Category Archives: NZ Housing Bubble

Ring-fencing Rental Losses. An officials’ issues paper – NZ Inland Revenue Department.

Prepared by Policy and Strategy, Inland Revenue, and the Treasury.

March 2018

Background

The Government has committed to a number of policy measures aimed at making the tax system fairer and improving housing affordability for owner occupiers by reducing demand from speculators and investors.

One of these measures is to introduce loss ring fencing on residential properties held by speculators and investors. This means that speculators and investors will no longer be able to offset tax losses from their residential properties against their other income (for example. salary or wages, or business income), to reduce their income tax liability.

Current settings

Under current New Zealand tax settings tax is applied on a person‘s net income. We do not generally ring fence income and losses from particular activities or investments. This means that there is generally no restriction on losses from one source reducing income from other sources though there are some exceptions to this general treatment.

Investment housing is currently taxed under the same rules that generally apply to other investments. This means that rents are income. and interest and other expenses (other than capital improvements) are deductible. Capital gains on sale of the property are not taxed unless the property is on revenue account. This could be, for example, because you are in a land related business (for example, a land dealer or developer), bought the land for resale, or sell the property within the bright line period of either two or five years (depending on when you first had an interest in the land). Most rental property investors hold their property on capital account and are not subject to tax on the capital gain.

While rental housing is not formally tax favoured. there is an argument that it may be under taxed given that tax free capital gains are often realised when rental properties are sold. The fact that rental property investors often make persistent tax losses indicates that expected capital gains are an important motivation for many investors purchasing rental property. While interest and other expenses are fully deductible, in the absence of a comprehensive capital gains tax not all of the economic income generated from rental housing is subject to tax. There is therefore an argument that. to the extent deductible expenses in the long term exceed income from rents, those expenses in fact relate to the capital gain, so should not be deductible unless the capital gain is taxed.

Aim of the proposed changes

The introduction of loss ring fencing rules is aimed at levelling the playing field between property speculators/investors and home buyers. Currently investors (particularly highly geared investors) have part of the cost of servicing their mortgages subsidised by the reduced tax on their other income sources, helping them to outbid owner occupiers for properties. Rules that ring fence residential property losses. so they cannot be used to reduce tax on other income, is intended to help reduce this advantage and perceived unfairness.

Officials are interested in feedback on the suggested changes outlined in this paper.

How to make a submission

Officials invite submissions on the suggested changes and points raised in this issues paper. Send your submission to who.webmaster@ird. govt.nz with “Ring fencing rental losses” in the subject line.

Alternatively, submissions can be sent to:

Ring fencing rental losses

Deputy Commissioner, Policy and Strategy Inland Revenue Department

PO Box 2l98

Wellington 6l40

The closing date for submissions is 11 May 2018.

Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.

Submissions may be the subject of a request under the Official Information Act l982, which may result in their release. The withholding of particular submissions, or parts thereof. on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this.

Summary of the suggested changes

The proposed loss ring fencing rules will mean that speculators and investors with residential properties will no longer be able to offset tax losses from those properties against their other income (for example, salary or wages. or business income), to reduce their tax liability. The losses can be used in future years. when the properties are making profits. or if the person is taxed on the sale of land.

A summary of officials’ suggestions for the design of the loss ring fencing rules is set out below. These design issues are discussed in more detail in the chapters that follow.

Property the rules will apply to

It is proposed that the loss ring fencing rules will apply to “residential land”. We suggest that the rules use the definition of “residential land‘” that already exists for the bright line test which taxes sales of residential land bought and sold within either two or five years.‘

The rules would not apply to:

A person’s main home

A property that is subject to the mixed use assets rules (for example, a bach that is sometimes used privately and sometimes rented out)

Land that is on revenue account because it is held in a land related business (that is, a business of land dealing, development of land, division of land or building).

Portfolio basis

It is suggested that the loss ring fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties calculating their overall profit or loss across their portfolio.

Using ring-fenced losses

Under the suggested changes. a person’s ring fenced residential rental or other losses from one year could be offset against their:

Residential rental income from future years (from any property); and

Taxable income on the sale of any residential land.

Interposed entities

Under the suggested changes, there would be special rules to ensure that trust, company, partnership, or look through company cannot be used to get around the ring fencing rules. It is proposed that such an entity will be regarded as “residential property land rich” if over 50 percent of its assets are residential properties within the scope of the ring fencing rules and/or shares or interests in other residential property land rich entities.

Where that is the case. it is suggested that any interest a person incurs on money they borrow to acquire an interest in the entity (for example, shares. securities, a partnership interest. or an interest in the trust estate) would be treated as rental property loan interest. The rules could then ensure that the interest deduction is only allocated to the income year in question to the extent it did not exceed the distributions from the entity (deemed rental property income). any other residential rental income, and residential land sale income. Any excess of interest over distributions, rental income, and land sale income would be carried forward and treated as “rental property loan interest” for the next income year.

Timing of the introduction of the rules

It is proposed that the loss ring fencing rules will apply from the start of the 2019/20 income year. The rules could either apply in full from the outset, or they could be phased in over two or three years. We are interested in feedback on which of those approaches should be taken.

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Property the rules will apply to

Under the proposed changes, the loss ring fencing rules would apply to “residential land”. The rules would use the definition of “residential land” that already exists for the bright line test.

Definition of “residential land

There is already a definition of “residential land” in the Income Tax Act, which is used for the bright line test which taxes sales of residential land bought and sold within two years. It is proposed that the loss ring fencing rules apply to land within that definition with the exceptions discussed below. Using the definition already in the legislation would avoid the additional complexity of having different definitions for different rules.

“Residential land” means:

Land that has a dwelling on it

Land for which there is an arrangement to build a dwelling on it

Bare land that may have a dwelling built on it under the relevant operative district plan rules.

However, “residential land” does not include:

Farmland

Land used predominantly as business premises.

“Residential land” is not limited to land in New Zealand it would extend to overseas land. This means that losses from overseas residential rental investments could not be offset against other income in New Zealand.

Apart from the exceptions below, the rules would apply to all residential land, whether or not it is currently rented out. including bare land. This is because the proposed rules are aimed at levelling the playing field between residential property speculators/investors and people looking to buy their own home or land to build a home on.

Main home

The proposed loss ring fencing rules will not apply to a person’s main home. This is to ensure that a person who has a boarder in their main home, or who rents out a spare room occasionally, would not have to apply these rules, which are primarily targeted at residential investment properties. The meaning of “main home” would be the same as for the bright line test, which has a main home exclusion.

A person can only have one main home at a time. If someone has more than one residence, their “main home” would be the one they have the greatest connection with. That would be determined by looking at factors such as:

The amount of time the person occupies the dwelling;

Where their immediate family live;

Where their social ties are strongest;

Their use of the dwelling;

Their employment, business interests and economic ties to the area where the dwelling is located; and

Where their personal property is kept.

Trusts

A significant number of family homes in New Zealand are owned by family trusts. The definition of “main home” would therefore ensure that a home owned by a trust can be regarded as a main home.

Like with the bright line rules, we suggest that a dwelling owned by a trust only be considered a main home (so not subject to the loss ring fencing rules) if it is the main home for a beneficiary of the trust. provided that a principal settlor of the trust does not have a different main home.

This restriction would ensure that trust ownership cannot be used to claim multiple properties as main homes. and so not subject to the loss ring fencing rules.

Mixed-use assets

The existing definition of “residential land” in the Income Tax Act would also include holiday houses that are sometimes used privately and sometimes rented out. However, many such properties would be subject to the mixed use asset rules, which already provide for the quarantining (or ring fencing) of losses where there is low income earning use of the asset.

We suggest that property subject to the mixed use asset rules should be scoped out of the rental loss ring fencing rules, because the mixed use asset quarantine rules will cover most if not all mixed use asset losses. We are interested in feedback on whether property subject to the mixed use asset rules should be outside the scope of the loss ring fencing rules.

Revenue account land in dealing, development, subdivision and building businesses

Land that is held in certain land related business is on revenue account. so the profits on sale are taxed. This applies to land held in dealing, development, subdivision, and building businesses.

At balance date, taxpayers in these businesses are likely to have a number of properties on hand, though they may not be currently rented out.

It is proposed that residential rental or other losses could be used against taxable land sales to reduce the taxable gain to nil, with any further unused losses remaining ring fenced to future rental income or taxable income on land sales. While taxpayers in the business of land dealing, development of land, division of land, or building may have losses in respect of properties on hand at balance date, those losses being able to be used against income from other sales or rental activity in the year would mean that their businesses would be unlikely to be disadvantaged by the ring fencing rules. In most cases the income from their sale or rental activity would be expected to exceed their losses.

However, in any overall loss making year, we do not consider it necessary to ring fence losses for land held in these businesses. There is not the same concern about any of the deductible expenses in relation to land in these businesses relating to untaxed gains, as all of the businesses’ land is on revenue account. Therefore, we propose that the ring fencing rules not apply to land that is on revenue account because it is held in a land related business. This would enable taxpayers in these businesses to use losses arising in any year against other income for example within their corporate group (as they are likely to be companies).

