Imagine you are sitting around the kitchen table playing Monopoly with your siblings and then the excitement you feel when Mum, who very rarely plays, agrees to play too. You are only a short time into the game when Mum goes bankrupt. All of the players are bitterly disappointed that the game ended so soon, so you all agree that Mum and everyone else should be given $2000 from the bank. Mum survives to play a little longer and everyone is happy.
This is a similar situation to what happened shortly after 2008, when the Federal Reserve in the United States created enormous amounts of money – out of thin air – and farmed it out very cheaply to the world. It was like winning Lotto. What happens when we get access to easy money? Well, we generally spend it and we don’t really mind if we pay a little too much for the thing we are buying, especially if we are confident that thing is going up in value.
The effect of the Federal Reserve’s actions was to inflate asset prices and lower yields around the world. Providing money at very low interest rates to stimulate the world economy to prevent it from collapsing was the plan. That is why house prices are so high. That is why share markets have been booming since 2008.
What haven’t changed much are wages. So, with high house prices increasing at a much faster rate than wages are, is it any wonder that housing is unaffordable for so many?
We have experienced massive asset value increases even here in little old New Zealand. The consequences are that those people who hold assets such as houses find that their wealth has improved while those people who only have cash savings and wages, or just wages, find they cannot buy a house in Auckland. House price inflation has very little to do with little old New Zealand’s migration and tax policies.
It surprises me that the only politician I have heard explain what has occurred is National’s Steven Joyce. It has been reassuring that our current finance Minister understands world economics. It is disconcerting that National might soon be replaced with Labour.
Unfortunately, the self-interest of politicians desperate to get elected seems to get in the way of the truth. Pointing the finger at scapegoats such as dirty speculators and migrants is a very lazy and distasteful way of explaining the economic environment we are all living in.
If we want more houses built in Auckland, it is ridiculous to increase the taxes landlords will pay. The opposite strategy would be more effective if the Government wants to encourage housing supply. Investing in residential property in Auckland is currently not very attractive. Negatively geared properties require landlords to subsidise the cash flow from their other income. If tax deductions currently available are removed, many will be pushed over the edge and be forced to sell up. This strategy has the potential to crash the residential property market. Crashing the market doesn’t just affect landlords. It affects everyone that owns a property as valuations are continually updated based on recent sales data. If values drop significantly your bank may ask you to repay lump sums off your loans to bring your Loan to Value Ratio back to acceptable levels. Many people may not be able to find the cash to do this so we could get a domino effect. I saw this happen in the UK back in the late 80’s.
Speculators are already subject to income tax in New Zealand. There is a well-established set of tax laws already in place to tax property transactions. Whether you call them speculators, traders, flippers or developers is irrelevant. They are all subject to income tax on their profits. If there is leakage in this area the Government simply needs to put more money into ensuring people are complying with existing law. National appears to be fully aware of this and have pumped huge amounts into the IRD to focus on property speculation with great success.
UHY Haines Norton’s Managing Director Grant Brownlee specialises in property investment and advises many property investor clients as well as personally investing in property. If you would like to discuss this article, or any aspects of property investment, please contact Grant at firstname.lastname@example.org or phone (09) 839-0297.