but I’m not saying no. Well, not yet anyway.

    I would prefer that the current loopholes be closed off first, Because without doing that then the greatest drivers of housing inflation will remain.

    I’m primarily referring to the tax free status of capital gains on rental properties. I did the numbers just over three years ago and calculated the government was giving away over $500 million a year in income tax. This does not include family homes.

    Doing this will help to level the playing field between investments – if you’re in business then your profits should be taxed. And if you’re a landlord you’re in a business with two sources of income: – rent and profit on the sale of properties.
  • adam shand
    commented 2017-01-04 21:45:51 +1300
    I think the way NZers invest in property and what that has done to our house prices is insane and immoral. I will support just about any policy which addresses this in meaningful ways and I don’t mind taking a financial hit if that’s what it takes.

    BUT I hate this proposal. I am not a baby boomer I’m the young end of GenX and (let me say it again for effect)I hate this. I’ll try and explain …

    My wife and I own a nice house with some land. We’ve been planting gardens, saving money to buy trees, some sheep etc. You know, the back to the land dream. We’ve made choices to downsize our lives, live cheaply and enjoy the home we are fortunate enough to own. And it hasn’t been easy, giving up the regular pay check from the city job, figuring out new ways to earn a living etc.

    Now you want to tax our home. And you say it’s going to be okay because you’re going to give us the money back on income tax credits. BUT WE DON’T have the income to match our house.

    You haven’t released any of the details so I can’t know anything for certain, but my fear (which seems rational given what you have stated) is that we’re either going to have to sell our house (which we don’t want to ever sell) or I’m going to have to go back into the city to earn enough money to pay your new tax.

    Don’t get me wrong, I understand that this is a privileged situation to be in! It’s been a long time since I did a minimum wage job living in a shitty flat. But this also isn’t some little inconvenience that i’m being pissy about. What you are proposing has the potential to totally upend all the decisions that my wife and I have made about our lives.

    It also screws everyone else who has a home which is larger than their current income could afford. And there’s lots of legit reasons why that happens, not just whiny, greedy people. Getting sick, inheriting a house, lifestyle choices, etc.

    The bad behaviour isn’t owning a house, it’s using peoples home as an investment tool. It’s constantly buying and selling houses. It’s flipping houses in 30/60/90 days just cause you can make a buck. Tax the bad behaviour, don’t tax all of us who are just stoked to own a house and to have got out of the rat race.

