Recent Comments

Follow us on Twitter

Housing Affordability – What matters more: The physical or financial?

This is the first of a series of guest posts from reader Lucy JH looking at housing affordability

The title of this blog-post might sound like a Cleo article about finding the perfect man, but actually it’s about housing affordability in Auckland. I know, a lot less interesting but still important…

The other night I went to an Auckland Conversation public meeting which involved three economists discussing housing affordability in Auckland. Shamubeel Eaqub (from NZIER), Dominick Stephens (Westpac) and Arthur Grimes (Motu Economic and Public Policy).

In particular, I was interested to hear their views on the government’s recent policy announcements around housing affordability. While they didn’t discuss these policies directly too much, they did talk a lot about what causes increases in house prices. This is obviously quite relevant as if you don’t understand what makes house prices go up you are not likely to have much luck reducing them.

Arthur Grimes presented a model, drawing on NZ data from the last 30 years, in which he argued there are two key kinds of factors that influence house prices: Physical and financial.

Physical factors relate basically to supply and demand. So they include things like:

  • Number of houses currently existing and being built in an area each year
  • Number of people living in and moving into an area
  • The cost of construction materials and labour
  • Availability of land and the price of land (which are often pretty closely tied together)

Minimum parking requirements and minimum lot sizes both fall into this category because even though they themselves are regulations they still impact on the number of houses available in an area.

Financial factors, on the other hand, include things like the:

  • Tax system. This encompasses:
    • the lack of a capital gains tax in New Zealand
    • the fact that until recently landlords could claim depreciation on buildings at 3% a year
    • landlords could also use their rentals as LACQs, which meant they got a personal tax rebate if they spent more on their mortgage than they collected in rent
  • Inflation (high inflation makes investing in property attractive and vice versa)
  • The ways that banks lend money. As this article explains, right now banks in New Zealand tend to treat mortgages much more favourably than other types of lending, requiring just 5% deposit
  • Interest rates (when they go lower, buying houses becomes more attractive)

After Arthur presented this model there was some debate among the economists about what matters more: The physical or financial?

Dominick Stephens pointed out that the really big spike in property prices in NZ happened in the period from 2002-2007. During this period house prices rose about 100% everywhere in the country, even in areas like Dunedin and Invercargill, which had extremely low population growth and lots of available land during those 5 years. This suggests the increase probably wasn’t caused by physical factors.

This is not to say that physical factors don’t also have some impact. For example, all the economists agreed that house prices are going up in Auckland right now partly because the rate at which we were
building houses dropped dramatically in 2006 and partly because we had a big influx of people from Christchurch after the earthquakes.

But many economic commentators believe that financial factors are having more impact on house prices than physical factors.

Dominick Stephens argued that, if this is true, then the government’s recent policy announcement isn’t likely to actually have much impact on house prices. That is because it is mainly focused on changing
physical factors relating to housing costs (such as availability of land) rather than financial factors.

I think he’s probably right. Obviously, a really dramatic change to physical factors would change house prices. For example, if the council got rid of all minimum parking requirements or the government built
say 30,000 affordable houses in New Zealand over the next 5 years, then we’d probably see houses prices either stay at the same level or possibly even drop relative to inflation.

But unless we tackle the financial factors as well, we’re probably not going to stop house prices in NZ climbing in the long term. The government made a good start on that in 2011, when they removed the
ability for landlords to claim depreciation or use LACQs. But more has to be done.

What do you think – what matters more? The physical or financial? And what are the solutions?

72 comments to Housing Affordability – What matters more: The physical or financial?

  • This is something that is consistently missed, especially by the media who perennially wheel out “housing affordability” as an easy hot-button issue without any real analysis into the causes.

    One factor not mentioned in your list above, is the effect of financial benefits for first home buyers, such as the first home subsidy. In the absence of a capital gains tax and cheap money, the only impact of a subsidy for first home buyers is to drive up the average house price by the amount of the subsidy. It drives speculation by investors who know that “free” money is going to enter the market and inevitably sets the bar even higher still, driving further well-meaning initiatives that further increase property prices.

    It would be funny, if it wasn’t so depressing. Everyone knows that CGT really is the magic bullet. And yet, we’re so geared up that we (well, the vocal upper-middle classes) have got too much to lose in the short term to actually implement it.

