House Prices

March 13th, 2008 at 3:17 pm by David Farrar

DPMC have published a very good report on house prices. I quote one section:

Like other businesses, a rental property investor can combine their net rental income with income from other sources. An investor’s total deductions for interest, rates, repairs and insurance may exceed the gross income from rent, creating a loss that can be applied to reduce the taxpayer’s liability on other sources of income. The value of this aspect of the tax system is directly related to marginal . Therefore, the increase in 2000 to a top marginal tax rate of 39% may have encouraged some additional investment in rental housing.

So Labour increasing the top marginal tax rate increased demand for investment properties, pushing house prices up. And one presumes that a reduction in marginal tax rates would make investment properties less desirable and lead to a drop (or less of an increase) in house prices.

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38 Responses to “House Prices”

  1. burt (8,275 comments) says:

    Around the time Labour were winning the hearts and minds of the tall poppy bashers with their policies of envy attack on common sense there were many warnings about a) The disparity between the company rate and the person tax rate(s) and b) the effect of having a wealth tax.

    Needless to say Labour knew better – I recall Dr. Cullen quoting 39% as moderate compared to the 48% top tax bracket the US had at that time. He never mentioned that at that time the US rate kicked in at $400K USD.

    Needless to say it’s no surprise that having a punish the rick pricks tax rate encourages ‘rich pricks’ to be creative in how they manage their tax structures. Increased investment in rental properties is only one of the unintended consequences.

    Hey Labour are not going to learn to listen to prudent advice when it clashes with their desire to win an election. Unfortunately we (the tax payers) just have to pick up the pieces.

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  2. burt (8,275 comments) says:

    Oh and on house affordability – compare the PM’s salary in 1999 with the average house price, then compare the PM’s salary in 2008 with the average house price. Given her 80% increase in her salary over that time it’s no surprise that there has been precious little action from the govt regarding housing affordability.

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  3. Gooner (995 comments) says:

    I don’t believe it.

    We should compare how many people earn over $60K with how many houses there are, or even how many changed hands between 2000 and 2008. The difference would be enormous.

    The analysis means these earners over $60K have been making the market. Markets don’t work like that, and I don’t accept it.

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  4. Rex Widerstrom (5,354 comments) says:

    You’re right, burt – the people making the policy (including the CEOs and multiple ‘policy analysts’ of various government departments) are too far removed from the reality of ordinary New Zealanders’ everyday lives to be able to understand the effects of their decisions.

    Only two things can fix this, however – the respective parties’ selection processes, and the state sector’s employment policies.

    People need to start noticing, and questioning, the diversity of background (or lack thereof) amongst the people the parties field at each election rather than just following the media’s lead and talking only about the leaders. How many of them, within the past decade, worked for a non-government wage or salary? How many ran a small business? Precious few. So how, then, can they claim to represent us when that’s precisely what the majority do (albeit that by the looks of the figures quored by DPF on another post today, the numbers of us not suckling at the government’s bloated teat are dwindling).

    When some of those people are in Parliament then perhaps they’ll force the public sector to look beyond fresh faced graduates with polsci or comms degrees but no real world experience (or very little), at people who’ve had a few years getting ahead in the real world and thus have figured out some practical solutions.

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  5. sean (397 comments) says:

    My sentiments similar to Gooner. DPF – while there may be some influence as a result I think a direct relation impact is overstated. The LAQC model similar to explained in the DPMC report also has the affect of the State being relied on less to provide accommodation.

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  6. burt (8,275 comments) says:

    Gooner

    The analysis means these earners over $60K have been making the market.

    I think it’s quite reasonable to expect people earning over the rich prick (1999 rich prick that is) level will be the ones who own multiple houses. If it’s people earning less than $60K that are buying up rental properties then we obviously don’t have a housing affordability problem.

    Dooh !

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  7. burt (8,275 comments) says:

    The answer is simple really. If you live in a house it shouldn’t attract capital gains when you sell it. (IE: It is your own personal home). If it’s an investment property it should have tax status like any other investment.

    It’s not hard to administer – if you have claimed tax deductions for money spent on a house then it’s an investment property.

    This stuff ain’t rocket science, it might not be popular but it will be fair – tax should be fair and lets be honest – tax is never popular.

