Political meddling with property has never worked
It seems that it is an almost timeless belief of politicians that rapidly rising property values is a bad thing.
Those who own property, which in bygone days was the majority of the population, would disagree. This said sharply rising property values disenfranchise the poor and the young through stifling the human and understandable aspiration to own one's own home. The international measure of this is affordability, which is income per capita to average house cost. Thus politicians in past booms saw rising property prices in social terms, not economic.
In addition to other emotions, when property values rise, the owners feel richer and spend more liberally than when property values are declining, thus stimulating what economists now describe as the consumption-led recovery. In bygone booms a recovery, no matter how fuelled, was a good thing.
In bygone generations, a consumption-led recovery was a euphemism for spending a greater portion of one's income, not a description for a debt-fuelled consumption boom, and such recoveries were usually accompanied by what today would be considered excessive inflation.
The latest expansion has largely been fuelled with debt and its easy terms and availability. The ease with which credit has been made available is a response to an excessive supply of money on the back of a strong dollar, high relative interest rates and a massive flow of inbound capital to NZ's banking system which has been lent aggressively to NZ households.
Now politicians see rising property values in economic terms, being that it fuels domestic consumption, distorts the balance of payments, increases national debt and household debt and produces nothing of substance for the country, all bad things.
The first property boom in my experience was in the early 70s when big Norm's Labour government won a landslide victory sweeping out the long-term National government. It was a time of great hope and optimism. Gee, even as a 13 year old I was excited by the change.
The property market rose strongly and in 1974 the then finance minister, Bill Rowling, introduced a tax which aimed to slow the property market down: it was called Property Speculation Tax. In essence this was a tax on any gains on selling property within a set period of purchase.
This tax did alter behaviour, in that those who held real estate held on to it for the requisite period and were gratified to do so as the market rose even faster. Simple, really, with hindsight: if you want to reduce property prices, pretty dumb to compress supply. So the tax collected very little and property was an exceedingly rewarding investment in the growth in value during this time.
Of course the wealthy were completely unaffected as they simply sold property that they had owned for more than the requisite period and life went on, so in reality I suspect the tax had very little effect on the supply of property either.
The electoral consequence in 1975 was a landslide of equal magnitude, unprecedented in our electoral history, to National and Muldoon, without doubt the worst leader of our nation in my lifetime and who almost put me off National for life. Certainly the landslide was in part bad luck - popular Norm Kirk died in office in 1974, and they had to deal with an oil shock - but over time those parties who dick with property get dumped every time and quite quickly.
The seond interference in property was from Robert Muldoon in 1982. He too was dumped in 1984, and in came the Lange and Douglas government and on the back of Muldoon's muddling the country was literally near bankruptcy. We spent the next 15 years recovering and the last 10 regressing, such is the political and economic pendulum. This time, however, we have nothing left to sell to bail us out, so unless we learn some basic lessons soon it is terminal.
By the late 70s and early 80s, property was going mad again. I bought my first property in 1979 for $22k. I tried to buy the one next door in 1982 but couldn't get finance and the asking price was $55k. I finally bought it in 1985 for $106k - now that makes property growth today look benign. And this growth occurred despite the interference of Muldoon. In 1987 I bought yet another for $130k and in 1994 I bought the last at $265k. They were all the same, inner-city bungalows.
The desire for negative gearing and tax breaks was extreme in the early 80s: tax rates were 66 per cent on income, so negative gearing was exceedingly profitable. The tax base as a result was seriously eroding - sound familiar?
Muldoon's response? First, treat any activity that creates tax breaks differently from other activities; this was called the specified activity regime. Regardless of your actual losses you could only claim $10k a year from such activities and the rest had to be carried forward and offset against income from such activities, Sound familiar?
He also introduced in effect a capital gains tax through the interest clawback regime. This tax in effect said any gain on a property was taxable to the extent of interest deductions claimed by the taxpayer against rents.
And finally in an attempt to make rental activities uneconomic he imposed a rent, wage, price and interest rate freeze, as inflation was going mad.