    • Brendan

      Can you explain more how CGT is the magic bullet? Are there examples where it has worked and hasn’t worked to improving housing affordability in other similar countries, eg Australia, UK, Canada, USA, Ireland? Should personal home be exempted, wont it encourage over capitalisation in personal property if it is exempt, wont it hurt low income families if it isn’t exempt.

      Would Gareth Morgan’s CCT(comprehensive capital tax from Big Kahuna) be even better?

      • The only other financial mechanism we have to move house prices is interest rates. But if we lower interest rates to promote economic growth, we make speculative property even more attractive, and if we raise interest rates we suppress economic growth. Until we stop signalling to the market that speculative (and unproductive) property ownership is easy money, the cycle will continue.

        Whether or not the personal home should be exempt, I find largely irrelevant (although, as a home owner, it’s pretty attractive). It’s probably politically expedient, but that’s about all. Certainly can’t see how it could hurt low income families – lower monthly interest payments would have far more benefit than an untaxed future pay-off.

      • obi

        “Can you explain more how CGT is the magic bullet?”

        That’s my question too. The size of the current housing stock is fixed. If you tax housing investments then you’ll drive investors out of the market. That’ll make it cheaper to buy-to-own, but that in turn will squeeze renters who will have less chance of finding a home. Which is a bad outcome if you want to rent. So will a CGT increase the size of the housing market? No… it will do the opposite by discouraging investors from buying houses to rent.

        CGT hasn’t done anything to help housing affordability in Australia, where houses are significantly less affordable in the large cities than in NZ.

        The issue I have with CGT is the complexity of it. My parents bought their current home in about 1990. They’ve improved it since then. If my sister and I inherit it after they die, then do we pay a Labour Party CGT on the value since purchase or the value since inheritance? Will the values be inflation adjusted? Will the values take in to account improvements and how do we value them? What if we improve it before sale? What if I didn’t sell it, but decided to keep it as a beach house? So I retire, sell my primary (city apartment) residence… do I escape CGT on my beach house which is now my primary residence, AND my apartment? If I die in 40 years time and leave my beach home to my nieces, then what CGT do they pay? They live in Australia, by the way, so probably don’t pay any NZ tax. This seems a boon for lawyers and the people who set up trusts, but I can’t see how it’ll make homes more affordable.

        • I think the lack of CGT is the boon for lawyers and the people who set up trusts. My view of the questions would be: since purchase, no, no, no effect, depends on whether the first home is exempt (I don’t think it should be).

  • SteveC

    Clearly it’s not an either/or, but I think that the financial side has a massive impact;

    first, property is the default investment for small investors, they’ve been stung by shonky investment companies (even apparently “sound” ones), all the reasons you mention above and property is something tangible, you can (but don’t have to) manage it yourself without a funds manager taking a cut and the returns are reasonable

    second, we have an influx of migrants who see this favourable property environment and have the readies to invest, the house next door went to auction after the 80 something owner (who built it with her husband) passed away, it is shabby inside, but two flats and good views, it sold to a recent migrant for $852k, around $150k more than I anticipated

    so really we need to address the investment area to switch the focus from property to productive enterprise that creates sustainble jobs and wealth for the country, captial gains tax, banking policy etc, also we need to change the immigration laws so that migrants who come in on a financial threshhold basis must invest in production, not property, it’s a win/win

      • SteveWest

        You are exactly right – and this has been going on for years, so interesting that only really in the news recently! People seem to think they are suddenly wealthy, but for those with one house, unless you do what Bernard Hickey has done (sell up and then move to another city) or downsize, you are simply going to have to pay more for the next one. When you have a global housing market with localised wages, of course it is not going to work for average/low income earners trying to compete with Hong Kong wages. Vested interests however mean the obvious demand solutions are ignored and land, permits etc are the suggested answers, seems a bit like preventative health care v surgery!

