Ring Fencing Matters

[Perry]

So really all that remains to be argued against my position, is that a landlord is somehow doing someone a favour when they buy a house and rent it out to that same person who wanted to buy it, but couldn't quite afford the mortgage payments / deposit compared to what the landlord was willing to offer the previous owner that they were able to get finance with a bank for.

Favour?

As I see it, both the buyers and the banks are making business decisions.

It's been covered before, elsewhere on these forums. Banks are influenced by a variety of factors - and - being a business (productive or not? ) the banks seek profitable business propositions.

As I understand it, one of the significant influences is Basel III. I dimly recall that the PT threads before on this matter mentioned that the capital adequacy requirements for banks resulted in them having to hold higher capital reserves for commercial real estate and businesses than they did for residential property.

Loosely speaking, money in the bank - for a bank - is costing them. And if my recollection is correct - hypothesising now - if a bank has to hold reserves of 40 million for every billion it lent on commercial properties, and only 20 million for every billion lent on residential properties, then that's an extra 20 million working for bank lending on residential property.

And it's quite likely that NZ governments have "signed on" to Basel III, making them as much a part of the cause as anything else.

Labour's policies are aimed solely at populist, vote-garnering symptoms.

Symptoms that they are likely implicated in causing.

[Lanthanide]

Can I shorten that to this:
"So really all that remains to be argued against my position, is that a landlord is somehow doing someone a favour when they buy a house and rent it out to that same person who wanted to buy it, but couldn't quite afford the mortgage payments / deposit "
Conclusion B: The landlord is not offering a service if the tenant can't buy the house.

Nope, you can't shorten it to that, because you're missing out all the detail that actually matters.

Imagine a house goes up for auction. A potential owner-occupier offers $650,000 for it, because that is the maximum their deposit and bank lending allows them to offer. The landlord offers $660,000 for it, and wins, because they have sufficient capital to pay that much.

The landlord then rents the house to the potential buyer. The landlord has not done the potential buyer a service - they've simply used their assets and leverage to deprive the potential buyer the opportunity to buy the house.

No value has been added by the landlord.

I think you're arguing the landlord is not offering a service if the landlord is stopping the tenant from buying the same house?
I wonder how often that happens?
Maybe never or 1%?
All the remaining times the landlord is offering a service?

Person A is renting a house. Person B is living in their own house and wants to sell (downsizing etc). Person A makes an offer on person B's house, but is beaten out by a landlord, C, who buys the house for more than person A can offer. Person A is forced to keep renting in their house, and deprived of buying the house they wanted due to landlord C.

Landlord C is not providing a service to person A. The landlord rents the house out to person D, who would have been quite happy renting person A's house, had they moved out. Landlord C is thus also not providing any extra value to person D, who would have been happy to rent out person A's house, except for the actions of landlord C.

Thus, a landlord has bought a house, and not provided any additional value to person A (the alternative buyer) or person D (the person now renting it). All that happened is the landlord used their extra capital to rent-seek on a property, because they could. Note that I am not making a value judgement here - I am not saying the landlord is evil, or the landlord is a genius. I am saying the landlord is rent-seeking, and is not providing value to society as a whole as a result of their actions; they're engaging in a non-productive business. Probably the landlord is making the most rational investment decisions available to them - fine, I have no problem with that. But lets recognise what they're doing for what it is - rent-seeking behaviour, using their existing capital to deprive others of an asset, for their own personal enrichment.

Buying existing properties, and not improving them or doing anything differently than the alternative generic owner-occupier who would otherwise have bought that same existing property, is non-productive. In fact as I have mentioned in earlier posts, landlords often do less for their properties than an owner occupier would; owner occupiers are much more likely to install new insulation, redecorate, install more energy efficient heating or solar panels etc.

Favour?

As I see it, both the buyers and the banks are making business decisions.

I've snipped your quote. It seems rather off-topic to what we're discussing.

Capital requirements are increased for investment properties, because they are riskier assets - owner occupiers are much more intent on doing everything they can to save their own house, whereas investors will only do so much before they eventually cut their losses on a house when they get into financial difficulty.