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  8. Grendel (1,002 comments) says:

    as someone in the industry, one of the key things we do with people earning over 60K (though these days is 80+ before its truly economicly viable), is to see if we can get them into properrty. tax is their biggest expense and its also one of the ones they can reduce.

    if the top tax rate was gone, we would see a massive drop in needing to get people into property. now as rents caught up, we would see more people go back into becuase the returns would be higher, but there would not be the push there has been for the past few years.

    is it a total linear relationship? doubtful, but has the top rate played a massive part in housing price rises due to investors, i say absolutely yes.

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  9. dc (144 comments) says:

    Westpac economist Brendan O’Donovan estimates that the higher tax rate added 20% to house prices, purely because it increased the justification for negative gearing. Working for Families probably made it worse too. See here for a graph showing how many people have arranged their tax affairs to get just under $60k income.

    It’s not just that the higher rate was introduced at all, but that it turned out to be so easy to avoid just by investing in houses. This, together with immigration at a rate higher than our housing industry bound by restrictive RMA and councils could supply housing for, made the effects of the global credit boom and house price boom much worse in New Zealand.

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  10. PhilBest (5,125 comments) says:

    Could some apologist for the socialists attempt to explain here why it is OK for a single guy trying to save up for his own home, to have been SO COMPREHENSIVELY SCREWED by the economic results of socialist mismanagement PLUS the actual taxation and fiscal policy itself, over the last few years?

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  11. RossK (275 comments) says:

    Good call Phil Best!

    It is a curious thing – the government administers an economy where a single guy or a childless couple struggle to attain the financial platform to feel comfortable about making the move to the next level, (single to home ownership / couplehood, couple to family) and then tries to ameliorate that, not by reducing the tax burden, but by putting in place subsidies that kick in once you get there. Sort of like forcing you to take a leap of faith. Can’t afford a family and one of the couple being out of work for a bit on your salary? The answer – we will not reduce taxes, instead we will create the WFF / family support subsidy. Housing too expensive – we don’t plan on doing anything about that but we might give a one off first home buyers grant.

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  12. Short Shriveled and Slightly to the Left (786 comments) says:

    What Burt said

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  13. side show bob (3,660 comments) says:

    Thanks guys I have learnt something tonight, I always believed the the tax take on any Kiwi peasant was about 60 to 70 cents in a dollar, imagine my relief to find it was only 39 cents in a dollar. Can any of you brainy buggers tell me where the rest has gone as my wallet is still shrinking.

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  14. Tauhei Notts (1,724 comments) says:

    I think it is only tax accountants like me who fully understand just how horribly stupid the 39% marginal tax rate is. Once the top rate got above 33% people reverted to stupid 1983 – 1985 investment decisions – do anything to avoid that terrible impost.

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  15. SPC (5,643 comments) says:

    There are three factors

    1. net immigration from 2001/2002 (including expats after 9/11 who had cash)
    2. global cheap credit from 2001/2002
    3. people noticing the above, while LACQ existed, when we had no capital gains tax, and when tax on interest income (returns were falling as well) was at 33 or 39 cents.

    One answer is to reduce tax on interest income (allow people to sell property and move into cash) – this by

    1. indexing the cash deposit to the CPI (c2-3%) and calling this an untaxable return to maintain the real value of the investment.
    2. having one witholding rate for interest income taxation (20%).

    Improving the returns on this saving might even reduce the OCR (thus reduce the dollar and improve export returns and also lower business borrowing costs).

    Thus I would do this before reducing the top tax rate.

    I fear however that government has been captured by the investment industry into policy solely focused on encouraging us to invest through fund managers and this policy, which would help correct the high OCR/dollar problem, will be ignored. They would appear to be a continuously increasing private sector bureaucrat sector under either party.

    It’s all very well to join the global investment fund bubble (but like 1987 and with finance companies of late there are no guarantees to individual investors), but given how much we borrow offshore to finance our housing etc, its not sustainable. There is no balance to it.

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  16. burt (8,275 comments) says:

    dc

    The Gareth Morgan graph is very telling. Furthermore it’s based on 2004 figures, imagine what it must look like now!