  • Bryce P

    I believe that, apart from the CBD, some nearby suburbs with ‘name’ schools and the beaches along the North Shore, housing affordability in Auckland is not too poor. Agreed it could be better but there are actually quite a few areas that have affordable housing already. This is no different s situation to what my parents had to cope with over 40 years ago. Their first place was a 2 brm unit in Mt Roskill, which at the time was deemed to be a long way out of the city. In recent times, growth has caught up with Mt Roskill and it no longer is seen as being that far away so the title goes to another suburb further out. If we could create good transport links from greater Auckland to towns away from the main isthmus then people will be attracted to these areas. These areas already have much cheaper property than Auckland central. Once people start moving there, there will be a need for more shops / business etc and it will create it’s own centre. In my mind the transport must come first. Electrifying to Pukekohe is the first step. Where else you may ask? Well, if we could break up the ‘toy farm’ culture out West then Kumeu / Huapai would be another key area as would Waimauku. Spend the money and create a fast, electrified rail link to these towns (expensive but so are motorways) with some changes in town planning – more intensive housing around the town centre rather than spread out around the next 15km’s would be a good start. I think SH16 needs to be re-routed around the towns (with minimal connections – 2 or 3 roundabouts or similar) in order to make them people places. Heading North, well Silverdale has already started. There must be more alternatives (other than Warkworth – which I think is actually a poor choice as a satellite town). Wellsford with high speed rail would be just an hour out of town. Plenty of good land and with rail and good road access. It’s the access to these towns and town planning – more intensive and close to shops etc – that will make a difference. In the end, for me, it is a physical problem. The only real financial change I would like to see made is a change in rules to investment from non-residents. Other countries are doing this already and I believe it is time for us to look seriously at it. The people who oppose this are opposing it for exactly the reasons property is getting expensive – they wont be able to sell property at ever inflating values to these wealthy people. This is not the kind of overseas investment New Zealand needs.

    • Let me guess: You own property and would hate to pay tax on your capital gains?

      I agree that the transport infrastructure is necessary to allow increases in density, but do we really want to set up a city where everybody commutes 2+ hours a day? Even with public transport, this is a lot of people wasting a lot of their time on trains and buses. In a few decades time when the satellite towns have been connected up to the city and the gaps between them steadily filled in, we’ll have even greater sprawl than we have now. Will we have sufficient planning in place to make this work? Auckland’s past experience says; no.

      I think the main issues are financial – property speculation driving prices up because the lack of a tax on Capital Gains makes it a far more attractive investment. This then leads to our economy bleeding ever-higher interest payments to mostly Australian banks. I find it hard to reconcile your arguments with the property bubbles that have constantly disrupted our economy over the past decades. It’s clear that the financial side has a large role to play in this.

      The main physical issue is a cultural aversion to high-density housing and I don’t think trying to get people to live high-density in Wellsford is going to be any more successful than trying to get increased density in the inner suburbs.

      “This is not the kind of overseas investment New Zealand needs.” – agree with you on this, but I’d say it’s not the kind of domestic investment New Zealand needs either. We need more affordable houses, not more money for the houses we have already.

      • Bryce P

        Yes, we own a property – the one we live in, so CGT as per the Australian example does not affect us as the family residence is exempt (have not checked on the rest of the world but I expect to find the same). From what I have read about CGT has not worked in other countries so why would we expect it to work here? My first thoughts when it was suggested years ago were – great lets do it – but there is no point in making the changes required to the IRD system in order to implement something that has dubious at best benefit. Anyone who is set up as an ‘investor’ will already be paying tax to IRD and I understand IRD are taking very close interest in those who sit in the grey area of the ‘investor’ law – ie. those who regularly buy and sell houses.

        If we decided to use the rail and bus network we have by extending it to the limit of a 1hr express of the CBD there are countless opportunities to develop towns to the point where, once people can see the benefits of the regular PT, eventually the town will have a big enough centre with enough employment opportunities to create a significant difference. As a part of the planning process there would be significant areas of green belt / farming etc to break separate these towns and prevent them from just being sprawl. For instance, apparently Pukekohe already has something like 26,000 residents now so it cannot be far off the kind of size required to be a ‘mini’ city. Some development of medium to high density (not tower blocks) around the train station and regular train services would provide significant benefits.

  • CGT – sounds like an excellent idea to me. Then again, I only ever want to own my own house, so I’ve got no interest in proeprty speculation.
    Blocking non-residents from owning residential proeprty I also look favourably on. At the least then they’d have to set up an NZ company and pay a local accountant to do the books.
    I think the prices are stupid, and while I’d feel bad for those affected, I’d love a 30% reduction in price across the range.

    Personally, I don’t think the interest rates can be held down too long, and as soon as they go up 2%, we’re going to find a lot of people going bust.

    • I dunno about interest rates Roger, I have been more certain that there was less upside in the world economy since 2008 than almost every economist I heard discuss this in NZ since then and in fact -so far- my gamble with my own debt [stay floating] has been 100% right. Mr Eaqub and others have been constantly predicting higher rates coming next quarter ever since the first crash and been wrong every time and you have to ask why these clever and well paid and highly trained economists are so often so wrong?