I'm not quite sure why you're trying to argue that mortgages being more expensive for investors is somehow the reason house prices have gone up, because it suggests that investors have been buying a higher proportion of houses in the market than owner occupiers have, even though their mortgages cost more - so the benefit they get outweighs the extra cost. Which suggests, if we want owner occupiers in our country (and generally it's thought to be a good idea, for reasons such as creating a cohesive society where people have ownership in their community), then we need to bring in measures to dissuade people from buying investment properties, because whatever marginally extra cost they bear from their mortgages is clearly not enough to dissuade them. Which is hardly surprising, since a higher mortgage expense is either partly subsidised by the government if the property is running at a loss, or borne by the tenant if the property is running at a profit.

[Perry]

Labour has proposed a policy that will target landlords who run cashflow negative properties, who as I have established, are not productive businesses.

Was it that cut-and-dried? I.e. No time factor? Several examples were given of 'productive' businesses that were cashflow negative. Xero, Martin Jet Pack, RocketLab et al. Many other business types make losses initially. On that basis, are you alleging that any business that is negatively geared is non-productive?

[Lanthanide]

Was it that cut-and-dried? I.e. No time factor? Several examples were given of 'productive' businesses that were cashflow negative. Xero, Martin Jet Pack, RocketLab et al. Many other business types make losses initially. On that basis, are you alleging that any business that is negatively geared is non-productive?

No, I'm not arguing that at all. Read through the thread, my argument is very plainly and clearly set out.

[Perry]

Yes, I have read your arguments. I find a lack of consistently applied commercial criteria, with no real business reason why. LLs are in business and pay tax on their profits, claim deductions for their costs and some have losses instead of profits. Much the same as any and every other business type. Some even go broke. What seems to me to be an exercise in semantical chicanery does not change that.

The snipped quote you referred to must have been poorly expressed by me. What I intended to convey was that banks are keener to lend on residential property than commercial property and I adduced a cogent reason why.

[Don't believe the Hype]

An owner-occupier of the same property could have spent all of that money too. That is another element of why landlords are not doing anything productive - you're not doing things differently to the owner occupier who would own that same house.

In fact, you may even be spending LESS money into the economy than an owner occupier of the same house would. OO's like to redecorate, do landscaping, re-paint rooms and update the kitchen and bathrooms. Landlords do those things much less often, and often spend as little as possible when they do do it, so as to maximise their returns.

That's before you even take into account, that if the property is cashflow positive, you are charging your tenants more money than it would cost themselves to live there.

If the tenants are saving $30-40 per week because they're not lining YOUR bank account, they'll either save that money themselves, or spend it into the economy themselves - that's a coffee a day for a week, even with the very modest profit of $30-40 per week that's no longer going into your pocket.

now you're just making up a fantasy story.

I pay for services on these properties while every weekend I see hundreds of evil owner occupiers mowing their own lawns... or building their own fences with a few mates and a chilly bin full of beers.

by your logic, they're depriving some poor mower man and handyman of income, that could be spent on coffee down at the local cafe further driving the economy.

[eri]

Labour need to encourage saving

Probably tax breaks for term deposits so they return more than investment property

Of course less tax would mean smaller gov spending

Could labour live with that if it was for the greater good?

[Perry]

Could labour live with that if it was for the greater good?

No. Only if it was for Labour's good.

Of course less tax would mean smaller gov spending

The acidic irony of all this is that government can only spend on constituents what governments take from those constituents, in the first place.

Take National's budget. The unabashed and strident message is simple.

If you vote for us, then, of what we took from you in the first place, we'll give you back a Little more than Labour will.

[big fella]

http://www.gra.co.nz/articles-by-matthew-gilligan/labour-ringfence-losses

the attached written by Matthew Gilligan makes interesting reading and sense to me

[sidinz]

Lanthanide,
What is very clear from your posts on this thread is that, fundamentally, you don't understand property investment.

You do not know the difference between an investor and a speculator.

You do not understand that investors must pay sub-market prices to do well.

You do not understand that many Mum-and-Dad investors buy 1-2 rentals that will initially be negatively geared, knowing that they will be bringing in tasty returns by the time they retire.