    SPC

    Removing the tax on interest is giving unfair treatment to interest earned, and as earning interest is an activity that many do to earn income it would become a further distortion unless you clearly specified saving vehicles and/or term deposits type structures as being tax exempt. Compliance nightmare. Would be much more simple to have the same tax rate across business, interest earned and personal income. Far too simple for many on the left, they assume it’s inequitable and forget that their ideology deals with that via welfare – still they bleat it’s unfair to have flat taxation in the same sentence as defending WFF which is rebating ‘unfairly’ extracted taxation.

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  17. burt (8,275 comments) says:

    I would like to put a challenge out to all people who have the ability to manipulate their income for taxation purposes. This year, before 31 Mar 2008… (or whenever you own balance date is – if it hasn’t already passed) pay yourself over $60K. It need not be a lot, $65K is sufficient.

    This way when the 2008 statistics finally come in (hopefully not under a Labour govt but who knows) they will be an utter embarrassment to Labour. Imagine the shame if 30% of the tax payers are paying the top 5% tax rate.

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  18. Anthony (796 comments) says:

    The home ownership rate has dropped to its lowest rate since the 1950s yet someone still owns all the houses. It is middle aged, middle class people who have become landlords and paid high prices for properties to rent.

    As the report says, the reason is the tax breaks – both the reduction in tax from the tax loss able to be made and the tax free capital gains at the end. Otherwise, there is no way the economics would stack up. If the demand was just from immigration then the home ownership rate wouldn’t have dropped. And remember that rents have risen only at about the rate of inflation so they are no great incentive for landlords.

    Of course people have got carried away and now some will make capital losses instead of capital gains.

    All this was so predictable, yet the government sat by and did nothing to fix the distortions. And self serving tax experts like John Shoe-in have kept trying to say that there are no distortions.

    What’s more, a whole industry of dodgy characters selling the idea of getting wealthy from real estate has developed. This is now starting to fall over with likes of Blue Chip Investments going belly up.

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  19. SPC (5,643 comments) says:

    burt

    I don’t agree – those saving in deposits are discriminated against because even the return which merely compensates them for inflation is being taxed – yet they receive no actual income from the investment until the CPI return is reached.

    Many are actually charged more in fees than they earn in interest and they still pay tax!

    Property offers the capital rise – usually greater than inflation because of population growth and growing land scarcity as well as rental (which is an investment which comes off borrowed money, not saved money).

    Thus until this discrepancy is accounted for, the West will continue to rely on world savings elsewhere, while we save inside boom and bust asset bubbles.

    Is there a problem with compliancy? are you sure?

    So you prefer a 30% company and income tax rate – regardless of the impact on the productive sector of the economy – continuing high OCR and dollar and high borrowing costs for business.

    And once again a 30% tax rate on interest income – under the current taxation regime still discourages us from saving and leaves us dependent on borrowing from overseas to buy our property and capital gains free gains from property will continue … (if anyone can get National to bring in capital gains tax on property – with a 30% top rate of tax, guess what, it will only apply on houses bought after it came in and thus will not reduce the existing over-valuation or windfall profits tax the rising value profits achieved during the boom).

    PS

    1. The RB is already looking at a standard 2% deduction from interest income before tax accrues (such could apply in place of a fluctuating from period to period CPI). A 20% (one off and final) witholding tax on the rest of interest income is simple enough.

    2. I am sympathetic to a capital gains tax on rental property, but wary of the impact of 2006-7 home buyers and also on those paying for rent and or the accomadation supplement. I am also a little wondrous of how we have allowed people to develop a business of being a property investor simply by “borrowing” money for rentals. IMO the direction of incentives should exist for the purpose of expanding housing supply, encouraging more new homes.

    The rental property regime seems to have been a deliberate policy of National to increase private supply of housing (reduce investment in state housing) and in Labour’s hands a way of subsidising rents (reducing Accomadation Supplement costs), but a convergence of net migration, cheap global credit (a provincial dairy boom an employment recovery etc) has made it look a little tacky (enriching a few). Both parties are now deep in a hole, as any policy change will be a factor in house pricing and house pricing impact caused too obviously by their policy can be dangerous when electioneering.

    What should they do – a 20% capital gains tax on rental property bought since ….. brought in overnight, then no one would be able to sell housing and collapse the market before it was introduced. The money raised used as an insurance fund to either help “victims of this period” or get people into homes. Basically a windfall profits tax redistributed to those in need. As it is only at 20%, investors will still clear good profits when they sell. This somewhat distinct from the existing regime operating for businesses.