      Simple. They trust their models more than they look out the window. Their models say a recession is followed by a rebound. It’s in the text book, but clearly these books don’t accurately describe the world in times of discontinuity from past patterns. And it is surely becoming clearer every day that we live in time of big changes not small hiccups.

      What is interesting is the lack of market wide property price correction in Auckland in this period, especially compared to the US and other areas. Perhaps it’s still due? But if you dig down into the trends you will see that there are contradictory forces at work. A move in towards the centre has disguised any lack of demand for favoured areas [as mentioned by some above] and increasingly the further out you go, to suburbs with poor amenity and employment and long commutes are where you will find values have dropped.

      Poverty is now suburban. So how do we help these areas and ensure that any new builds [Labour's KiwiBuild for example] doesn’t just create poor distant and isolated ghettos? By improving the connectivity of these places and improving their own place value. So almost in a paradoxical way: with both widespread affordable Transit across the region and more mixed use local-ness. Communities with both their own employment but also much improved linkages to everywhere else in the region.

  • The problem as I see it is that the market is currently creating $500k 4 bedroom houses 1 hour from the CBD or $800k 4 bedroom houses 20 minutes from the CDB.

    Assuming two people on the median weekly Auckland income for people in paid employment ( See: http://www.stats.govt.nz/browse_for_stats/income-and-work/Income/NZIncomeSurvey_HOTPJun12qtr.aspx ) of $863/week that is around $90k per year or enough to afford a $360k house at 4 times income. If you assume a higher income you get a small minority of households while if you assume a higher multiplier then it will take forever for the household to generate any equity against the mortgage.

    Realistically the only things you can get for $360k are a small house a llloooonnngggg way out or an apartment (possibly much closer to town).

    So the policy goal should be to create enough of these to handle demand. Which probably means 5-10,000/year for a decade or two. Now what are the market conditions we need to make this happen?

    • Well the council certainly needs to be looking at their regs that may be dis-incentivising good affordable apartments. Like Minimum Parking regs, set backs, heights, etc. They should be making special Transit corridor zones.

      Anyway you are right. Auckland has just got to the size where the apartment is now needed to meet market demand at an appropriate price in the locations people want to live. We can of course expand the size of the desirable zone through effective Transit provision too of course. The CRL, for example, will essentially pick up the suburbs on the western line and love them 20 minutes closer to town…..

      • Owen Thompson

        The problem is that those screaming the loudest about being unable to find a house to buy, would not consider Te Atatu North at all.

        • The north western busway will make Tat north a lot closer. And it’s a bloody nice little hood with its own vibe and identity because it is surrounded by water and the motorway. Beats Tat South
          that’s for sure.

          • Bryce P

            It is a great little suburb and I love it here. It’s the closest thing in Auckland to being it’s own little town. Be quick though as others have now discovered it as well and houses don’t seem to last more than a couple of weeks on the market.

          • Robert

            Having lived in Te Atatu South for a while I think it’s a fantastic suburb. It’s just a shame the council is diverting funds more to Henderson and the Te Atatu Peninsula. Fantastic views, schools, handy central location to Henderson with its restaurants and the Corban Art Centre. 10 mins to the city off peak. 30 mins on the bus peak.

            The council poor efforts could be remedied by spending more money recreating a suburban heart it has stolen, boardwalks to open up the suburb to the river, cycleways to connect up to the northwestern cycleway and twin streams cycleway, or improving our parks and retail centres. Would be great it they created more outside dining instead of just promoting fast food outlets by it’s urban design measures.

          • Sarah

            Completely agree Robert. Te Atatu South is somewhat neglected. Some interesting ideas. I heard one of putting a cafe/ restaurant on top of Countdown to make the most of the views across the city. Probably a bit adventurous for Countdown but I think the council needs to wake up instead of forgetting the suburb. Some more public art would be nice too.

        • Bryce P

          And that Owen is the problem. People want to live in Pt chev or Grey Lynn or one of the other ‘hot’ suburbs but they won’t consider that these suburbs are expensive for a reason – they are very close to the CBD. It’s the same in Sydney, Melbourne, London or pretty much any major city you can name. Expecting to find a 3brm 120 sq/m house on a 600-800 sq/m section for under $400k is unrealistic and there is nothing the government, council or anyone can do about it regardless of whatever measures you put in place.