You do not understand that being cashflow positive is NOT the same as costing less to hold than a FHB's mortgage would be.

You do not understand that a key tenet of property investing is to add value and that one of the main ways of doing that is to buy and renovate.


Almost all of your arguments are predicated upon fallacies and you don't listen when someone tries to point this out.

[Lanthanide]

Yes, I have read your arguments. I find a lack of consistently applied commercial criteria, with no real business reason why. LLs are in business and pay tax on their profits, claim deductions for their costs and some have losses instead of profits. Much the same as any and every other business type.

Nope, not the same as any other business type, because other businesses exist to productively serve society.

A supermarket is created to sell food to the public. If the owners of a supermarket do a bad job, by putting prices too high, not carrying the right stock or having bad customer experiences, they'll go out of business. The next business that takes over the same supermarket location may do a better job and turn a profit.

When a landlord goes out of business, the house still exists. It can be bought by another landlord - who might continue the same business. Or it could be bought by an owner-occupier, in which case the house ceases to be used for business purposes. No-one buys a failing supermarket in order to move into it and live in it themselves.

Fundamentally houses in this country exist to be owned by private individuals, not to be rented out. If we wanted to have a country full of renters, the government could own all the properties, or we could have laws and customs like in some European countries that have inter-generational leases. But that's not the culture of house ownership in New Zealand, and it never has been.

When a landlord buys a house and uses it as a business to enrich themselves, they are depriving someone else of living in that same house. No other type of business in the country does that.

What seems to me to be an exercise in semantical chicanery does not change that.

Once again, I am answering the question "why should landlords be treated differently than other businesses for ringfencing losses". My answer is that they aren't the same as other businesses.

Sticking your head in the ground and denying the obvious does not change that.

Here's the definition of rentseeking:

According to Adam Smith, individuals and businesses can earn income from three sources: profit, wages and rent. Generating profit usually requires risking capital in hopes of a return, while earning wages tends to be labor-intensive and requires hard work. Rent is the easiest and least risky type of income one can earn, as it requires only the ownership of resources and the ability to use those resources to generate income through lending their use to others. Because rent income necessitates less risk or work than other types of income, it follows logically that individuals and companies seek to earn this income whenever possible. Rent-seeking becomes a problem when entities engage in it to increase their share of the economic pie without increasing the size of the pie.

The snipped quote you referred to must have been poorly expressed by me. What I intended to convey was that banks are keener to lend on residential property than commercial property and I adduced a cogent reason why.

Yes, that's not at all what I took away from what you said.

It doesn't really change anything though, pointing out that the government had signed up to Basel III and it had bad consequences - I'm not qualified to comment on the implications of what they did, and I doubt you are either. But really our government is not in any position to turn down signing such an agreement, we're an insignificant economy at the bottom of the world, if we don't play by the rules that the big powers implement then we'll suffer the consequences.

I pay for services on these properties while every weekend I see hundreds of evil owner occupiers mowing their own lawns... or building their own fences with a few mates and a chilly bin full of beers.

Firstly, using emotive language such as "evil" isn't helpful.

]by your logic, they're depriving some poor mower man and handyman of income, that could be spent on coffee down at the local cafe further driving the economy.

This is a facile argument. When an owner occupier chooses to mow their own lawn instead of paying a gardener to do it, the money doesn't cease to exist. The homeowner will simply spend that money on something else instead.

Lanthanide,
What is very clear from your posts on this thread is that, fundamentally, you don't understand property investment.

Almost all of your arguments are predicated upon fallacies and you don't listen when someone tries to point this out.

Actually, until your post just now, no one in this thread has "tried to point [these fallacies] out".

You do not know the difference between an investor and a speculator.

Which isn't relevant to whether property investment is a productive business. I'm also not the one that made the laughable assertion that landlords don't care about capital gains.

You do not understand that investors must pay sub-market prices to do well.

Certainly I understand that. I am an investor of a cash-flow positive house myself.

You do not understand that many Mum-and-Dad investors buy 1-2 rentals that will initially be negatively geared, knowing that they will be bringing in tasty returns by the time they retire.