    There being an exemption from this capital gains tax, if the house is sold to a first home buyer. This would cut home prices c10% for first home buyers (in any phase in the market).

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  20. calendar girl (1,242 comments) says:

    “If it’s an investment property it should have tax status like any other investment. It’s not hard to administer – if you have claimed tax deductions for money spent on a house then it’s an investment property.”

    In adopting that course, should we first examine the possible distortionary effects in both the tax base and the wider economy? For example, on the basis of the above proposals, if you’ve claimed interest costs or depreciation on plant or buildings in establishing a successful business (including a farm), are there any widespread “unintended consequences” of a capital gains tax that would be imposed on eventual sale?

    There’s room for caution, too, when all discussion revolves around a simple presumption of investment properties enjoying capital appreciation. The real world is not always like that. Suppose over the next five years a lot of residential investment properties (not owner-occupied) sell at a capital loss. That’s a prospect for new amateur investors of the last few years. So their short ownership periods have given them tax benefits that some people are complaining of now, yet (under the proposals above) they will also be able to claim capital losses on exiting to offset against other personal income. Is that the intention, or does it need some more thought? What could be the impact on the tax base over the next five years?

    I’m also not convinced about preferential tax treatment for passive interest income. The economy needs more investment in productive activities – businesses – rather than in interest-bearing bank term deposits or finance company debentures. It runs against the grain to target tax advantages towards interest streams, as opposed to dividends earned from risk businesses involved in manufacturing, primary production, exporting or tourism, for example.

    In my perspective, there are no simple answers for what are fairly complex issues. It’s hard to escape the feeling, though, that many of the current property investment distortions come from high direct personal tax rates (encouraging effort to minimise tax burdens) and from artificially high interest rates (Reserve Bank too slow and too timid in the early phase of the boom cycle).

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  21. burt (8,275 comments) says:

    SPC

    So you prefer a 30% company and income tax rate

    Who said anything about 30% ? 30% taxation is way too high – for anything. No govt can justify taking almost a third of a persons or business income from them.

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  22. SPC (5,643 comments) says:

    calendar girl

    Is there not “capital gains taxation” already in the “taxation” of the rental property business profits? Capital gains taxation, of itself, only really impacts on the truly “amateur” investors (investing their savings for at last some of the cost of the property) and for them a lower tax – say 20% is more appropriate. As to capital losses, amateurs cannot claim them. The property businesses can simply fail to make a profit whether there is a capital gains tax for amateurs or not. Thus if dome properly capital gains taxation should have no adverse consequences for tax revenue.

    In so far as passive interest saving is concerned, ending discrimination against this form of saving is a necessity if we are to restore some balance to our economy (Europe has the 20% rate VAT, ours is a too low 12.5%) in terms of gaining greater saving and less consumption. Our too high OCR is always a factor later in the growth cycle because of this – as our BOP deficits, from rising borrowing costs and consumption, get too high to be sustained (a problem of the entire western world because of dependence on foreign saving). This is not a fault of the earlier RB policy decisions this time (they were overwhelmed by the global credit binge, which meant we attracted plenty of cash – so higher rates would not have prevented house prices rising from property investment and people feeling wealthy). As I see it, we cannot realise the necesssary active investment in production until we get the OCR and dollar lower (this to establish an expectation of competiveness in the global economy and some surety to making profits, only this will encourage reinvestment – and via lower interest rates make it possible for business to use the money we borrow, rather than those who buy up existing housing) and this can only come from first getting the passive savings and consumption patterns into better balance (otherwise we will be dependent on government to make the saving and contribute to investment through R and D breaks and subsidy). This through either a higher GST at 20% and or a lower tax regime on passive saving. The latter is easier politically and with a budget surplus also affordable.

    Most preferable would be wider tax reform from government, rather than tax cuts, but our politicians seem too lacking in vision.

    The ideal would be 20% GST (with zero rating for food and power – with tax on power moving to carbon rating – which makes it politically acceptable – which is why this happens overseas, because the economic gains outweigh the compliancy costs) and 20% tax on (after CPI adjusted) interest income, with a 20% capital gains tax (not payable when a first home buyer buys the property). This should allow some reform of the income tax thresholds. My preference then would be a 33 cents top rate, no income tax on the first $10,000 (helps the lower waged onto Kiwi Saver), then 20 cents and 30 cerns rates where possible -allowing for some continuing surplus for the NZSF-CF (and also annual dividends at the peak of the economic cycle, if investment in infrastructure is not required).

