Who's Got What Wrong?

[Perry]

I read most of the Stuff article, but not all. To me and my modest understanding, there is so much wrong with Geoff Simmons' diatribe.

Election 2020: Who'll gain from Labour's plan to tax the rich? The rich
11 Sep 2010

The real problem with our tax system is the different tax treatment of property compared with other investments. People with money in other forms of investments ? KiwiSaver, bank deposits and businesses ? pay some of the highest tax rates in the world on the returns from those investments. Meanwhile, property investments ? especially the family home ? pay some of the lowest taxes in the world.

Overlooking the bad semantic construction of that last sentence, I do not see how that is or can be true that income from PI is taxed differently to income from shares, term deposits, etc. (Ignoring the deceptive family home sophistry, too.)

This provides a massive incentive to speculate on property. That is why we put more of our money into property than any other country in the world. That means we put less into businesses (which actually create jobs and exports) than any other country. This is also one reason why we have some of the most unaffordable housing in the world.

Suddenly, the word speculate pops up. What? The put less into business, jobs, exports is just the usual empty rhetoric.

We have unaffordable housing for a wide variety of reason, not the least of which is the failure in NZ wage growth and increase in regulatory and compliance costs.

Increasing the top tax rate to 39c will make the problem worse. If someone is earning more than $180,000, they would now pay 39c in the dollar on dividends from shares, for example. Whereas they will pay no tax on the returns from owner-occupied property, and only half the returns from rental property. This is an even bigger incentive to pile into property investment.

Leaving aside the empty-headed nonsense about owner-occupied, how does anyone get a 50% reduction in tax rates on rental property income? Never mind that the 39% applies only to income over $180k.

As I see it, the item is one of the worst, most factually-inaccurate gutter-media opinions on this matter that the digital public has been STUFFed with, for quite a while.

Or have I missed something significant?

[Sanya]

The article by Geoff Simmons, a former Treasury economist, and leader of The Opportunities Party was so poorly written and so misleading that STUFF had to add the below addenda

* This article has been amended to recognise that property owners do currently pay some level of tax.

Yes, of course property owners pay some level of tax!

“Some” for the record is likely to be more than the effective no income tax that many kiwi households pay after taking into account Government transfers like working for families. Charts from the Tax Working Group show that about half of kiwi families are net recipients rather than payers under our tax system.

Increasing the top tax rate to 39c will make the problem worse. If someone is earning more than $180,000, they would now pay 39c in the dollar on dividends from shares, for example. Whereas they will pay no tax on the returns from owner-occupied property, and only half the returns from rental property. This is an even bigger incentive to pile into property investment.

Completely inaccurate because if "someone", lets say a property investor, earns a salary of more than $180,000 per annum then additional profits (income less expenses) from their rental investments will be taxed at the top rate of 39c in the dollar.

This is important because leveraged property investors determine house prices.

Nonsense. Roughly 65% of housing is owner occupied. An owner occupied house is not an investment is because its primary purpose is to provide shelter. But apparently the 33% of housing which is owned by “leveraged property investors” determines house prices?

I’m sorry Geoff but house prices are actually significantly shaped by supply and demand, like any other economic asset. With periods of rising demand and limited supply – as we have been experiencing in New Zealand – we will naturally see rising house prices and increasing rents.

[Perry]

"some" How's about the same tax rate as everyone else?

An econ-o-mist, eh?! Say no more. Clodditunities Party to the fore. They're welcome to him.

As for the STUFFed response, abysmally inadequate, given that the item remains replete with errors - IMO.

I'm surprised that Treasury recruited from Outer Moron-golia, too.

[McDuck]

Nonsense. Roughly 65% of housing is owner occupied. An owner occupied house is not an investment is because its primary purpose is to provide shelter. But apparently the 33% of housing which is owned by ?leveraged property investors? determines house prices?

I?m sorry Geoff but house prices are actually significantly shaped by supply and demand, like any other economic asset. With periods of rising demand and limited supply ? as we have been experiencing in New Zealand ? we will naturally see rising house prices and increasing rents.

huh?

Why look at the houses already in people's possession?

Wouldn't the prices be set by the houses in play at the moment?

Isn't the supply of credit the main factor at the moment?

[PC]

The commies are just wetting themselves about getting a CGT through.
It'll probably come next term. Probably brought in by National.
Then more rent controls will really be needed.

[Sanya]

huh?

Why look at the houses already in people's possession?

Wouldn't the prices be set by the houses in play at the moment?

Isn't the supply of credit the main factor at the moment?

Geoff grumbles that “property investments” – especially the family home – pay some of the lowest taxes in the world and that “leveraged property investors determine house prices.”

I’m merely pointing out that purchase intent for the majority of housing acquisitions is not investment but shelter. Shelter is a basic human need.

While there are many determinants to house pricing, supply of credit certainly being one – the Reserve Bank of NZ reckons that house prices are more affected by supply conditions / constraints. If supply is constrained, house prices will reflect scarcity.

[McDuck]

that ?leveraged property investors determine house prices.?

I?m merely pointing out that purchase intent for the majority of housing acquisitions is not investment but shelter.

Yes, I see your point.

But there may be an error in your reason?

Consider this.

At an auction, only the top bid matters.

Say you had 99 bidders that wanted a home, and only 1 bidder that wanted an investment.

If that top bidder was the investor, he would set the price.

From then on in, armed with a 0% interest line of credit.

The buyers of all the surrounding houses would be expected to match that figure.

[Sanya]

[...] Consider this.

At an auction, only the top bid matters.

Say you had 99 bidders that wanted a home, and only 1 bidder that wanted an investment.