    Please meaningfully address this concern, otherwise you’re just throwing everyone who is lucky enough to own a house (or who was sensible enough to prioritise paying off their mortgage) under the proverbial bus.
  • Tim McMahon
    commented 2017-01-04 21:42:11 +1300
    I’m one of the baby boomers who (with my wife) has a mortgage free property and I agree entirely with Gareth’s argument. A small tax on the value of properties, and particulalry those who own more than one property, will disincentivise multiple ownership possibly leading to lower values and easier entry to the market for the next generation, and provide revenue to enable income taxes to be lowered. Would be investors could put their money into supporting business startups and expansions rather than seeing those bought off by overseas investors.
  • Greg Wiechern
    commented 2017-01-04 20:24:57 +1300
    The rising property prices aren’t only caused by the baby boomers. We need to look at the price of land, set by developers and the cost of building, the cost of building materials being substantially controlled by our friends at CHH and James Hardy. The price of new builds has a major influence on the price of existing housing stock. We also have had the craziness caused by immigration that is outstripping the rate of new building, and thus creating a ‘market’ for existing housing stock. I have bought property to protect my savings for when I retire and provide a small income to top up my superannuation, not for a massive capital gain. I have also been careful with my income over the years with retirement in mind. All going well, there is going to be something left for my children/grandchildren when I depart this mortal coil.
  • Greg Wiechern
    commented 2017-01-04 20:24:56 +1300
    The rising property prices aren’t only caused by the baby boomers. We need to look at the price of land, set by developers and the cost of building, the cost of building materials being substantially controlled by our friends at CHH and James Hardy. The price of new builds has a major influence on the price of existing housing stock. We also have had the craziness caused by immigration that is outstripping the rate of new building, and thus creating a ‘market’ for existing housing stock. I have bought property to protect my savings for when I retire and provide a small income to top up my superannuation, not for a massive capital gain. I have also been careful with my income over the years with retirement in mind. All going well, there is going to be something left for my children/grandchildren when I depart this mortal coil.
  • Rod Prowse
    commented 2017-01-04 20:06:51 +1300
    I’m 53 almost 54. Recently separated. I have a good house that I now only own around 50% of. Still got 3 kids to get through varsity or some form of post secondary education. I know plenty of people my age or older who are still struggling and seeking some security in at least getting a house free hold. The “baby boomers” you talk of are only a small segment of this age group. I remember a lot who made a fortune in the late 80s / early 90s as consultants who have mostly now buggered off to Melbourne or Sydney. I want to support your party but this is a stumbling block for me. Would rather see a capital gains tax.
  • Gordon Rodgers
    posted about this on Facebook 2017-01-04 17:50:42 +1300
    Making NZ fair again requires an investment by somebody, there’s no free lunch here. The somebody is those of us who hav
  • David George
    commented 2017-01-04 17:23:30 +1300
    No boomer did this consciously… it is a trend because property is seen to be a stable asset.
  • Doug Thomson
    commented 2017-01-04 14:55:51 +1300
    Tax is only one of the things that can be adjusted to try to make things fairer. One thing that I haven’t seen a stance on from you guys yet is labour policy. I think this is one of the biggest things that needs a shake-up in NZ. Better worker protection and a livable minimum wage. We need to combat the problem of the “working poor”. As you point out in the article above, it is tax payers that fund social spending like top-ups for low wage earners. What this is effectively doing is subsidising employers who pay slave labour rates. The owner of the McDs franchise gets rich while the workers at the McDs franchise are on zero-hour contracts and cannot live of their wage.
  • Geoff Lye
    commented 2017-01-04 14:52:10 +1300
    A lot of us baby boomers have never been able to save let alone buy a house due to rogernomics and ruth richardsons black budget/ employment contracts act.

    I do agree with your general direction you are taking things.

    The other thing that needs doing, is a FTT tax on ALL financial transactions, this too will help the question is who is going to have the balls to bring it in.
  • Brian Smith
    commented 2017-01-04 14:50:28 +1300
    I agree “MAKE NZ FAIR AGAIN
    Why are we not pushing to have the “Politicians pensions” have the same PARITY as the rest of us NZers.
    As soon as they resign, retire from their employment treat them like everyone else until they actually reach retirement age i.e find another job via WINZ or apply for the “dole” alternatively survive on what they have saved when getting well paid via taxpayers.
    Don’t forget the 5% of the population who via inheritances, legacies, canny business acumen that either are not paying taxes due to numerous loopholes in our tax system or are siphoning or have siphoned their money to " TAX HAVENS " overseas ergo avoiding taxes on their spa wings etc that we the plebes cannot afford.
  • Liam Hehir
    commented 2017-01-04 14:14:43 +1300
    “The reality is taxes are collected as the price of a civil society, to underwrite fairness. "

    This sentence makes it entirely clear that you have no idea what the concept of “civil society” actually is.
  • Jane Shearer
    commented 2017-01-04 13:23:07 +1300
    “Make NZ Fair Again”, you mean like “Make America Great Again”? The New Zealand you are eulogising was not “fair” to lots of people, include women and Tangata Whenua. There is no ‘again’ here, we are in a different time and going back is not possible nor desirable. Perhaps you mean something different, in which case please change your rhetoric.
  • VernonTaurima
    commented 2017-01-04 11:35:05 +1300
    I’m 43, own my own home and completely agree Gareth. Sick of hearing babyboomers trashing younger generations.
  • Geoff Stokes
    commented 2017-01-04 11:05:34 +1300
    I like what I’m hearing Gareth. I am a baby boomer but am not a house owner. Just about impossible for me to own a house now. With a large family the banks wont even look at us. My wife and I are also pretty much going to be life-time beneficiaries due to chronic health issues too. So we really have little or no power to increase or create income and the price of houses is so far out of reach it’s not funny. I have always felt that houses are way over-priced given the actual assets often have had little or no value added to them through work and maintenance. It is a travesty really and a complete rip-off.
  • Josko Sestan
    commented 2017-01-04 10:33:25 +1300
    The key is the belief and fulfilment of doing this with as little shock as possible, keep at it.