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  23. PhilBest (5,125 comments) says:

    SPC Add karma Subtract karma +0 Says:
    March 13th, 2008 at 10:48 pm

    “There are three factors

    1. net immigration from 2001/2002 (including expats after 9/11 who had cash)
    2. global cheap credit from 2001/2002
    3. people noticing the above, while LACQ existed, when we had no capital gains tax, and when tax on interest income (returns were falling as well) was at 33 or 39 cents. ”

    Oh and RESTRICTIONS ON THE SUPPLY OF LAND, don’t have ANY EFFECT?

    Remember 3rd form economics? Supply and demand? Or was that only taught back in my day, have the Marxists taken over the curriculum to the extent that supply and demand isn’t taught in economics any more?

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  24. calendar girl (1,242 comments) says:

    SPC – “As to capital losses, amateurs cannot claim them.”

    That’s right, at present, but they would qualify under your proposal if they had made any claims for expenditure on their investment properties – interest, R&M, insurance, depreciation, rates, etc – all normal investment expenses. Then the system would have to cope with the tax treatment of capital losses, not simply dismiss it as of no consequence.

    I agree with you that there’s room for genuine tax reform on a broad front. But as a starting point it requires a set of coherent principles rather than a smorgasbord of ad hoc tweaking manoeuvres. Otherwise we will simply open pandora’s box of further tax minimisation schemes.

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  25. Waymad (136 comments) says:

    Oh, SPC, people with brains the size of planets, struggle over this stuff.

    Variable GST = high admin costs. Ask an Aussie in the food business
    Variable GST = Perverse Incentive to re-describe goods and services. Ask an NZ’er in business who remembers the ’70’s.

    The CGT, LAQC loss ring-fencing etc possibility was comprehensively canvassed in a series of articles in the NZ biz press last year sometime. By competent writers with deep backgrounds in the biz. They didn’t come out with a clear winner, and there was a lot of collateral damage with some options.

    Tax redesign is happening as we speak, and will be in the May Budget. Theorising now is just electron torture.

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  26. SPC (5,643 comments) says:

    Phil Best

    “Oh and RESTRICTIONS ON THE SUPPLY OF LAND, don’t have ANY EFFECT? Remember 3rd form economics? Supply and demand? Or was that only taught back in my day, have the Marxists taken over the curriculum to the extent that supply and demand isn’t taught in economics any more?”

    What school taught/teaches economics in the third form?

    What new restriction of land occured between 2002 and 2006 (but not 1999-2002) and what changed so that price fell in some regions in 2007-8?

    Land supply restriction, as a significant factor in a temporary abrupt house price increase across a country in a short period of time is unusual, its impact is more in the medium term in meeting rising demand for new housing (one can still subdivide in the short-term and this occurs when land price rises).

    SPC As to capital losses, amateurs cannot claim them.

    “That’s right, at present, but they would qualify under your proposal if they had made any claims for expenditure on their investment properties – interest, R&M, insurance, depreciation, rates, etc – all normal investment expenses. Then the system would have to cope with the tax treatment of capital losses, not simply dismiss it as of no consequence.”

    That idea was from burt, not me.

    “I agree with you that there’s room for genuine tax reform on a broad front. But as a starting point it requires a set of coherent principles rather than a smorgasbord of ad hoc tweaking manoeuvres. Otherwise we will simply open pandora’s box of further tax minimisation schemes.”

    The difference is that some people see an ideology as guiding their “coherent principles” and impune deviation as ad hoc and unprincipled …. Actually reduction in tax on interest income, is a tax minimisation scheme … the pandora’s box is actually premised on economic policy being applied elsewhere, but deviated from here by people who think they know better.

    The only reason we do not have capital gains tax was/is because Roger Douglas initially preferred an assets tax and by the time he realised he was wrong he was focusing on a flat tax …

    waymad

    I am aware that sector interest (compliancy issues) influences government, but the fact is governments introduce variable rate GST if they feel they cannot ignore the public. Variable rate GST is popular overseas and its probably essential here if we are to increase GST to 20%. IMO the public/economic interest in a better savings regime/consumption balance outweighs the problems. Especially when carbon taxing power source should replace GST on powern (this will reduce business cost and thus mitigate the Kyoto factor).