Landlords got around it by dumping tenants out and moving family members in (an exemption) then moving the family out and increasing the rent. The finance industry got around the interest rate freeze at 11 per cent (the going rate was about 16 per cent) by charging up-front application fees, and life went on.
This said now guys like me did not have access to such finance and the equity requirements were not what they are today, but necessity is the mother of invention - where there is a will there is a way and life went on, just with more bullshit.
Property continued to inflate rapidly and continued to do so right through the late 80s, only stalling from 1989 to 1992. For a period, tax loss claiming was difficult, but again taxpayers modified their activity and divided up the deductions and changed their form. The interest clawback collected a little tax, but not much, and in 1984 Muldoon was gone in a landslide.
So our latest batch of thinkers have come up with very little that is new, and worse - with the exception of land tax, none of the other experiments with tax gains on property or limiting losses have worked to slow down the market or even raised much tax and nor did it rejig the economy into sharemarket investing.
John, if you want to slow property down, the most effective tool is to work out how to reduce the supply of debt money flowing into it; whatever you do with taxes, investors will adapt. I can already think of three ways to avoid a loss limitation; remember, some of us have seen this before.
* Next blog: back to how to fix company boards
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I wish the property investors would stop whining - they have been making loads of money and then selling on run down houses at inflated prices (a true doer upper - my ar$e) and then going on to buy more properties at entry level. As for the "we are providing a service" arguement - no your not, your making money, otherwise you would not be doing it! Tax the s**t out of them and leave the private home owners alone.
Bruce, I highly respect your opinions and enjoy reading your blogs. How do you propose to reduce this supply of debt in the housing market? From what I can see the only way young people can get into a first home is to either have a large inheritance or take on a large amount of debt, and by reducing the ability of younger people to get into first homes (likely with high debt) will this not further drive the division between rich and poor and enable older people to drive property higher and benefit at the expense of the younger generations?
I am certainly no expert and would love to hear what you have to say on this. Thanks!
As a "property investor"; I have one townhouse which I rent out which pays the mortgage, its bills and nothing much else, I would have to say that being taxed on it hardly seems fair. Being my first house, and this was a leaky home which I repaired out of my own back pocket - $40K later this house owes me - why should the government get money back from it when I am still trying to recoup my costs through anything left at the end of each year. The house itself is unlikely to rise in value so at the risk of sounding infantile - its just not fair!! Consider this maybe if it was anything over 10 homes when people are starting to make some serious money have some sort of tax then but 1 or 2 is purely money-grabbing
Further to Alan's comment in the Dompost this morning they noted that companies listed on the stock exchange will be one of the winners out of any package targetted against property investors as this would mean that investors would shift their money to the sharemarket. Really this is very basic - despite Mark Weldon's propaganda - companies listed on the stock exchange get nothing when an investor buys shares on the stock exchange - the money goes to the previous investor!
Bruce,
1. Not sure if Muldoons demise was down to tinkering with property tax - he was well past his use by date and most people were sick of his bullying antics.
2. There is a basic inequity of deductible expenditure and non assessable income that investors in property enjoy (as do all who enjoy investments that produce capital gains and deductible expenditure). Of course this will remain as it looks like John will only change depreciation rules around property.
3. With housing affordability at the bottom of the OECD (5-7 times income) we may find that our children choose to live elsewhere if they are faced with a life time of renting.
4. The power companies are left to sell
5. Wouldnt the non deductibility of interest (or at least ringfencing interest losses to rental income) lower the demand for debt
Anyway I am sure you will get plenty of support as the current regime has made the majority of our generation property investors
3.
I am a property investor and have no problem with ring-fencing losses from this activity. I have invested in property to fund my retirement because the government's tax policy up till now has made it madness not to! I also encourage the government to more vigorously pursue those who make quick "capital gains" (which are really taxable profits) and make them pay tax on them. I buy and hold.
Unless the government makes it supremely unattractive to have rental property investments, I will continue to invest in this area because it's an investment that I feel I have real control over.