Property owned by companies and trusts

There is an argument that the loss ring fencing rules should apply only to individuals (that is, natural persons), and not to companies or trusts. This argument could be made because company losses are effectively ring fenced inside the company, as are losses in a trust.

However, such an approach would leave open the possibility of individual speculators or investors operating through a company or trading trust, holding their residential properties in that vehicle, and offsetting the losses against their labour income. It would also mean that a family trust holding residential rental property and also some other investments could offset rental property losses against income from the other investments. For example, it would not be fair for a professional operating through a company or trust to not be subject to the ring fencing rules where another person operating as a sole trader would be.

It is acknowledged that there may be some compliance costs for some corporates that own some residential property incidentally to their business. However. it is considered that limiting the ring fencing rules to individuals would significantly undermine the fairness of the rules. For this reason. we suggest that the ring fencing rules should apply to all taxpayers, not only to individual taxpayers.

Portfolio basis

It is suggested that the loss ring fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties calculating their overall profit or loss across their portfolio.

The alternative, a property by property basis, would mean that each property would need to be looked at separately, with losses on one not able to be offset against income from another.

A property by property approach would be stricter than a portfolio approach, achieving the highest level of ring fencing. However, it would add complexity, as losses would need to be tracked separately for each property. Moreover, a property by property approach may just result in taxpayers with portfolios re balancing their debt funding to avoid having loss making properties (or at least minimising the extent to which any particular property is loss making). That response to the rules applying on a property by property basis would be inefficient. and may mean that this approach may have no real advantage over a portfolio approach adding considerable complexity and increasing compliance costs for no real gain.

Also, a property by property approach may be seen as unfair in that if a taxpayer has two properties and breaks even on the ponfolio overall, the taxpayer’s tax position would depend on whether they break even on both properties or make a gain on one and a loss on the other.

We therefore suggest that the ring fencing rules apply on a portfolio basis. so a person with multiple properties would calculate their overall profit or loss across their whole residential portfolio.

Using ring-fenced losses

Under the suggested changes, ring fenced residential rental or other losses from one year would could be offset against:

Residential rental income from future years (from any property); and

Taxable income on the sale of any residential land.

Most residential rental investors are not subject to tax on the sale of their investment properties under current tax rules. However, in some circumstances. the sale of a residential rental property may be taxed under one of the land sale rules in the Income Tax Act or the taxpayer may have taxable income on the sale of other residential property (not rented out). This could be the case, for example, because the taxpayer is in a land related business (for example, a land dealer or developer), bought the land for resale, or sells the property within the bright line period of either two or live years (depending on when they first had an interest in the land).

Under the suggested changes. where a taxpayer sells a property that is subject to the ring fencing rules (that is a residential property) and the sale is taxed, any ring fenced losses the taxpayer has could be used to reduce the taxable gain on sale to nil. Any remaining unused losses would stay ring fenced, and could be used against any future residential rental income or taxable income on other residential land sales.

There is an argument that in the case of a property with ring fenced losses that is taxed under one of the land sale rules on disposal, the losses should be able to fully utilised (that is unfenced) at that point. and be used to offset any other income of the taxpayer. This would reflect that all of the economic income from the investment has been taxed (the rental stream and the capital gain), and that the investor should not be penalised for making an overall loss on the investment.

However. if the rules are to apply on a portfolio basis, as suggested, allowing accumulated losses to give rise to a tax loss on a disposal subject to one of the land sale rules would create risks. For example, it would enable a portfolio investor to sell a property that has made a small capital gain within the bright line period. offset that gain with ring fenced losses from across their portfolio, and apply any remaining losses from the portfolio against other income. While there are ring fencing rules in relation to the bright line test, they only apply to deductions for the cost of the land, not other costs.

Enabling taxpayers to sell their lowest capital gain makers within the bright line period and access what might be substantial portfolio wide accumulated ring fenced losses would significantly undermine the credibility of the rules.

For this reason, we propose that where a disposal is caught by one of the land sale rules, ring fenced losses should be allowed to be used only to the extent they reduce the taxable gain to nil, with any further unused losses remaining ring fenced.

Structuring around the rules

There are two main structuring opportunities that we have considered, creating specific rules to deal with. These concern interest allocation and the interposing of entities.

Interest allocation

We have considered whether specific interest allocation rules are required, as without them investors may be able to structure around the loss ring fencing rules. For example, this could be done by reorganising funding so that business assets other than rental properties are debt funded, and rental properties are equity funded to the greatest extent possible.

However, interest allocation rules would add substantial complexity and compliance costs. Because money is fungible, it is very difficult to attempt to match borrowings to particular investments (tracing). Stacking rules (for example, allocating debt firstly to ring fenced investments) may be seen as unfair. And pro rata interest allocation between assets that are subject to the ring fencing rules and those that are not would require regular valuation of assets.

If interest on any loan that was secured by a residential property was included in the rules, this would create issues for many people who use their rental properties to secure loans for their businesses. This would impact on small and medium business’ access to capital. In addition. many arrangements could be even more difficult to apply interest allocation rules to, as revolving credit facilities are often used to fund both a rental property and a business.

We do not propose specific interest allocation rules because of the considerable complexity and compliance costs they would add, which would be particularly onerous on smaller taxpayers.

Interposed entities

Under the suggested changes, there would be special rules to ensure that a trust, company, partnership, or look through company cannot be used to get around the ring fencing rules. These ownership structures are referred to here as entities for simplicity.

Otherwise a simple way to get around the ring fencing rules would be for a taxpayer to interpose an entity to hold a residential rental property, and borrow money to invest in or acquire an interest in the entity. For example, a taxpayer could borrow money to buy shares in a company, which uses those funds to buy a residential investment property. Because the money is borrowed to buy shares, the individual taxpayer would be able to claim deductions for the interest on the borrowings. and offset those amounts against other income sources.

However, if the taxpayer had used the borrowed money to purchase the property directly themselves, the interest expense would be attributable to the residential rental investment, not shares, so would be taken into account in determining whether the person‘s residential rental activity was profit or loss making. And if the rental activity was loss making. losses would be ring fenced under the proposal rules.

This simple mechanism is illustrated in figure 1.

A suggested approach to dealing with interposed entities is to specifically define when such entities would be “residential property land rich”. It is proposed that this would be the case where over 50 percent of the entity‘s assets are residential properties within the scope of the ring fencing rules, and/or shares or interests in other residential property land rich entities.

The rules could then treat dividends, interest, or distributions from the entity as being “rental property income”, and treat interest on borrowings to acquire an interest in the entity (for example, shares. securities, a partnership interest, or an interest in the trust estate). as “rental property loan interest”. The rules could then ensure that the interest deduction is only allocated to the income year in question to the extent it did not exceed the distributions from the entity (deemed rental property income), any other residential rental income, and residential land sale income. Any excess of interest over distributions, rental income, and land sale income would be carried forward and treated as “rental property loan interest” for the next income year. This would mean that losses from rental properties would not reduce the tax on other sources of income.

This suggested approach is illustrated in figure 2.

We are interested in feedback on this suggested approach to preventing the simple interposition of an entity to get around the ring fencing rules.

Timing of introduction of the rules

It is proposed that the loss ring fencing rules will apply from the start of the 2019/20 income year.

The rules could either apply in full from the outset, or alternatively they could be phased in over two or three years. If the rules are phased in, this would be done by reducing the proportion of losses that could be used to offset other income over a two or three year period, until no losses could be used to offset other income sources.

For example, if phased in over two years, 50 percent of residential investment losses could be used to offset other income in 2019/20, and no offsetting would be allowed in 2020/21.

Tax law changes are not usually phased in. But this possible approach has been suggested to allow affected investors more time to adjust to the new rules, or to rearrange their affairs before the rules apply in full. However, we note that phased introduction of the rules would result in some additional complexity.

We are interested in feedback on whether the loss ring fencing rules should apply in full from the 2019/20 income year the simpler approach or be phased in over two or three years.


First published in March 20l8 by Policy and Strategy. Inland Revenue, PO Box 2198. Wellington, 6140.

Ring-fencing rental losses an officials” issues paper. ISBN 0-978-0-478-424454

Shares v houses. The winner is clear – Mary Holm.

Question:
You will no doubt have read Brian Gaynor’s recent column in which he says: “Thirty years ago, on Friday, September 18, 1987, the long-standing NZX benchmark index reached an all-time high of 3968.89. This capital index, which is now called the S&P/NZX 50 index, has never returned to this level and is still 8 per cent below its 1987 high.”
This doesn’t quite fit with your mantra that you have to be in the share market for at least 10 years to avoid the lows, does it? However, there have been good dividends on a lot of shares along the way, so all is not totally lost.
Will you admit now that property (including rents) has been the better investment over the past four decades?
Still, I wouldn’t be putting any bets on the property market continuing the ridiculous run of the past few years over the next decade. For the sake of our children, I hope it levels out for a while and gets back to a reasonable ratio to median income.

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No, I won’t “admit” any such thing. As you say, the index Gaynor writes about doesn’t include dividends. And that makes a bigger difference than you apparently realise.