        • David O

          To be fair, that place is also pretty small and the better part of an hour into town on PT – so if there were two of you, that’s two cars likely needed, which adds a fair amount to the cost relative to something with better transport. At 55 minutes to the CBD off-peak by PT $379K for something the size of a US double-wide mobile home is pretty steep. Almost certainly this will end up as an investment property for rental. Move this place 25 minutes nearer to town by providing decent PT and then it might start to look like an option.

          All of which goes to prove the wider point being made by this website about how decent PT could change the game by making a much greater slice of the city thinkable for many more people.

  • The physical factors are foundational. If you can build a new home yourself on cheap land, using maybe a good kit-set, then you can have your new house for cheap regardless of what the banks will and won’t lend to people, etc.

    But when you have that under-supply of houses (most importantly, land), and it’s serious, then the financial games of the banks become critical. This is because they are lending (or not) in a context of consumer desperation. The consumers compete aggressively amongst each each other with whatever money they have, so if the bank lend more they just scale up the game, across the board, like a financial arms race. The result is severe property inflation.

    http://andrewatkin.blogspot.co.nz/2009/10/explaining-new-zealands-property.html

  • erentz

    CGT is well overdue.

    But another factor I hear from building/architecture types, and in my own anecdotal experience, is that building a house just costs MORE here than in other countries. And when I see the quality difference I’m amazed. Why? Regulatory costs are maybe a factor, I’m not suggesting deregulation but the regulation we have now is a mess, and we haven’t learned a thing from the leaky homes disaster. We’ve still put the burden of responsibility on local councils through the silly certified builder programme that just skirts around the real issue. Builders should be insured, the insurance companies pay out if the builder is crap, and it’s their incentive to not insure bad builders, and the Govts responsibility is to ensure they regulate the insurance companies so that they don’t go bust leaving the taxpayers holding the bags. Not surprisingly this seems to work elsewhere in the world, and I was surprised to find this isn’t how we do things here. It seems like such a free market right wing national party way to go too — actually that’s wrong, the national party way to go is to deregulate and make the taxpayer take responsibility so that business get a free ride to screw people anyway they like. Next up, materials costs, why are these so much more expensive? Sure we’re a small market, but could we do anything to drive down the cost of materials and introduce better competition here? Some companies providing materials in NZ basically have a monopoly. It’s no wonder we get bad, expensive houses as a result.

    • I agree with this. Leaking homes have caused a number of our problems.

    • There are five (count them: 1, 2, 3, 4, 5) builders in NZ putting up more than 100 homes per year, according to the working group that looked into housing affordability. The vast, vast majority of builders do fewer than five a year, and a fair whack only do one or two a year. The desperate desire for bespoke housing in this country screws with any hope of the cost efficiencies that come with scale.

      I saw a suggestion, probably on this blog, that what should be done is knock out town houses but put on different doors and shutters (same size, different styles and colours), plus interior moulding changes. Gives the points of difference but allows the scale.

  • LucyJH

    Ooh Bryce, I look at that last one you posted and I think “Leaky home!” I mean there has to be catch doesn’t there?

    I don’t actually think that even in the cheaper parts of Auckland our houses are “affordable” compared to our incomes. Even a cheap house in Auckland will cost you around $300,000 and the median income is $62,000 so that means it would take you what? 5 years to pay off. Isn’t the ideal ratio meant to be much lower. http://www.interest.co.nz/property/home-loan-affordability

  • LucyJH

    I mean assuming the hypothetical person could spend their whole income on housing costs it woudl take 5 years..

  • Anthony

    So by how much is it calculated that labours CGT would reduce house prices?

  • Luke C

    @Anthony of course its impossible to know. However property speculation is an attractive investment partly as the income can escape tax. Yes it does not stop a housing boom on its own, but can knock the edge off. Another note is that it was not proposed to be on the family home.
    Our monetary policy also causes trouble and it is very strictly ‘academic’ and raising interest rates is only way to slow down house prices, with various other negative consequences and higher hosting costs for all. CGT and cracking down on LAQC etc will certainly help taking the edge off.

    • jonno1

      Luke, as others have pointed out, speculators already pay tax at their marginal rate, ie at 28% if a company or 33% if a trust or individual. The touted CGT rate is 15%, so speculators would be laughing all the way to the bank. Oh, and once again, the LAQC and depreciation loopholes were closed off by the evil National government very soon after coming into power.