    “The CGT, LAQC loss ring-fencing etc possibility was comprehensively canvassed in a series of articles in the NZ biz press last year sometime. By competent writers with deep backgrounds in the biz. They didn’t come out with a clear winner, and there was a lot of collateral damage with some options.”

    Sure, most of the ideas have been around for years *** – a surcharge on mortgages to reduce the OCR, a CPI deducation off cash deposits before assessing interest income for tax purposes (also reduces the OCR) etc

    “Tax redesign is happening as we speak, and will be in the May Budget. Theorising now is just electron torture”

    Yeah sure, our experts have delivered the best government design and best economic policy in the OECD. Our productivity since the 1960’s speaks for itself.

    Cynical SPC (***I suggested them years and years ago, shortly after the current lot arrived in 1999).

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  27. calendar girl (1,242 comments) says:

    My apologies, SPC. The capital gains proposal was indeed from Burt, not you.

    But please don’t try to convince me that variable rate GST / VAT is popular overseas. It’s simply not. Most economies in hindsight would gladly adopt a non-variable rate tomorrow if they were not locked into populist variations conceded decades ago, and now too politically challenging to unwind.

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  28. SPC (5,643 comments) says:

    calendar girl

    I use the term popular overseas in reference to public support for no GST/VAT on items such as food etc. When you say these exemptions are not popular overseas you mean …? You acknowledge its politically difficult for governments to do things their public opposes … And exactly what do you mean by their “economies” (having an opinion) supporting a universal rate of consumption tax… . I surmise you mean those who think they know best what is right for the economy and just have a problem convincing the majority of the people to accept this … . IMO the compliance cost problems are outweighed by the advantage of a higher rate consumption tax (politically impossible if it includes food) and this advantage is enjoyed by their economies. So maybe listening to the people and governing as a democracy, rather than imposing pure economic systems loved by some of the business sector and the great minds amongst the technocrats, can result in a better economy … .

    We take a lot of pride in our GST system design and the RB Act, but we have problems in this area – our savings and consumption regime is flawed and the too high OCR and dollar are stifling economic growth.

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  29. calendar girl (1,242 comments) says:

    Sorry, SPC, count me out on variable rate GST. I’m an ardent democrat, but I don’t look to popular referenda for micro-management of the national economy.

    Food happens to be your personal preference for preferential GST levels. Others will point to education, electricity, healthcare, books, “first home” housing, “basic clothing”, domestic tourism by overseas visitors, or any number of equally meritorious claims. An elected government is there to balance those conflicting claims and all the related vested interests.

    But good luck with your share of the GST-free caviar, truffles, fois gras and chocolate-covered strawberries.

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  30. Owen McShane (1,226 comments) says:

    While I agree that the Labour Government’s Tax regime has been a disaster for the reasons so many have outlined here one cannot conclude that changing the tax rules (and especially introducing a wider ranging capital gains tax) will have any significant impact on the cost of housing. Taxation regimes are only important if excess profits can be made by rent seekers and the like. In a lightly regulated land and housing market the gains are due to overall investment in the economy and the CPI and are equally distributed.
    The US experience makes the point well, because in the US states the tax regimes are essentially the same as are the interest rates.
    And yet the experience of home owners in different states has been dramatic. Those states where housing is severely unaffordable, all have Smart Growth or similar restraints on the supply of land. NOne of the states where housing is affordable have such restraints.
    And yet all states have the same tax and interest rates. Similarly, the build rate (houses built per thousand) is directly correlated to the number of planners (planners per thousand) in the markets surveyed by Demographia.
    There are reasons to have a 30/30/30 tax rate housing affordability is not one of them.
    And capital gains taxes need careful assessment -otherwise they have a negative impact on the overall quality of the housing stock.
    None of this should come as a surprise. I wrote a report for the Reserve Bank in 1996 predicting all this – and capital gains taxes did not figure then. Here is my concluding paragraph to the executive summary.