Our graph shows this clearly. Although the New Zealand share index excluding dividends (S&P NZX50 Capital) has indeed gone nowhere since the 87 crash, the index that includes dividends (S&P NZX50 Gross) has quadrupled. And it would have grown a bit more if there had been an index that included dividends in the 1980s. We had only the Barclays Top 40 – which excluded dividends – until 1991.

Why on earth would you exclude dividends in share returns? Some people spend dividends rather than reinvesting them, but they’re still part of the return. Excluding dividends is like excluding rent in rental property returns.

But hang on a minute. Isn’t that what the graph does? The QV Housing Index shows growth of detached housing valuations. Why haven’t we included rent?

When you stop to think about it, that’s not doable. There’s data on average rents. But unlike shares, rental property comes with ongoing expenses such as rates, insurance and maintenance, which can be huge when you have to replace a roof or something.

Also, most landlords – except those who have owned a rental for many years – pay mortgage interest. In fact, many landlords find that expenses including interest total more than rent, and they make ongoing losses. And the tendency for that to happen will increase when mortgage interest rises. Their investments make sense only when they sell the property at a profit.

Taking all this into account, there’s no way to come up with representative numbers for net rental income. On average they will probably be positive, but how big?

All we can say is that the graph shows total returns on New Zealand shares since the end of 1979 are twice as big as house price increases. Shares look a better bet to me.

Okay, you might say, but the graph also shows that shares are much more volatile, adding to risk.

True, most landlords take on a different sort of risk, by borrowing to invest – something that few share investors do.

Borrowing ups the ante. If the investment goes well, you get gains on the bank’s money as well as your own. But what if you’re forced to sell – perhaps because you lose your job – when house prices are down? If your mortgage is bigger than the proceeds of your sale, you can end up with no investment and owing the bank. It happens.

Even if you sell the property at a gain, does it more than cover your losses over the years because of interest and expenses?

The added risk from borrowing can certainly make rental property a bigger worry than shares.

And there are other ways that shares are less risky:

• If you also own your home, your investments are in a different market.

• It’s much easier to spread your risk by owning many different shares than many different properties.

• It’s also much easier to invest offshore, which also spreads risk.

• You can easily drip-feed money into shares, removing the risk that you invest the lot at the top of a cycle.

• If you need some money, you can sell any portion of your share investments. Even if you own several rental properties, you can cash them in only in big lumps.

On top of all that, investing in a wide range of shares or a share fund – the best way to do it – is much less hassle than a rental property. You’re not going to get the 2am phone call from the tenants saying the washing machine has flooded the house, or the news that your tenants have used the house as a P lab.

Then there are the disputes. In 2016, 16,600 landlords and 2300 tenants made complaints to the Tenancy Tribunal, and many more were resolved in mediation. You don’t get that with shares.

Our graph also shows:

• Sometimes the New Zealand and international share markets (MSCI World Accumulated Index) move roughly together, but sometimes they are quite different. New Zealand had the 1980s boom and bust, and world markets had the turn-of-the-century tech bubble bursting. It’s wise to have some of your share investments in local shares and some offshore.

• You write of my “mantra” that nearly always a share market will gain over a 10-year period. In the graph that’s generally true, but with some exceptions. If you invest just before a crash – in the local market in 1987, or the world market in 2000 – you are barely ahead a decade later, although things come right quite soon after.

You can get around this problem by drip-feeding money into shares over time, as happens automatically with KiwiSaver. Then only a small proportion of your money will “fail” the 10-year test.

NZ Herald

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University of Otago’s Andrew Coleman looks at the intergenerational effects of the tax system on New Zealand’s housing markets. 

The tax system plays a crucial role in New Zealand’s housing markets. At the simplest level, the Goods and Services Tax is applied to new land development and new house construction, raising the price of new housing by 15%.

But the effects of the tax system are more complicated than this.

Since 1986 several tax changes have caused an intergenerational rift in New Zealand society by increasing the prices young people pay to purchase houses.

Some of these tax changes appear justifiable on efficiency grounds, but even these have made it more expensive for young people to purchase or rent property.

In conjunction with other tax changes that have artificially raised property prices, a generation of older property owners have become rich at the expense of current and future generations of New Zealanders.

The scale of the problem

The scale of the problem is seen by observing how average property prices have increased by over 220% in inflation-adjusted terms since 1989; the highest rate of increase in the developed world.

The average size of new houses has also increased more quickly than in Australia or the United States, the only two countries that publish this data.

The average size of a new dwelling in 2013 was 198 m2, up from 125 m2 in 1989, and nearly twice as large as the average new house in Europe.

The tax changes that have affected housing can be divided into those that affect the cost of supplying housing and those that affect the demand for housing.

Unfortunately, unravelling the effect of taxes on house prices and rents is challenging.

The effects depend on the extent that the supply of new housing is responsive to prices.

If the supply of housing is very responsive to prices, taxes that affect supply prices (such as GST) become fully reflected in prices, while taxes that affect demand (such as the relative size of taxes on housing income and other assets) do not. Conversely, if the supply of housing is not really responsive to prices, supply taxes like GST have little effect on prices but demand taxes have large effects.

The analysis is further complicated because the supply of land – particularly land in good locations – is less responsive to price than the supply of new houses.

It is quite possible that a particular tax can simultaneously lead to higher land prices but not much new land, and larger houses but not much of an increase in building costs.

Since 1989, the ways that the tax system affects the demand for housing has been the biggest problem.

The fundamental difficulty is that the returns from other classes of assets such as interest income are more heavily taxed than the returns from housing.

Because interest is more heavily taxed than the returns from owneroccupied housing – which are essentially the rent people get from their own home – people have an incentive to live in larger houses than otherwise, and pay more for well-located properties.

In the absence of this tax distortion, many people would choose to live in smaller houses and land prices in major cities would be a lot lower.

It is not unreasonable to suspect the premium people pay for well-located properties is twice as high as they would pay under a non-distortionary tax system.

Incentives

But this is not all. The tax system provides incentives for landlords to pay a much higher price/rent multiple for the houses they lease, largely because the absence of a capital gains tax.

Because the houseprice/ rent multiple could increase either because house prices increase or because rents decline (or some combination of both), the tax system could make buying more expensive or it could make renting more affordable. Most of the evidence suggests house prices have increased rather than rents have fallen; either way, the result is a tax-induced decline in home ownership rates.

When the tax system causes artificially high house prices, costs are imposed on current and future generations of young people, who have to borrow more and pay higher mortgage costs.

Why 1989? New Zealanders have never paid tax on the capital gains associated with house price increases, and the way housing is taxed was not fundamentally changed in 1989.

This is true. But the distortionary effects of taxation depend on the way houses are taxed relative to other asset classes, and in 1989 the government changed the way some other capital income is taxed.

Until 1989, money placed into retirement saving schemes was tax deductible, and the earnings from this money were not taxed as they accumulated.

Under this tax scheme – which is used in most developed countries including the United Kingdom, the United States, France, Germany, and Japan – the money placed in these savings schemes is taxed in a similar way to housing.

It reduces the incentive for owner-occupiers and landlords to overinvest in housing.

While the distortions in the current tax system could be eliminated by introducing a capital gains tax on housing and all other assets, and by taxing the rent you implicitly pay yourself when you own your home, most countries have found this too difficult to do.

As they have discovered, it is far simpler to change the way other savings are taxed.

On the supply side, in addition to GST, the Local Government Act (2002) has also affected the cost of supplying housing by changing taxes.

Instead of levying property taxes (rates) to fund the costs of developing new sections, local governments have progressively imposed development charges.

This change has improved efficiency by moving the costs of a larger city to the new people populating it, but it has also increased the price of housing right across cities.

People who bought before 2002 shifted the cost of new development to others, increasing the value of their houses, even though their development costs had been paid by other ratepayers.

For a long time, economists have pointed out that if you tax the income from housing less than other assets, you tend to increase land prices.

At the macroeconomic level, they have noted that this tends to increase national debt levels, and lower national income.

The first owners of land benefit from these schemes, but everyone else loses.

Perhaps this is a reason why other countries have been concerned to tax housing on a similar basis to other assets.

It is unfortunate New Zealand does not do so, even if the tax changes implemented since the late 1980s have proved very advantageous to middle-aged and older generations.

Interest.co.nz

First home buyers need LVRs to stay – Liam Dann. 

Real estate agents are wasting their breath calling for a removal of Loan to Value Ratio restrictions. They will not be removed prior to the election, nor should they be.

Though the housing market has cooled there is a risk that it will bounce back post-election as spring takes hold. That would be a disaster for first home buyers.

We know that population pressure is still far stronger than the rate of new building.

Those looking to get in to the housing market need prices to stay flat – or ideally fall further over the next 12 months – long enough for housing supply to reach the kind of peaks that could prevent another bubble.

If that happens then LVRs will inevitably be loosened and first home buyers will be in far better shape than they would have been without them.

The LVRs have been highly successful in cooling the housing market, but even the Reserve Bank would acknowledge that they have been just one of several factors. It’s possible they are getting too much credit.

The retail banks have also tightened their lending based on concerns that the market was in bubble territory.