      I don’t have a problem in principle with CGT as part of a balanced tax strategy, but once you introduce exclusions it all turns to custard – think of VAT in the UK, or the bizarre suggestions of some here in NZ to exclude fresh veggies etc from GST. The average Kiwi can already pay 50% of their income in tax at the margin: 33% on general income, 2% on ACC levies & 15% GST on expenditure (yes I know rents, mortgages and other and financial services are zero-rated). So if CGT were introduced those other taxes would have to reduce.

      But the real problem is the market distortions that CGT introduces, and there’s no evidence that house prices would reduce, quite the opposite in Australia for example.

      • MFD

        The distortion in the market is pre-existing and is caused by the fact that unearned income is largely untaxed and earned income is heavily taxed. The message is that gambling is favoured over generating wealth (or saving so that others may generate wealth with your capital).

        Exclusions from VAT and/or GST are irrelevant; the only proposed exclusion is the owners own dwelling and there is a good case for claiming that no real capital gain is made on that.

        Claims that CGT has not reduced house prices in Australia, for example, are also irrelevant; there is no control in the “experiment” and, to my knowledge, nobody is claiming that a CGT will reduce house prices, just reduce the rate of increase by effectively reducing demand from speculators.

        • jonno1

          Ah MFD, now you’re just being disingenuous, especially with the bit about “nobody is claiming that a CGT will reduce house prices, just reduce the rate of increase by effectively reducing demand from speculators.”

          So apparently all points of view that you disagree with are irrelevant. That’s a great strategy for reducing cognitive dissonance; I must try it some time. Oh, and try reading my previous post again without the blinkers (sorry, I’m not really grumpy about it, but I expected a more reasoned response…).

          • Bryce P

            How about a combination of this:
            http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1170002/1/.html

            which can help to pay for this:
            http://www.theaucklander.co.nz/news/council-seriously-consider-labours-housing-policy/1637408/

            This is effectively what Singapore is doing and we have to try something.

          • jonno1

            Yes Bryce, stamp duty is another tool, depending on the rate, and probably more effective than CGT as it’s up front, done and dusted. I can recall buying & selling here in NZ with stamp duty, but I don’t remember who paid (purchaser or vendor). One problem with stamp duty is that it doesn’t bring in much net revenue which is why it was dumped I think (like gift duty).

            Another problem is that any targeted tax introduces market distortions, eg Hong Kong has also recently introduced a 15% duty on non-residents and corporates buying residential property. Result? Investors have switched to commercial property so commercial rents have shot through the roof (as if they weren’t already pretty astronomical). Face palm.

          • Bryce P

            Hey Jonno. My way of looking at it is that it would be an easy way of ‘taxing’ those who, for some reason, don’t get on IRD’s radar – you know the 1 per year kind. Anyone buying and selling greater numbers of property would already be classed as an investor and taxed accordingly. The Hong Kong non-resident duty is interesting, especially as any time you bring up non-resident duties of some sort for NZ you are then given the xenophobe title.

          • MFD

            Jonno 1: How is a hypothetical GST removal on vegetables (which, incidentally, I do not favour) of any relevance to the exclusion of the family home from GCT? How is appealing to us to consider differing rates of VAT in the UK even slightly pertinent? If you want to use an example from the UK surely the fact that the family home is excluded from UK CGT is a lot more relevant. Is there any evidence from the UK that it is problematic? As you point out, we have different rates of GST already – zero on financial transactions, loans and rent. Is there some fundamental issue with that, and if so, does that lead to the conclusion that there will be a problem with the exclusion of the family home from a CGT in NZ? That the examples you provide are irrelevant is bordering on the self-evident. If you don’t like the term irrelevant try non-sequitur or red herring instead. A reasoned discussion requires relevant information, not references to a sloppy yellow starch-based dessert substance!

            How is what has happened to house prices in Australia germane to understanding the effect of a CGT without knowing what the effect would have been, absent a CGT? House prices in much of the US have declined in recent years (I know from personal experience) but it would be equally irrelevant to claim that it was caused by their CGT.

            House prices are determined by supply and demand. The demand can be divided into demand from potential occupiers and demand from investors (aka speculators). A CGT will rightly tax the speculative gains and decrease the attractiveness of housing to the speculators. As you point out, working hard and generating wealth results in ca. 50% given up in taxes. Speculating for a capital gain by pretending that you are in it for the rental returns is rewarded by a 0% tax (well, 15% GST on subsequent purchases to make the comparison equivalent). What’s the message there? Working is for losers? Speculation is activity that is to be encouraged? To my way of thinking a 15% CGT is too light. I have lived and worked in 4 different countries that had a CGT (with the family home excluded) and it seemed to work quite satisfactorily in all of them.