    “The hoped-for increased efficiency from the flexibility and light handed approach of the Resource Management Act has not been realised in practice in the local authorities studied in the Auckland Region. The increase in costs to both applicants and to ratepayers has far outstripped the increase in the CPI. Papakura demonstrates that the implementation of the RMA need not necessarily lead to massive increases in charges to applicants or to ratepayers and that it is possible to run a local authority without rates increasing faster than the CPI.
    The case study stories on which these findings are based are now common parlance in the industry and builders and landowners are becoming increasingly conscious of the high costs of development, especially if new subdivision is involved. These extra costs, often referred to as ‘the hassle factor’, are now being built in to the prices set for existing housing, and are likely to prove a significant deterrent to those who might otherwise be prepared to build a new dwelling, or to create a new subdivision.
    Unless changes are made, the shortage of residential land in Auckland seems set to continue and new housing prices will continue to escalate, with a consequent impact on the CPI and monetary policy.”

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  31. calendar girl (1,242 comments) says:

    Thanks for that insight, Owen McS. I don’t pretend to have any such depth of understanding, even of that one aspect of the issue. But what you say tends to reinforce my own innate caution about trying to “fix” one perceived problem in the economy by artificial means like readjusting entrenched tax rules at the stroke of a pen.

    Overall, markets tend to be best at providing balancing factors over time, except – as in your example – when governments ride in professing to “protect the public good”.

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  32. PhilBest (5,125 comments) says:

    SPC:

    “What new restriction of land occured between 2002 and 2006 (but not 1999-2002) and what changed so that price fell in some regions in 2007-8?”

    It is not necessary for NEW RESTRICTIONS of land to happen, just for not enough land to be freed up in the face of demand, under EXISTING restrictions.

    The prices EVERYWHERE would drop even MORE than they are forecasted to IF LAND WAS FREED UP, and some of us who’d like to buy our first home might be able to do it with 12 years earnings, not 18……..

    But the socialists LOVE to SCREW anyone of sufficiently independent mind to ACTUALLY WANT TO OWN THEIR OWN HOME – the FIIIIILTHY BOURGEOISE, SHOCK, HORROR!!!!!!!

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  33. SPC (5,643 comments) says:

    calendar girl

    I referred to both food AND power as local spending on necessities, taking GST off power depending on the scale of the zero rate would compensate for the carbon charging regime (in fact allow a higher rate and thus one with more impact without costing users more). Taking it off food would mitigate the rising cost of dairy products and soon meat). The higher 20% rate on other items would assist in lowering the trade deficit.

    It would with a zero tax rate at low incomes allow a wider Kiwi Saver take up (this is a way of saving for a first home) and personal savings (lower tax on interest income) which should improve home affordability.

    This with measures to reduce new home building costs and encourage investment property owners to sell to first home buyers, this is about the only way to return to former home ownership levels.

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  34. SPC (5,643 comments) says:

    Phil Best

    Ignoring the fact that new home building in response to demand occurs in response to (rising demand creating shortages and) the rising values resulting from these shortages and not before this occurs … .

    And its not just an issue of building new homes if first home buyers cannot afford them. With the best will in the world in making more and more land available – keeping land values down, the problem would still be the cost of building new homes on this land. And the more new land which is freed up, the higher the cost of building a new home would be (we have a builder shortage). Some say we need to prefabricate more and that we have low productivity in this area …

    That said, was the rising value of homes caused by a shortage of homes or rising demand for investment property fueled by cheap 100% loans and LACQ?

    The question now is how many landlords will sell itno a declining market (for whatever capital gain is still there) and how many will increase rents to over the higher interest costs (so they can hold the property as an investment).

    If the market was a bubble fueled by speculation and easy credit then we should soon know (there is of course a possibly incidental end to net migration which could exacerbate it all – some immigrants brought the capital to buy up homes and some people moving to Oz are selling them also).

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  35. SPC (5,643 comments) says:

    Owen McShane

    Yes the increasing cost of building on subdivision land deterred new housing on this land – that is until the land values rose to such a level that it became viable despite the building cost/shortage of builders and RMA compliancy both. A lot of people on some larger sections must have been able to use their surplus land to secure loans for the new homes that gave acceptable property developer profits (oh those lucky enough to sell into the 2007 market) and of course a lot of jealous neighbours who had homes built in the wrong place on the section.

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  36. calendar girl (1,242 comments) says:

    ” ….. going to look at ….. ” (and your link doesn’t work).

    Nobody’s talking about “system purity” for its own sake. The debate is about deadweight costs on an economy.

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