Nevertheless LVRs stand out as a piece of policy that is doing what it is supposed to do.

Specifically LVRS were designed to target New Zealand’s dangerously high levels of housing debt and remove the wider risk to the economy.

The growth in mortgage lending has slowed but not by enough yet to say that the job is done.

It seems highly unlikely that Reserve Bank Governor Graeme Wheeler or his immediate replacement Grant Spencer will be swayed by lobbying.

Spencer is currently head of financial stability for the Reserve Bank so was instrumental in putting the LVRs in place.

Real Estate agents are unhappy because the market is seeing a huge slump in the volume of sales – that effects their livelihood.

Their industry concern is understandable

But the slump in the past few months is largely to do with the toughening of restrictions on investors – the big change to LVR rules last year.

REINZ’s claim that LVRs are hitting first home buyers is disputed by Kiwibank chief economist Zoe Wallis.

“While REINZ notes that LVR restrictions have been particularly hard on first home buyers, the data suggests that the recent changes to property investor lending LVR restrictions have instead opened up some opportunities for first home buyers and other owner-occupiers,” she wrote last week.

“The latest round of LVR changes has meant that the percentage of bank mortgage lending to investors has fallen from 33 per cent of all loans in July last year, down to 24 per cent.

“Over the same time period the share of lending to first home buyers has increased from 11 per cent to 14 per cent.

“Lending to other owner occupiers (i.e. people moving up the property ladder) has also increased,” she concludes.

Many first home buyers won’t need a 20 per cent deposit either. LVR rules allow banks to offer 10 per cent of their loans to owner-occupier buyers who have less than 20 per cent deposit.

So basically if you have a decent job and in excess of 10 per cent on a good solid property then there is a good chance you can find a bank that will lend to you.

And even if that takes more time, LVRs are helping your cause.

You are less likely to need a $200,000 deposit if we stick to our guns now.

Prices are falling, so the pressure to get in the market quickly has gone. Would be home owners can keep saving without feeling like they are being left behind.

There will of course be some, ready to buy now, who feel hard done by.

But it seems that the most aggrieved parties right now are would be investors and the real estate agents themselves.

Giving up on LVRs now would be akin to quitting a tough fitness regime after you’ve done most of the hard work but before you reached your goal.

It would be a wasted opportunity.

NZ Herald

New Zealand’s political leadership has failed for decades on housing policy – Shamubeel Eaqub. 

New Zealand’s political leadership has failed for decades on housing policy, leading to the rise of a Victorian-style landed gentry, social cohesion coming under immense pressure and a cumulative undersupply of half a million houses over the last 30 years.

House prices are at the highest level they have ever been. And they have risen really, really fast since the 90s, but more so since the early 2000s and have far outstripped every fundamental that we can think of.

After nearly a century of rising home ownership in New Zealand, since 1991 home ownership has been falling. In the last census, the home ownership rate was the lowest level since 1956. And for my estimate for the end of 2016, it’s the lowest level since 1946.

We’ve gone back a long way in terms of the promise and the social pact in New Zealand that home ownership is good, and if you work hard you’re going to be able to afford a house.

The reality is that that social pact, that right of passage has not been true for many, many decades. The solutions are going to be difficult and they are going to take time.

Before you come and tell me that you paid 20% interest rates, the reality is that, yes interest rates are much lower. But the really big problem is, house prices have risen so much that it’s almost impossible in fact to save for the deposit. People could have saved a deposit and paid it off in about 20-30 years in the early 1990s. Fast forward to today, and that’s more like 50 years. How long do you want to work to pay off your mortgage?

What we’re talking about is the rise of Generation Rent. Those who manage to buy houses are in mortgage slavery for a long period of time.

There is a widening societal gap. If younger generations want to access housing, it’s not enough to have a job, nor enough to have a good job. You must now have parents that are wealthy, and home-owners too. The idea of New Zealand being an egalitarian country is no longer true. The kind of societal divide we’re talking about is very Victorian. We’re in fact talking about the rise of a landed gentry.

For those who are born after the 1980s, the chance of you doing better than your parents are less than 50%.

What we’re creating is a country where opportunities are going to be more limited for our children and when it comes to things like housing, than ourselves. I worry that what we’re creating in New Zealand is a social divide that is only going to keep growing. This is only one manifestation of this divide.

There has been a change in philosophy in what underpins the housing market. One very good example is what we have done with our social housing sector.

Housing NZ started building social housing in the late 1930s and stock accumulated over the next 50-60 years to a peak in 1991.

Since then we have not added more social housing. On a per capita basis we have the lowest number of social housing in New Zealand since the 1940s.

This is an ideological position where we do not want to create housing supply for the poor. We don’t want to. This is not about politicians. This is a reflection on us. It is our ideology, it is our politics. Our politicians are doing our bidding. The society that we’re living in today does not want to invest in the bottom half of our society.

The really big kicker has been credit. Significant reductions in mortgage rates over time have driven demand for housing. But we have misallocated our credit. We’re creating more and more debt, but most of that debt is chasing the existing houses. We’re buying and selling from each other rather than creating something new. The housing boom could not have happened on its own. The banking sector facilitated it. We have seen more and more credit being created and more of that credit is now more likely to go towards buying and selling houses from each other rather than funding businesses or building houses.

One of the saddest stories at the moment is, even though we have an acute housing shortage in Auckland, the most difficult to find funding for now is new developments. When the banks pull away credit, the first thing that goes is the riskiest elements of the market.

Seasonally adjusted house sales in Auckland are at the lowest level since 2011. This is worrying because what happens in the property market expands to the economy, consents and the construction sector.

I fully expect a construction bust next year. We are going to have a construction bust before we have a housing bust. We haven’t built enough houses for a very long period of time. And if we’re going to keep not building enough houses, I’m not confident that whatever correction we have in the housing market is going to last.

New money created in the economy is largely chasing the property market. Household debt to GDP has been rising steadily since the 1990s. People were now taking on more debt, but banks have started to cut back on the amount of credit available overall.

For every unit of economic growth over the course of the last 10, 20 years, we needed more and more debt to create that growth. We are more and more addicted to debt to create our economic growth.

Credit is now going backwards. If credit is not going to be available in aggregate, we know the biggest loses are in fact going to be businesses and property development.

It means we are not going to be building a lot of the projects that have been consented, and we know the construction cycle is going to come down. I despair.

I despair that we still talk so much more about buying and selling houses than actually starting businesses. The cultural sclerosis that we see in New Zealand has as much to do with the problem of the housing market as to do with our rules around the Resource Management Act, our banking sector.

On demand, we know there’s been significant growth in New Zealand’s population. Even though it feels like all of that population growth has come from net migration, the reality is that it’s actually natural population growth that’s created the bulk of the demand.

But net migration has created a volatility that we can’t deal with. A lot of the cyclicality in New Zealand’s housing market and demand, comes from net migration and we simply cannot respond.

We do know that there is money that’s global that is looking for a safe haven, and New Zealand is part of that story. We don’t have very good data in New Zealand because we refuse to collect it. There is a lack of leadership regarding our approach to foreign investment in our housing market.

Looking at what’s happening in Canada and Australia would indicate roughly 10% of house sales in Auckland are to foreign buyers. Yes it matters, but when 90% of your sales are going to locals, I think it’s a bit of a red herring.

Historical context of where demand for housing comes from shows the biggest chunk is from natural population growth. The second biggest was from changes in household size as families got smaller – more recently that has stopped, ie kids refusing to leave home.

There has been a massive variation in what happens with net migration.

New Zealand needs about 21,000 houses a year to keep up with population growth and changes that are taking place. But over the course of the last four years, we’ve needed more like 26,000. We’re nowhere near building those kinds of houses.

This means we need to think about demand management from a policy perspective. It’s more about cyclical management rather than structural management.

Population growth has always been there. Whether it’s from migration or not doesn’t matter. The problem is our housing market, our land supply, our infrastructure supply, can’t keep up with any of it.

While immigration was a side problem it nevertheless was an important conversation to have due to the volatility that can be created. I struggle with the fact that we have no articulated population strategy in New Zealand. We have immigration because we have immigration. That’s not a very good reason.

Why do we want immigration, how big do we want to be, do you want 15 million people or do you want five?

What sort of people do we want? Are we just using immigration as shorthand for not educating our kids because we can’t fill the skills shortages that we have in our industries?

Let’s not pretend that it’s all about people wanting to live in houses.

You’d be very hard pressed to argue that people want to buy houses in Epsom at a 3% rental yield for investment purposes. They want to buy houses in Epsom at 3% rental yield because they want to speculate on the capital gains. Let’s be honest with ourselves.

If your floating mortgage rate is 5.5% and you’re getting 3% from your rent, what does that tell you about your investment? It tells you that you’re not really doing it for cash-flow purposes. You’re doing because you expect capital gains, and you expect those capital gains to compensate you.

The real story in Auckland is that a lot of additional demand is coming from investment.

Land supply in New Zealand is slow, particularly in places like Auckland. But it’s not just in terms of sections, it’s also about density. The Unitary Plan was a win for Auckland. The reality is that if we only do greenfields, we will just see more people sitting out in traffic at the end of Drury.