If that top bidder was the investor, he would set the price.

From then on in, armed with a 0% interest line of credit.

The buyers of all the surrounding houses would be expected to match that figure.

Generally, a property investor has little emotional attachment to a property. It's a numbers game. The investor needs to achieve a certain investment return. The higher the purchase price, the poorer the return, therefore out of 99 bidders how likely is it that the top bidder is the investor?

Consider this to. Record low housing stock [1] creates scarcity which in turn creates increased competition which in turn drives the price upward. In its most recent report REINZ data showed that the national median house price increased by 16.4% year-on-year on July and REINZ noted that "Unless we see more listings come to the market before Christmas, we may start to see additional pressure on house prices and affordability." [2]



References

[1] https://www.landlords.co.nz/article/...-lows-round-nz
[2] https://www.landlords.co.nz/article/...ket-is-booming

[McDuck]

Generally, a property investor has little emotional attachment to a property. It's a numbers game. The investor needs to achieve a certain investment return. The higher the purchase price, the poorer the return, therefore out of 99 bidders how likely is it that the top bidder is the investor?

Now you're talking.

Let's be clear, I'm not saying that investors are the main cause of higher prices.
It's accepted that there are about five pull factors and two push factors.
The housing prices may even be an unintended effect of a totally different area of the economy.

I was just noting the error in assuming that:
60 % home buyers and 30% investors would mean that:
" investors could have only a 30% effect on prices".

In an auction situation, you actually only need TWO individuals (with deep pockets) to set a very high price.
And once that high price is reported, that sets higher expectations all over.

It's my personal experience that the prices are set by money coming from " another place" and that:
money " earned here" was competing with that.
( via credit ).

I guess, what's needed is a way to sync house production with local income.
As the present stop gap measure " credit" causes other problems, and feeds around and back in, to compound the initial issue.

That's from a long term perspective, not an individual wealth point of view.

[Anthonyacat]

Just wanted to speak up from the tax expert perspective.

Property is taxed no less than shares or direct business ownership, but significantly less than term deposits, which have no tax-free capital appreciation element.

In truth, residential property is taxed much more heavily than the other investments with a capital appreciation component, because of the bright line and subdivision laws. If you buy a business and sell it in 3 years, no tax on the gain in value of that business. And no tax if you decide to split it in half and sell the bits separately for more, either. With a residential property, both are caught.

... Maybe I will write a post on this one for my website.

If you really wanted to stop run away house price inflation, set a LVR cap of 30% (that is, deposit requirements of 70%). That aligns property with the way most banks treat share investments.

[donna]

The commies are just wetting themselves about getting a CGT through.
It'll probably come next term. Probably brought in by National.
Then more rent controls will really be needed.

We've already got the CGT and all Labour have to do is increase the threshold to catch more . I reckon they will up it from 5 years to 7 or even 10 and not long after the election

Great thread - and I can only assume STUFF were paid to publish that article given it's obvious inaccuracies etc.

cheers,

Donna

[donna]

Just wanted to speak up from the tax expert perspective.



... Maybe I will write a post on this one for my website.

Do that Antony and share the link here.

cheers,

Donna

[Anthonyacat]

Do that Antony and share the link here.

cheers,

Donna

Didnt even think to do that for the one I wrote last month. I dont tend to post self promo rubbish often except when responding to others' queries. Might do it now.

[Chris W]

Generally, a property investor has little emotional attachment to a property. It's a numbers game. The investor needs to achieve a certain investment return. The higher the purchase price, the poorer the return, therefore out of 99 bidders how likely is it that the top bidder is the investor?

Depends on the specifics of each property.

How likely is the top bidder a small property developer? (especially with respect to properties located in a highly desirable area on a large section of land) such as

i) a subdivider of the section and plans to add more dwellings?
ii) remove the existing dwelling and build a large number of new residential dwellings

If the property developer or property investor has some assumptions in their calculations that prove subsequently to be incorrect, they may subsequently find out that they may have overpaid for the investment property and actual returns are much lower than the expected return in their original calculation.

There are property investors / property traders who add value to the existing dwellings, and they may be willing to pay a higher price to purchase in expectation the increased value of the property after the renovations to the existing property are completed.

For example, how many property investors recently purchased property (pre COVID 19) in Queenstown using high levels of debt with the view of letting the property out in the Airbnb market? The underlying assumption was that the Airbnb market would continue unaffected and that prices and vacancies would remain relatively stable.

[Sanya]

Now you're talking.

Let's be clear, I'm not saying that investors are the main cause of higher prices.
It's accepted that there are about five pull factors and two push factors.
The housing prices may even be an unintended effect of a totally different area of the economy. [...]

That's cool McDuck.

The debate started because Geoff Simmons opined that "leveraged property investors determine house prices".

It seems we are in agreement that the determinants of house prices are broad and extend far beyond "leveraged property investors" and in fact "leveraged property investors" are incentivised to pay the lowest prices possible to acquire properties in order to meet investment return goals. Property investors are in search of yield.

Geoff is just extending the myth promoted by many low rent publications that property speculation is the cause of runaway house prices and poor housing affordability. This narrow focus is both lazy and careless.

In its Inquiry into Housing Affordability back in 2012, the Productivity Commission identified land scarcity, restrictive urban planning, and the time and costs associated with land development and construction as factors constraining the supply of new housing in New Zealand. My feeling is these observations are all still valid with some geographic variation.

You note "there are about five pull factors and two push factors" impact house pricing. I'd suggest there are a few more than that. I recently used the below model to explain to some interested friends how it is possible for house prices to markedly increase when the overall New Zealand economy is tanking.