          • jonno1

            It’s what is called an analogy MFD. The point is that any form of tax with exemptions leads to distortions. So why exclude the family home from CGT? That’s around 65% of the housing stock. And what if the home is owned by a family trust or a company, is it exempt or not? If CGT discourages investment in rental housing then where will those who prefer to rent live?

            Socialist gummints such as National use targeted taxes to try and force certain behaviour – think excise duty on cigarettes and tobacco (actually, excise taxes [eg ciggies, alcohol, petrol] and levies [eg ACC, fire service, EQC] make my 50% overall tax rate claim a bit light). And BTW zero-rating is not exemption, although I agree it’s a fine distinction.

            What is ultimately needed is a simple, broad-based, balanced tax system, but unfortunately there are too many snouts in the trough and too many ideologies in play for that to happen any time soon.

            Oh, and how about “straw man” to add to your list?

  • I wasn’t persuaded by Dominic’s analysis, which was essentially a few graphs (correlations) that supported his hypothesis. His analysis didn’t control for many other factors that can affect house prices and so doesn’t provide good evidence of the importance of financial factors. I found Arthur’s analysis using a sophisticated econometric model to be more convincing, which showed as expected that many factors are important, and the importance of different factors can change over time.

    It was interesting that one factor Arthur stressed several times was the importance of *space* constraints in Auckland. Not just land constraints, but also other restrictions eg height and subdivision restrictions, that have an effect on house prices.

  • LucyJH

    where do you get that median income figure from Nick R? This suggests median household income is $62,900. http://www.stats.govt.nz/browse_for_stats/people_and_communities/Households/HouseholdEconomicSurvey_HOTPYeJun11.aspx Although that is for all of NZ, not just Auckland

    • Statistics New Zealand (try the table builder). Yes Auckland (and Wellington and to a lesser degree Christchurch) has significantly higher median income than NZ as a whole, as well as significantly higher housing prices.

  • TimR

    Financial or physical? Sounds like a false dichotomy to me. Are phones/computers/technology cheap due to cheap raw material or money in the pocket of the purchaser? Or something else?

    Presenting the issue this way ignores lots of process in the middle, and plays into the hands of those who are happy to have the blame put against others. Blaming council bureaucrats and bankers is easy, enjoyable sport after all.

    The good news? Necessity is the mother of invention.

  • Dave Howick

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10848593
    Mutiple factors at play. Also, the simple fact is that New Zealanders in general are on lower wages than other developed nations, yet the housing market is one of the few in the world which is truly global/restriction free. Blaming councils with talk of freeing up land and reducing resource consent costs does not go to the heart of the issue, yet vested interests in the money/people that flow from Hong Kong/ mainland China etc means you TimR are right – invention is necessary, as seen by those hundreds of thousands moving overseas!

  • Only real attempt to address issue is Labours KiwiBuild policy. A proper coordinated financial, construction, and location programme. With its own funding and other positive benefits for economy.

  • Kleefer

    What Auckland needs is not just to get rid of the urban limit but to do away with zoning altogether. NIMBYism is a huge problem under the current system, both in the central suburbs (stopping apartments) and on the outer fringe (stopping new housing development). Let’s replace the current system with one in which property rights are front and centre. Instead of owners having to get permission from every man and his dog, the onus should be on others to prove their property rights would genuinely be infringed upon by a proposal.

    This would allow central suburbs to develop to a higher density while also taking pressure off the city fringes. Getting rid of the urban limit wouldn’t result in the city suddenly sprawling everywhere, but it would allow people to build around Papakura, Drury etc rather than Pokeno. As Andrew Atkin said, the current system of restricted land supply is a direct subsidy to the banks. Left-wingers who support urban limits need to be constantly reminded of this.

  • andysh

    How about make it more favourable to rent, I.e. make rent only be able to increase by inflation each period, or have longer rental agreements with fixed prices, or even max price rent per the value of the property (CV), but this again might push up the price of places so they are able to charge more rent. If you make rental more affordable and less attractive for people to invest in, then that should stop investment into property. This hopefully will stop the speculative buying and pushing up the prices. I think you will also need to capital gains tax on the increase of property value for investments.

    However, if you were to do this, this may short the supply of houses / property and therefore push up the prices due to smaller supply as there are wont be as many investors buying into the large apartment complexes.