The majority of New housing supply are large houses, when the majority of new households being formed are 1-2 person households.

Between the last two censuses, most of the housing stock built in New Zealand were four bedrooms or more. In contrast, the majority of households that were created were people that were single or couples. We have ageing populations, we have the empty nesters, we have young people who are having kids later…and we’re building stand-alone houses, with four bedrooms.

We have to think very hard about how to create supply not just for the top end, even though we know in theory building just enough houses is good for everybody, when you’re starting from a point of not enough houses, it means the bottom end gets screwed for longer. We have to think very hard about whether we want to use things like inclusionary zoning; we have to think very hard about what we want to do with social housing.

Right now we’re not building houses for everybody in our community. We are failing by building the wrong sorts of houses in our communities.

Right at the top is land costs. If we think about what has been driving up the cost of housing, the biggest one is the value of land. It’s true that we should also look at what’s happening in the rental market and what was happening with the costs of construction. But those are not the things that have been the majority driver of the very unaffordable house prices that we see in New Zealand today.

The biggest constraint is in land, and that is where the speculation is taking place.

We know we’re not building enough. In the 1930s to 1940s we had very different types of governments and ideology. We actually built more houses per capita back then than we have in the last 30 years.

In the late 40s-early 70s, with the rise of the welfare state and build-up of infrastructure. On a per capita basis, we built massive amounts of houses.

But since the oil shock and the 1980s reforms, we have never structurally managed to build as many houses as we did pre-1980. That cumulative gap between the trend that we have seen in the last 30 years, versus what we had seen in the 40s, 50s and 60s, is around half a million houses.

So there is something that is fundamentally and structurally different in what we have done in terms of housing supply in New Zealand over a very long period of time.

The changes in the way that we do our planning rules, the advent of the RMA, the way that we fund and govern our local government. All these things have changed. So the nature of the provision of infrastructure, the provision of land, then provision of consents, all of these things have changed massively. But the net result is we’re not building as many houses, and that is a fundamental problem.

In Auckland there is a massive gap between targets set by government for house building over the past three years and the amount of consents issued. On top of this, the targets themselves were still not high enough.

Somehow we’re still not able to respond to the growth that Auckland is facing. Consistently we have underestimated how many people want to live in a place like Auckland.

But it’s not just Auckland. Carterton surprises every year, it’s because they’ve got a fantastic train line and people live there, it’s not surprising.

But we are failing. We have been failing and we continue to fail. We have to be far more responsive and we have to have a much longer time horizon to have the provision for housing that’s needed.

There is in fact no real plan. The Unitary Plan is fantastic in that it actually plans for just enough houses for the projections for population. We can confidently say that projection is going to be pessimistic, we’re going to have way more people in Auckland.

Trump and Brexit have marked a shift in politics and a polarisation in the public’s view of politics. In New Zealand I think one of the catalysts could be Generation Rent. In the last census, 51% of adults, over 15 year olds, rented. It is no longer the minority that rent, but the majority of individuals that rent.

I’m not saying we’ll see the same kind of uprising in New Zealand, but what we saw in Brexit was that discontent was the majority of voters. If young people had actually turned up to vote, Brexit wouldn’t have happened. The same is true for New Zealand.

It is strange that there was no sense of crisis or urgency. For a lot of the voters, things are just fine. For the people for whom it’s not fine, they’re not voting and they feel disengaged.

The kind of politics that we will start to see in the next 10 years is something much more activist, the ‘urgency of now’.

The promise of democracy is to create an economy that is fit for everyone. It is about creating opportunities for everyone. Right now, particularly when it comes to housing, we are failing. We are not creating a democratic community when it comes to our housing supply because young people are locked out, because young people are going to suffer, and we know there are some big differences across the different parts of New Zealand.

It’s not going to be enough, when we’re starting from a position of crisis, to simply create more housing that will appease the public. We have to make sure that we’re far more activist in making sure that we’re creating housing that is fit for purpose, not just for the general populous, but for the bottom half who are clearly losing out from what is going on.

We know what the causes are. I’m sick of arguing why we’re here. We know why we’re here, because we haven’t ensured enough political leadership to deal with the problems that are there.

We can’t implement the solutions unless we have political leadership, political cohesion, and endurance over the political cycle. This is a big challenge, but a big opportunity.

Shamubeel Eaqub

***

  • There has been a cumulative 500,000 gap in housing supply over the last 30 years.
  • Eaqub predicted a construction bust next year, led by banks tightening lending.
  • It’s remarkable NZ authorities do not have proper data on foreign buyers. While he estimates 10% of purchases in Auckland are made by foreign investors, he said the main focus should be on the other 90% by local.
  • However, migration creates cyclical volatility that we can’t deal with; it is unbelievable that New Zealand doesn’t have a stated population policy.
  • New Zealand is still not building the right sized houses – the majority of properties being built in recent years have had four-plus bedrooms, while household sizes have grown smaller
  • The majority of New Zealand’s adult population is now renting. This could be the catalyst for a Brexit/Trump-style rising up of formerly disengaged voters – young people in our case – to engage at this year’s election.
  • New Zealand’s home ownership level is now at its lowest point since 1946.
  • We have a cultural sclerosis of buying and selling existing houses to one another.

interest.co.nz

Young home buyers – Don’t believe the hype – Mark Lister. 

Save hard, wait for the cycle to run its course, then take your opportunities, columnist Mark Lister says.

Struggling first-home buyers seem increasingly frustrated, most recently in response to Herald stories of those who’ve found a way onto the ladder.

It’s even been suggested they give up completely, which isn’t actually a bad idea for a lot of people. Not because they’ve no hope of ever owning one, but because home ownership just isn’t a great deal at today’s prices.

Prices are overheated in many places, especially Auckland. Never before have they risen so quickly or become so detached from what ultimately drives them – namely rents and incomes.

Whenever things have got out of whack like this in the past, prices have fallen sooner or later, so there’s every chance that happens again. Choosing to buy at what could easily be the top of the cycle is a big call, especially if you can’t really afford it.

I can hear the housing bulls scoffing already, citing numerous reasons the old valuation rules don’t apply and “this time it’s different”. Those words were once described as the four most dangerous in investing.

The same one-eyed property types will suggest I’ve got a vested interest in beating this drum, because I’d like more people to invest in shares and bonds, rather than houses.

That’s true, although I wouldn’t recommend taking your life savings, borrowing five times that amount and spending the lot on shares right now either. Or ever, actually.

At least you can stagger your way in to an expensive sharemarket over a period of time. With houses, you have to buy all in one go, so your timing is much more important.

There are genuine reasons house prices have gone up a lot, like building costs, population growth and an undersupply. However, that doesn’t mean they can’t get overvalued.

Low interest rates have also a big part of the price rises, and these could prove temporary. Borrowing costs have never been as low as they are now, so a 2-3 per cent rise to more normal levels will undoubtedly have an impact.

Auckland rents suggest something is amiss in the housing market. In the last six years the average rent has risen 30 per cent, way behind house prices which are up 85 per cent.

Rents are driven almost solely by economic fundamentals, while house prices are influenced by sentiment and speculation. Over the long term prices tend to follow rents, not the other way around.

If you’ve missed the housing boat these last few years, think twice about trying to get on the ladder at all costs today.

Sit back, relax and rent something much nicer than you could afford to buy. Let someone else fork out a fortune in interest, maintenance, rates and insurance on their overpriced asset while you get to enjoy it for a fraction of that.

Renting looks like a bargain at the moment, and it’s not “dead money” any more than home ownership running costs are.

Don’t believe the hype. Just save hard, wait for the cycle to run its course, then take your opportunities.

NZ Herald

Who will fund Auckland’s future? – Liam Dann. 

How will this crazy property cycle end? What will Auckland’s housing market look like in a decade?

Will it be an elite international city where home ownership is the preserve of the rich and privileged?

Will the market overheat and crash, causing financial pain and hardship for many but offering opportunity for a new generation of home buyers?

Or will we resolve the issue, as this Government seems to think we will, with a steady and stable increase of supply to flatten prices?

It’s hard to predict the future. But we can imagine plausible scenarios.

We can also decide what sort of behaviour may be likely to cause those scenarios. We can adjust our behaviour to achieve the scenario we think most desirable.

That’s probably be a bit much to expect. We are talking about property and this is New Zealand. We’ve been arguing about it since at least 1840.

But let’s take a look at what we know about that numbers underpinning Auckland’s surging property prices.

Westpac senior economist Satish Ranchhod has published an excellent report – A Tale of Three Cities – crunching the numbers on the property market in Auckland, Christchurch and Wellington.

His snap shot of the past five years in Auckland paints a troubling picture.

Between 2011 and 2016 Auckland’s population rose by 154,800 or 11 per cent. Meanwhile, the increase in housing stock over the same period was just 6 per cent.

Throw in a period of low interest rates and, what looks like a relatively small shortfall, has had an incredible effect on the market.

Average house prices in Auckland rose 95 per cent between February 2011 and February 2017.

Rents rose 31 per cent over the same period. And median wage growth was 23 per cent.