I too am awaiting with great interest what John Key has to say today. It could make a big difference to my investing decisions in the future.
Why do they want to reduce property investment- about only 5% of Kiwis are in a position to finance thier retirement and property investment is a great vehicle. Reducing your mortgage thru monthly repayments is infact a form of saving as is gains in equity. What are the alternate investments? Shares -remember 1987 or maybe managed funds-how much has Kiwi saver lost already? Landlords provide housing- private sector or govt - state houses. In places like London and Amsterdam due to property taxes etc the rental accommodation such as in the LOndon Docks area or Historic Amsterdam has been returned to ownership flats and rental accommodation is now in large buildings like we see in 'The Bill' on TV or in Amsterdam the building that the 747 jet crashed into. Taxing landlords will have the longterm effect of lowering the quality of rental accommodation and creating slums. Especially if the perceived income is tagged to the Govt. bonds yield say 6% ... then property investors are far better to buy cheap houses with high yields rather than better quality expensive houses with low yields.
It will certainly be interesting to see what the NatACTs come up with.
Personally, I don't mind some sort of property speculation tax. The Rowling one you mention is clearly flawed.
I suggest investments in property are treated like any other investment.
If I put $100k in the bank and over time it turns into $200k, I get taxed on the profit (the extra $100k, right?)
Why can't property investments (and I would specifically exclude the place you live) be treated in the same way? When you sell, you subtract the purchase price and pay tax on the difference. Do people think that might work?
Also, I think you need to disallow the depreciation costs (3% is it?). By all means if you paint the rental property or spend money in some other way, THAT'S an expense and you can claim it. But the 3% is just money for jam.
Taxing when you sell means landlords may hold onto properties for a lot longer, perhaps causing a shortage, but I doubt it would change much. I suspect they'd hold onto it until they retired (which is what a lot of people do anyway) when they could pay a lower tax rate but it still broadens the tax base and gives some room to make the personal income tax rates lower overall.
Off topic, I am opposed to an increase in GST at the expense of a personal rate drop. While I'd be a lot better off personally, it is only going to increase the gap between rich and poor and - here I AM being selfish - the size of that gap is strongly linked to societal crime. I'm happy to pay more than my fair share of tax for this.
I would support, however, a gradual increase in fuel tax to be matched by a corresponding decrease in personal income tax at the low end. A tax free bracket at the bottom (Aussie has $6k, I think?) means everyone gets it. This helps the high-income earners like me (I bank it) but helps the low-income earners proportionally more as an extra $20 a week to them is a big deal.
This would discourage the use of carbon fuels (which, even if you don't believe they're linked to climate change, still cause significant pollution) and at the same time encourage people to go from not-working to working.
(And as the two would be matched, the Government gains the same revenue - it's just changing where it comes from.)
Thoughts?
Stifling the supply of money will simply do what it did to you in 82 Bruce - that is - increase price (i.e interest rates)went up -remember your 22% mortgage that you paid for your highly inflated property? The policy debate regarding the property market has been far too narrowly focussed around tax and supply of money. The policy debate needs to take into account a broader range of factors affecting supply and demand in regional economies and consideration given to what is contributing to those factors - a current example would be very strong net migration (primarily in Auckland) and low levels of construction (everywhere) - and defining a policy response which facilitates markets, primarily in labour and capital, being flexible enough to respond quickly to the conditions so that distortions or bubbles do not become prevalent. Similarly rather than banging "property investors" because they did the smart thing and took advantage of one set of silly (read distortionary) rules ( LAQC - depreciation) to avoid another set of silly (again read distortionary) rules (tax) I would have thought there was now an opportunity to reduce disparities and distortions across asset classes and pick up the lost tax through greater activity. Lets hope John Key does the right thing today then...
Well said, Bruce. Newspapers will continue to lose market share to bloggers since journalists who do not live and work in a field cannot compete with knowledgeable analysts in specialist areas.
Unfortunately most of the public will remain misinformed - in this case by the kind of nonsense on property the MSM has fed us from vested interests for the last couple of years.