    Basically I think we need to make investment into houses as unattractive as possible but do it slowly. There can not be any quick fix because if the house market was to collapse in New Zealand, we would become poor very quickly as a lot of peoples retirement fund is in their home. By doing this hopefully people will see the sharemarket as a better investment, and invest in companies that are producing wealth by hiring people, creating products, and exporting to overseas.

    Disc: I do not own my own home, and rent in Kingsland area. Instead of paying mortgage I invest into the sharemarket. I will want to own my own home one day, but when I have one decent deposit. I would rather pay tax to the government through tax on dividends, than interest to an Australian bank.

  • Ari

    Obviously this is a complicated issue. I liked Bob Jones’s take on the affordibility issue. 50 years ago, houses were 3bdrm,1 bath and no garage. Now they are 4 bdrm, 2 bath, ensuite, two living rooms, study, and attached garage etc. He suggests housing prices haven’t outpaced wages, it is the size of the house that has grown faster than wages.

    • Yes Ari, so it’s a market failure. The market is not supplying affordable options. So the state should serve this market. Unless of course you can’t allow that for religious reasons…..

      • Market failure occurs when people willing to pay the marginal cost of something are not able to buy. The market supplying large fancy houses that people want is not a market failure per se. You need to look deeper — why are costs of building smaller houses high? Why are price-cost margins high? Economics isn’t a religion if you take it seriously.

        • Aaron certain positions are held with religious fervour though. And economics is no science either, assumptions are everything.

          • Stu Donovan

            Supporters of rail and highway based transport solutions tend to be particularly fervent ;)

          • Stu Donovan

            P.s. The wonderful field of economics was side-tracked by two things: 1) the desire to imitate the field of mechanics in all it’s mathematical elegance and 2) a individualistic political philosophy that took hold much of the world in the 1970s and 80s.

            From what I can tell these two diversions led to economic thought becoming either hopelessly theoretical or fervently ideological, or both. Beneath it all, however, was a minority of economists (say 10%) who continued to believe that theirs was simply a social science concerned with understanding how humans responded to incentives and in turn how this impacted on the efficiency and equity with which resources were allocated.

            In recent times, this minority has grown – and begun to receive more attention. In the transport and land use sector, however, neo-classical economics never actually held as much sway as it did in other disciplines, because a) networks exhibit economies of scale and returns to density hence tend to be monopolies and b) “space”, or distance, is generally just sand in the wheels of capitalism that stop markets from functioning efficiently. Space effectively creates market power …

            So transport economics in particular, and spatial economics in general, has never sat comfortably with the prevailing neo-liberal economic thought of the 80s and 90s. That is, by the way, why people with general economic backgrounds (e.g. Liberty Scott and others) tend to misunderstand transport and land use policy, That is, their underlying economic intuition is premised on assumptions about the efficiency of markets and private sector agents, usually individuals, which don’t hold so well in this context.

            That’s my take on it at least, I could be wrong. Either way: A “new economics” is emerging and thank god for that.

          • Stu, your views on transport and land use may differ from that of the neo-liberals, BUT, you both have the same goal, of encouraging and managing growth, without stopping to ask whether growth is even a good thing, whilst giving little or no regard for the wider consequences.

            It’s time to start focussing on bringing “growth” to an end. Stop the population growth, stop the consumption growth, stop with the city building, and focus more on local sourcing of what essentials we do need to sustain ourselves. I suspect you’ll join the neo-liberals at baulking at the very notion, but the truth is, if we want to survive as a species in the long run, we need to stop what we are doing to ourselves and to the planet. This blog often writes about doing things different, but really it’s more about doing things the same.

            A couple of articles:

            http://www.localmatters.co.nz/Environment/Environment+Columns/Environment/Christine+Rose/Degrowth+redefines+happiness.html

            http://www.interest.co.nz/opinion/69431/murray-grimwood-thinks-current-political-leaders-will-be-turned-when-voters-realise-wh#comment-772581

  • jyoti

    Thank you for sharing valuable information. Nice post. I enjoyed reading this post. The whole blog is very nice found some good stuff and good information here Thanks..Also visit my page Rental Property Accountant Auckland There is great satisfaction in knowing we’ve done our job well and served our clients’ interests. It gives us particular satisfaction when our clients take the time to acknowledge their satisfaction by providing Rental Accountants with their testimonials .

Leave a Reply