The Government remains adamant that inequality hasn’t worsened under its watch.

I’m no mathematician but based on those numbers it looks as if people who owned a house in 2011 have become a lot richer. And people who have rented are now poorer.

Luckily I’m in the former camp. Unluckily I have children.

It gets worse.

We’ve had another 50,000 people arrive in Auckland in the past year and projected growth is for 290,200 more between 2018 and 2029.

Don’t get me wrong, I’m not blaming the new arrivals. I was one once. I’ve also lived in and loved cities a lot bigger than Auckland.

Growth and diversity are part of what makes cities a great place to live.

But we need to acknowledge that Auckland is going through an historically unprecedented time of growth.

We need to plan for it. Actually, we needed to plan for it. Instead we argued about it. Government blamed council, council blamed government. We pretended the differences were complex and difficult to resolve.

In reality no one in power was particularly motivated to resolve the issue because so many home-owning Aucklanders were feeling so much richer.

In the past year the Government has grudgingly accepted there is a problem and council has finally introduced its Unitary Plan, clearing a path to faster development.

Here we are then, ready to start dealing with a problem that is already well out of control.

As Ranchhod notes, in a dispassionate way: “Housing market tightness will get worse before it gets better”.

In fact he estimates building levels – which though rising are still not yet at the minimum required to keep up with population growth – will need to stay elevated for another decade to address Auckland’s housing shortfall.

So where will we be in a decade?

Well, we may have a crash, that’d fix it … but it wouldn’t be pretty.

Some think Auckland’s property market can’t crash. It’s true that values for renovated villas in good school districts have never fallen through the floor. But CBD apartments and developments on the city fringe do – almost every decade.

Imagine that we are successful in ramping up supply. But progress is slow so prices keep rising.

We may see tough policies introduced to curb immigration and taxes to deter investors.

If that were to happen just as supply was peaking, we would have all the right conditions for a sudden downturn.

An international banking shock, a spike in interest rates: Bob’s your uncle, all of a sudden there’s a whole bunch of first-home buyers wondering why they paid $900,000 for a two bedroom unit in Helensville … or apartment investors staring into a hole in the ground.

Then again, perhaps we won’t get there on supply in the next decade.

A consensus about the need to build doesn’t mean it is going to happen.

Who will fund all this building? Who will hammer in the nails or plumb the toilets? We have acute skills shortages in the trades, which may put a limit on the pace of building.

If we’re still struggling to keep up in a decade – if house prices have continued to outstrip wage growth as they have in the past five years – this will be a very different city.

It will be a more sterile, less diverse place with gentrification stretching from the Eastern bays to the Waitakere ranges. We’ll have an underclass of transient service workers, more homelessness and more crime and poverty.

And don’t get me started on the traffic.

NZ Herald

Economist: Pay rises won’t be enough to cover interest rate rise – Tamsyn Parker. 

Auckland 2017

‘Falling Off The Property Ladder’

$1,000,000 House – $700,000 Mortgage

1% Rate Rise = $135 PER WEEK!

$900,000 Mortgage = $173 PER WEEK! 

All going to the Banks rather then into the economy. Insanity.

Pressure on employers to boost workers’ wages is not going to be enough to cover the rising cost of mortgage rates, warns an economist.

Daniel Snowden, who analyses retail and consumer economic data for the ASB bank, said mortgage rates were roughly back to where they were a year ago but in about 18 months time were likely to be higher.

“In 18 months time it will be particularly unpleasant for people rolling off two-year rates,” Snowden said. Banks began lifting longer-term fixed mortgage rates at the end of last year and that has been followed by a flurry of increases in January.

Kiwibank has increased some of its fixed-term mortgages rates twice already this year and ASB also announced plans to increase its rates last week. While smaller banks SBS bank and the Co-operative Bank have also raised rates.

The banks have blamed rising funding costs from borrowing money in the offshore market for the rate rises.

“With the majority of mortgages fixed for two years or less, rising interest rates are going to impact people much more quickly in the current cycle compared with when interest rate cuts happened back in 2008/09.”

It’s recommended people calculate what a higher rate would cost them ahead of time to see what they could afford.

NZ Herald

WAKE UP KIWIS! One in five Australian homeowners will struggle with rate rise of less than 0.5 per cent – Julia Corderoy. 

Can’t say you haven’t been warned, often. 

One in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

The love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as Australians scramble over each other to snap up property while interest rates are at historic lows, they have gotten themselves into a bit of a pickle. They might not actually be able to afford funding our affair.

20 per cent – that’s one in five homeowners – would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less.

An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

NZ Herald 

OECD: Fears of a massive global property price fall – Szu Ping Chan, Isabelle Fraser. 

Property prices have climbed to dangerous levels in several advanced economies, raising the risk of massive price falls if markets overheat, according to the Organisation for Economic Co-operation and Development (OECD).

Catherine Mann, the OECD’s chief economist, said the think-tank was monitoring “vulnerabilities in asset markets” closely amid predictions of higher inflation and the prospect of diverging monetary policies this year.

Mann said a “number of countries”, including Canada and Sweden, had “very high” commercial and residential property prices that were “not consistent with a stable real estate market”.

The EU’s financial risk watchdog recently warned that eight countries, including the UK, had property markets that risked overheating in the environment of low interest rates. The Bank of England also cautioned last month that the improvement in household finances seen since the 2008 crisis “may have come to an end”.

The OECD’s Mann said countries such as Canada, New Zealand and Sweden had all seen rapid increases in house prices over the past few years.

While many of these countries have already introduced policies designed to reduce financial stability risks, including forcing buyers to find larger deposits and imposing borrowing limits, Mann suggested that a house price crash would also reduce household spending.

NZ Herald

Nation of Debt: Ready, set, crash – could New Zealand be next to fall? – Liam Dann. 

“We’ve almost got the perfect storm,” says veteran fund manager Brian Gaynor as he reels off the many reasons New Zealand house prices and debt levels are soaring to precipitous heights.

There are many ingredients. But right now, New Zealand seems to have them all: not enough building, restrictions on development, surging migration, baby boomer savings, low interest rates and banks that are all too happy to lend for property investment.

“When you get the perfect storm like we did in the 1980s with the sharemarket, you see things just go up and up. People start to believe they will never fall,” he says.

“People didn’t believe the sharemarket would fall in the 80s. I’d come in from a trip to Australia and the guy at customs wouldn’t let me in unless I gave him sharemarket tips. It was just euphoria. Everyone was talking about the sharemarket. Now everyone is talking about the property market.”

New Zealand’s gross debt is a whopping half trillion dollars; housing now accounts for $218 billion of that.

NZ Herald 

How our Tax Reform will result in more houses being built – Gareth Morgan, TOP. 

While the Establishment Parties are falling over themselves to build more houses, their policies leave the real problems unsolved. These problems include land banking, and viewing housing as an investment rather than as a means for providing shelter. Our tax policy would address both of these, and see developers scrambling to build rather than bid up the value of existing stock.

The line the Establishment Parties are pushing is that we just need to build more houses to solve the problem. National is pointing the finger at Councils for providing paperwork bottlenecks, when even their own attempt to step in and create Special Housing Areas has achieved little. Meanwhile the HomeStart scheme simply fans the flames of an overheated housing market.

Meanwhile the Labour Party is promising to put on their collective carpenter belts and build houses.

The real problems here? Land banking and demand for housing as an investment that outstrips the need for shelter.

Our tax reform policy will deal with both of these issues.

We simply cannot keep getting richer buying houses off each other indefinitely and this has to stop. Our Tax Reform Policy will halt the rise of house prices, which will cut off the demand for buying housing as a speculative investment.

The Opportunities Party

Fed rate hike a milestone for world markets – Jamie Gray. 

US Federal Reserve chair Janet Yellen’s announcement of an official rate hike marked a significant milestone for the world’s financial markets.

In one of the year’s most anticipated market events, the Fed raised its official fed funds rate by 25 basis points to a range of 0.5 to 0.75 per cent.

While the hike came as a surprise to no one, the Fed’s projection that it could raise rates three more times in 2017 was seen as a more aggressive, or hawkish, stance than was generally expected.

The US 10-year bond yield bumped up to 2.57 per cent for the first time since 2014, giving investors yet more evidence that world interest rates are finally on the move after a seemingly interminable post-Global Financial Crisis hiatus.

At 0.5 to 0.75 per cent, the fed funds rate is still a long way short of the 3 per cent norm. 

NZ Herald

Janet is saying: “interest rates are going nowhere but UP!”. 

Will Common Sense Economics Prevail? Tax the house? It’s worth a look – Brian Fallow. 

“Vote for me. I’ll tax the equity in your home” does not sound like an election winner. But the tax policy released last week by Gareth Morgan’s political vehicle, the Opportunities Party, deserves a second look.

It would gradually but substantially broaden the tax base and recycle the proceeds as income tax cuts.

It is a serious proposal for dealing with an entrenched structural distortion in the tax system, which drives savings into bricks and mortar rather than enterprises that might employ people and earn us a first-world income.

The distortion contributes to the capital shallowness, or low levels of capital invested per worker, which is part of the explanation for our weak productivity and income growth.