And under the new proposal, the losses from the first few years will be ring-fenced. They'll be able to use them to offset future taxes. Hopefully this will help to dampen the rampant house price inflation in this country, that has been greatly out-stripping wage growth.

You do not understand that being cashflow positive is NOT the same as costing less to hold than a FHB's mortgage would be.

No, I don't understand that. Can you please give a detailed example so that I might understand?

You do not understand that a key tenet of property investing is to add value and that one of the main ways of doing that is to buy and renovate.

I've already said in my replies above that building a new house is productive, and that renovation is generally productive, but in a bit of a grey area because that's historically a path that FHBs have used to get into the property ladder, so having landlords buy up all the houses, renovate them and take the gains for themselves isn't as clearly positive for the community at large as allowing FHBs to do the same (aka, distributing the profits into many peoples hands, instead of concentrating them into landlords).

[Bobsyouruncle]

See Sid he has one house himself, he is an expert........

[Lanthanide]

See Sid he has one house himself, he is an expert........

I'm not the one asserting other people don't "understand" things.

[Courham]

I've already said in my replies above that building a new house is productive, and that renovation is generally productive, but in a bit of a grey area because that's historically a path that FHBs have used to get into the property ladder, so having landlords buy up all the houses, renovate them and take the gains for themselves isn't as clearly positive for the community at large as allowing FHBs to do the same (aka, distributing the profits into many peoples hands, instead of concentrating them into landlords).

So you are more than happy for people to "flip" houses as long as it is FHB working their way up the property ladder, almost all of whom won't declare their profits and pay taxes on them but you do have an issue if it is investors/developers (who pay taxes on their profits) from doing so.

Many investors/developers buy run down houses and do them up thus improving the overall housing stock, houses many FHBs often wouldn't touch, which they then sell to owner/occupiers or other investors it is, an always has been, an important part of the property cycle and regeneration of housing stock.

Finally, I'd like to know when we ever had 100% owner occupier of housing which you seem to think is the only way things should be. Even at the height of gov't subsided initiatives to encourage owner occupiers we were about 74% and that was when we had the highest standard of living in the world but has been declining for the past 20-30 years or so, just like our overall standard of living. I wonder if the two are linked.

Craig

[Lanthanide]

So you are more than happy for people to "flip" houses as long as it is FHB working their way up the property ladder, almost all of whom won't declare their profits and pay taxes on them but you do have an issue if it is investors/developers (who pay taxes on their profits) from doing so.

I don't mind either way.

I'm explaining why landlords shouldn't be treated the same way as other businesses.

Many investors/developers buy run down houses and do them up thus improving the overall housing stock, houses many FHBs often wouldn't touch, which they then sell to owner/occupiers or other investors it is, an always has been, an important part of the property cycle and regeneration of housing stock.

Yip, and that's why I said it's a bit of a grey area - I acknowledge that there are houses that owner-occupiers wouldn't buy and do up, because they don't have the skills, time, money or vision for it. But similarly there are houses at the low end of the market that FHBs would love to buy, even if it meant doing them up, and they don't get the chance because a landlord with a big capital stack behind them can outbid them on the property any day of the week, helped along by the negative gearing that they have access to that owner-occupiers don't.

Finally, I'd like to know when we ever had 100% owner occupier of housing which you seem to think is the only way things should be.

Nope, I never said that at all. Read my previous posts, you'll see I acknowledge that there is a place in the market for rentals, for people who can't or don't want to buy their own houses.

My point is that in recent years, especially in Auckland, landlords have been locking an increasing portion of the population who would like to own their own homes, out of the market, and they're simply being non-productive rent-seekers in doing so. Overall it's bad for society.

We're a low-wage, low-productivity country with very high private debt. It's because too many people are investing in housing, which is unproductive - hence the high debt, low productivity and low wages. It's too hard / expensive for businesses to access capital in this country because of the way the playing field is tilted in favour of property.

Labour's policy is a step towards re-balancing investment away from rental properties, so I support it. TOP's policy is far better, and if they actually had a chance to get into Parliament, I'd vote for them.