And it fuels the house price inflation which deepens inequality, condemns lots of Kiwi families to poverty and blights the prospects of children, as the Children’s Commissioner’s latest report reminds us.

So the status quo should not be the default option.

The Morgan plan starts from the proposition that not all income is cash income.

Income from labour (wages and salaries) is taxed. So is the income from some forms of capital, including financial assets like shares, bonds and bank deposits.

But if you own the roof over your head, you avoid the cost of renting a similar property out of your after-tax income.

That return on your investment – “imputed rent”, in the jargon – escapes the tax system altogether.

“The benefit you receive each year from owning the house is every bit as real as that you receive from owning a bank deposit or from rent paid by a tenant,” Morgan says.

“Why should you be tax-exempt when tenants have to pay rent from their income after tax and their landlords pay tax on that income received?”

The Morgan plan would take all forms of capital above some threshold, including land and housing, and net off any associated debt; it is equity which is the tax base.

It would then specify some deemed minimum rate of return on that capital and tax that. If the asset already returns more than the minimum, the higher amount is what would be taxed, as it is now.

We are not talking about trivial sums here.

NZ Herald 

Renters must Vote next year to achieve change – Bernard Hickey. 

$1 trillion will be the total ‘value’ of New Zealand’s houses by the end of 2016 if prices keep going up in December at the rate of the previous 11 months.

The ‘value’ of New Zealand’s homes has risen by more than $400 billion, or two thirds, over the past eight years. Those homes are not bigger or fancier or warmer or drier or have better views, but interest rates are substantially lower and over that time we failed to build enough houses to match population growth.

Also over that time, New Zealand’s home ownership rate has fallen to close to 60 per cent and many young Auckland first-home buyers have had to abandon their dreams and deal with rents rising faster than incomes.

Yet voters also rejected Opposition proposals at the past two elections for a Capital Gains Tax. Labour has given up trying to campaign for any changes that would see house prices fall.

Less than half of young renters voted at the last election, and more than 90 per cent of property owners over the age of 50 voted. Politicians know this and have calculated that more voters want higher house prices, which means they can afford to ignore the renters.

The big question for New Zealand in 2017 is: will young renters start voting at high enough rates to change that political calculation in the same way that poor white voters started voting and changed the calculations in America?


What inevitable shock will pop NZ’s bubble? – Brian Fallow. 

An air of unreality surrounds the economic and fiscal update the Government released today.

It forecasts brisk economic growth averaging 3 per cent over the next five years, generating ever plumper surpluses.

It sets up an election-year debate about how to divide up those surpluses between tax cuts/income support, increased spending on public services, debt reduction and resuming contributions to the Cullen fund.

But by definition, the cheerful forecasts for economic growth do not allow for New Zealand being sideswiped by an economic shock from the rest of the world – the kind of shock that turns a lot of two-income households into one-income households and pops a property bubble.

The chances of getting through the next five years without such a shock are very low indeed.

There’s Donald Trump, for one thing.

Everything we know about his temperament and character indicates he is a disaster waiting to happen – the only question is when and in what arena. His election is akin to putting a child behind the wheel of a supercar and handing him the keys.

For example, hard on the heels of trampling over the One China policy, this week he has fired off intemperate tweets over the renminbi’s depreciation against the US dollar – oblivious to the complexities of China’s exchange rate policy and ignoring the effect his own election has had in driving US interest rates and the US dollar higher.

It does not augur well for relations between the two largest economies, nor therefore for the rest of us.

Then there is Europe.

Last weekend’s Italian referendum adds political instability to that country’s bitter cocktail of feeble economic growth, high unemployment and sky high public debt.

It increases the chances that a toxic build-up of bad debt in the Italian banking system will go from being a chronic to an acute problem, shaking the single currency’s already rickety foundations.

If it is the harbinger of Euro Crisis II, The Sequel, it would only add to Europe’s other challenges: Brexit, populism, refugees and Russian irredentist adventurism.

China, meanwhile, is sitting on a credit bubble. The ratio of private sector debt to gross domestic product (fast-growing though its GDP is) has doubled over the past eight years.

“The rapid increase in Chinese debt, continued pressure on the renminbi from capital outflows, and high house price inflation in major city centres indicate large vulnerabilities in the Chinese economy,” the Reserve Bank says in its recent financial stability report.

“A disorderly unwinding of China’s imbalances could particularly affect New Zealand banks’ access to offshore funding markets, given that China is the second largest market for New Zealand exports.”

Against this international background, fragile at best, we need to look at our own finances from the standpoint of resilience.

Our Reserve Bank has only 1.75 percentage points now available for conventional monetary policy.

New Zealand households are net borrowers from the banks to the tune of $75 billion, and “other residents” (ie businesses) another $25b. The banks fund this by being net borrowers from non-residents (foreign savers) to the tune of $92b.

Access to that inflow of savings at tolerable interest rates, and the ability to lay off the risk that when it has to be repaid the exchange rate will have moved against us, are clearly vital.

Offshore funding markets could be disrupted by a number of factors, including credit rating downgrades, a disorderly unwinding of vulnerabilities in China or Europe, and geopolitical risks.

Statistics NZ reported this week that 99,000 owner-occupier households spend 40 per cent or more of their pre-tax income on housing. Another 127,000 households that rent spend 40 per cent or more of their income on housing.The Reserve Bank tells us that about a third of new mortgage lending is at debt-to-income ratios of more than six times.

Looking forward there are two possibilities. One is that the economy is not walloped by an almighty international shock.

In that scenario, banks are increasingly reliant on offshore funding, their funding costs are rising and mortgage rates inevitably follow.

The more likely scenario is that there will be a shock that sees unemployment rise, incomes fall, foreclosures and forced sales jump, and a hit to household wealth generally that deepens the recession.

NZ Herald 

Leverage can be a double-edged sword –  Mark Lister. 

There has been a bit of commentary recently proposing New Zealanders use the equity in their homes more aggressively to grow their wealth. We’ve even heard suggestions that people borrow against family members’ homes to get into the property game.

This isn’t necessarily bad advice. Most wealthy people have gotten where they are by taking risks, and this often means borrowing to invest in something, be it real estate, businesses or farmland.

The financial term for using other people’s money to invest in something is “leverage”. In a rising market leverage can make you very wealthy, supercharging your returns and leading to the massive gains many property speculators have enjoyed in recent years.

However, it comes with a catch. In a flat or falling market leverage can do the opposite, by magnifying your losses. That’s the tricky bit when it comes to borrowing to invest. The timing is crucial and the concept only works if asset prices are rising.

Will those large gains continue over the next few years? I would suggest that’s highly unlikely, given the strength of recent years, and with interest rates now rising from all-time lows. A highly-leveraged investor isn’t quite as well positioned to make a quick buck if we’re heading into a sideways market.

Come On Mark, Say It! A deflating market. Will it be a slow collapse or a sudden BANG! 

NZ Herald 

Neoliberal New Zealand Government won’t commit to debt-to-income limits on house buying. Risk to economy not yet big enough! 

The Reserve Bank is asking the Government for new powers which would limit lending to home buyers if they did not earn enough.

If introduced, the restrictions would restrict what New Zealanders could borrow for a mortgage relative to their income. It is used in the United Kingdom, where buyers cannot get a mortgage higher than 4.5 times their annual earnings.

Reserve Bank governor Graeme Wheeler said he was not proposing to use the tool at this time, but he was signalling he wanted it in reserve, just in case.

“Restrictions on high [debt-to-income] lending could be warranted if housing market imbalances were to deteriorate further.”

NZ Herald 
Get on with it! 

Land-banking lessons from Britain. 

The upper end of the British housing market has slowed this year, with homes worth more than one million pounds down by more than 15 percent compared with last year. That weakening has been attributed to changes in stamp duty rates introduced at the end of 2014, introduced to make the tax system fairer for people at the lower end of the market. 

Annual price growth in Britain is tipped to further slow next year, to about 3.4 per cent, and Britain is facing a slowdown in the economy as household average earnings dip.

Inflation there is predicted to rise and wages slow, with real pay likely to be below 2008 levels even in 2021. Headlines about real wages have already dubbed it Britain’s “dreadful decade”.

Economies around the Western world face real challenges in the short to medium term. It can only be hoped that should any dire scenario play out in Britain it will not have too detrimental an impact on New Zealand, and the two countries do of course face very different challenges and trading realities, particularly in the wake of Brexit.

But the state of Britain’s housing market does have some parallels in New Zealand, and Auckland in particular.

While developers in an open economy are obviously welcome to do as they please in terms of buying and selling land, Javid’s threat will strike a chord with New Zealanders who are struggling to enter the housing market in this country.

It may well be that local authorities here will analyse any changes in the UK industry and consider similar tweaks to our own development laws. Many people will have sympathy for the idea of conditions being introduced to try to prevent land banking from happening.

NZ Herald 
Trump’s in. Interest rates have already started rising. New Zealand is very vulnerable. 

Now Smart to ‘Time The Market’ – Mary Holm. 

Since 2010, New Zealand’s ratio of house prices to incomes has soared 33 per cent. Other countries anywhere near that growth rate are in Europe. The countries we usually compare ourselves with – Australia, the UK, the US and Canada – have all seen considerably slower increases in that ratio.

Regardless of supply and demand, immigration, the pace of construction and so on, house prices can’t keep rising if people can’t afford to buy. That’s why I’m making an exception to one of my golden rules of investing: don’t try to time markets.

If you were buying shares or bonds, you could dripfeed into the market, but unfortunately with a house purchase you must buy the whole thing on one day. Because of that, and this country’s top spot in price-to-income comparisons, I wouldn’t buy a house right now – or certainly not in Auckland or elsewhere where prices are rising fast.

New Zealand has the third highest growth in prices since 2010, after Turkey and Sweden. House prices are rising much faster than rent. Paying rent isn’t a stupid thing to do.

Mary Holm, NZ Herald

Symptoms of Irrational Exuberance. “Does your home earn more than you do?” – NZ Herald. 

The typical Auckland property now makes $8 a day more in capital gain than the average employee’s daily wage. NZ Herald 

A ‘dream home’ nightmare in the making.

“Sometimes we’ve had to wonder if it’s worth it to be that financially stretched, just to have a house. I mean we want it, so badly, but at what cost?”
 Their mortgage repayments are slightly over $600 a week, which was more than their $495 a week rental in Te Atatu, but they could afford it. NZ Herald

Stretched to the absolute financial limit at a time of record low mortgage interest rates. Real smart.

And buying at the ‘top of the market’. Even Smarter. 

Housing Debt Hits Record Levels As Speculative Contagion Spreads. 

Auckland’s speculative housing bubble might be cooling in the wake of the Reserve Bank’s new loan to value ratios, but there is little to suggest that our days of housing speculation are over. The pause in Auckland may only be temporary , and the bubble is showing all the hallmarks of spreading across the rest of the country’s main centres. Meanwhile even bank economists are sounding warning bells about rising debt levels. 
The only reason this state of affairs is affordable is because interest rates are at an all time low. We are literally betting the house that they stay that way. In fact we may be betting our entire economy on it. The Morgan Foundation 

NZ Finance Minister foreshadows housing ‘correction’.

“What we do know is that if you’ve got very high levels of debt because you’ve paid a lot for your house, then you’ve taken a risk and if interest rates rise sooner than expected, you’re going to be under pressure.”

Under pressure and ‘Under Water’. An interest rate increase of just 0.25% on the average NZ$800,000 Auckland mortgage equates to another NZ$2000 per year deducted from your and your children’s lifestyle. An increase of 0.5% will gobble up another 10% of the average Auckland after tax income. 

A long term trend would be a godsend. History and economic common sense predict otherwise. 

Nick Smith said today that the fall in the number of sales in Auckland in September could be an “early indicator” of a slowdown.
Real estate company Barfoot and Thompson also said today that the Auckland housing market was “subdued” in September and “a totally different market to 12 months ago”. NZ Herald 

A small cabal of ancient NIMBYs seems to be holding Auckland to ransom – mostly by accident

None of the appeals are enough to stop large parts of the Unitary Plan becoming operable. That task was left to a tiny group of property owners from Takapuna and the leafy suburbs.

A joint High Court appeal by heritage group the Character Coalition and anti-change gremlin group Auckland 2040 is affecting zoning rules across Auckland. According to the Auckland Council, that will hamper attempts to intensify the city from rural Rodney to the farms of Franklin. The Spinoff

NZ Government’s Housing Policy “Lazy, Naive and Negligent”. 

Editorial: Surprisingly damning house verdict from business leaders.

What’s surprising is the surprise. Business people obviously have a more balanced opinion obout the property bubble than the average brainwashed Kiwi victim of the coming debacle. 
The Government’s insistence that the problem was purely one of supply is “disingenuous” and its constant blaming of the Auckland Council “pure politics”. We advocate restricting non-resident investors and imposing a stamp duty on domestic investors to discourage speculation and to raise revenue for infrastructure. NZ Herald 

Kiwis ‘drowning’ in housing debt – Labour

Eighty percent  per cent of all personal debt in this country is tied up in property.
That’s why this time bomb is so dangerous. The coming crash is going to devastate our economy. This time is Not different, every boom ends in a bust. We are racing headlong to the wall with our eyes shut and our brains switched off. NZ Herald

Criminal Selfishness could delay Auckland’s future. 

Phil Twyford calls for action on Auckland’s Unitary Plan. 
National should urgently legislate to make the Unitary Plan operative while a court challenge make its way through the legal process. NZ Herald 

Come On Nick,  Say It. The Bubble is Ripe for Bursting. 

Rent levels are driven by what renters can afford.

​So I would say that this drop in average rents in Auckland signifies that the limit of renters financial choices have been reached. What does this mean for landlords? Less profitable investments, more costs coming on. Should have a cooling effect on house prices one would normally expect.

Except of course that the frantic Ponzi pyramid going on in Auckland’s housing market is anything but normal. Time heals all wounds they say. We Wait. 

“Auckland property prices are rising rapidly but rents are heading in the opposite direction, unlike most other parts of New Zealand. Rents dropped from $520 median in May to $500 this month, and only risen $1 in an entire year, according to an online real estate listings web site.” – NZ Herald

Auckland is about to embark on an apartment building spree like it has never seen. – Bernard Hickey

Apartments can be part of the solution to Auckland’s housing supply crisis and can be a foot on the ladder for a generation locked out of a traditional house on a section, but the Government will have to heed the warnings and take up the proposals for better regulation to reinforce and build confidence in these homes for decades to come. A failure risks adding insult to injury for an already struggling cohort of home buyers. NZ Herald

JKey thinks he can sort out social housing like this?

She’s got 15 ‘homes’ a week coming ‘online’ and she’s gonna scale that up.

So how are you going to do that Minister? Pulling every lever? Pull the other one Paula.

Are We Serious? 

Bungling Bennett

​Just how badly the Government is struggling on housing is underlined by this damaging interview with Paula Bennett on The Nation. Lisa Owen plays a straight bat, and as the questioning goes on Bennett’s trademark gushy “sincerity” and wide-eyed smile seem more and more forced. Bennett has to concede her various announcements on emergency housing have only produced 300 extra places. That after three years of Government talk about boosting the community housing providers, the NGOs cannot build houses on the money the Government has put up. And to make matters worse Bennett is reduced to quibbling with the Government’s own official definition of homelessness. Most tellingly Bennett claims she gets up every morning to deliver more housing, and is pulling every lever, but Owen asks the question everyone else is thinking: why doesn’t the Government just build more houses?  The Nation has been trying to get Bennett on the programme for months. After that interview I guess it will be a while before she comes on again. – Phil Twyford

Watch the interview on Newshub

Prepare for the party to end. Bernard Hickey

​Should we all celebrate? Or sink into a great depression, or run for the nearest bunker? It’s hard to know how to react to the news Auckland’s average house value rose over $1 million in August. Auckland’s homeowners should in theory be celebrating their good fortune and voting for more of the same.

Indeed, some are celebrating. New car sales are at record highs and spending in Auckland’s cafes, bars and restaurants is growing at double-digit rates. They can also feel in their bones that house prices at 10 times incomes are hyper­ventilated, if not downright over-valued.

New Zealand’s house-price-to-income multiple is the second-most-expensive relative to long run averages in the OECD (behind Belgium), and is the most expensive relative to rents in the OECD. That overvaluation has grown more than any other country in the OECD over the past six years.

This is not the sort of world champion tag we want.

Another response is to hunker down and prepare for an implosion, which means saving madly to repay debt ahead of the housing market end-times and to diversify into other types of assets. This isn’t so much a celebration as a preparing for the party to be shut down.

If you think one day the music will stop and you don’t want to be holding the bad loan parcel, the best approach is to flick-pass the parcel as fast as you can and hope the music stops for someone else.

Let’s take the long-term view and use the Crown’s balance sheet to negotiate our way out by funding and building homes that will be there for many decades and housing cycles to come.

NZ Govt Confirms It’s Own Lousy Performance

​The gap between rich and poor is growing in New Zealand, new data shows, partly driven by rising housing costs.

The poorest households in New Zealand are spending more than half their income on accommodation, a series of Ministry of Social Development reports revealed.

http://bit.ly/2cHqdDG

Kids Education Suffers because of our Greed

Children are having to move schools because of the housing shortage in Tauranga, some principals say.

Robert Hyndman, principal of Brookfield School, said since the last school holidays in July, his school had lost 18 children, seven of which had been identified as changing schools because of housing issues. Of a school roll of 228 children, this was a significant number.

Sonya Bateson,  NZ Herald

The ‘property ladder’ is getting very unstable

Home values in Tauranga continue to soar, as QV release its latest report. ‘Values’ have increased 28.5 per cent year on year and 7 per cent in the city over the past three months. The average ‘value’  in the city is now $633,638. –  NZ Herald

A ‘value’ increase of close to thirty percent in one year without any positive change in underlying economic factors or intrinsic values equates to an unjustifiable and dangerous situation for our economy. This is economics 101. The inevitable crash is getting ever bigger. High time for Capital Gains Tax.