Red Alert

Housing response a sham

Posted by on November 7th, 2012

I can understand why the Housing Crisis Action Group is planning to hold a protest at Parliament this afternoon against these drastic changes to the government’s social housing policy.

This has resulted in a severe loss of state housing across the country and meantime, the National-Act Government’s response to the Productivity Commission’s housing affordability report does nothing to help struggling Kiwi families get into their first home.

As Labour’s Spokesperson on Housing, Hon Annette King, said on November 2nd, “There is nothing in National’s response today that will make housing more affordable. It will do nothing to put the missing rung of the housing ladder in place and give people a leg up to it. The Government is in denial and is condemning the housing sector to a path of decline.”

http://www.labour.org.nz/news/government%E2%80%99s-weak-response-disappointing

From the perspective of my Building and Construction portfolio, I note Productivity Commission Chief executive Murray Sherwin said back in December that the cost of building a new house in Auckland is 25 percent higher than Melbourne and Gold Coast, and the difference was “not due to the requirements of the building code’” yet so far, all we have heard from this Government are the clichés about how we must “reduce delays and costs of RMA processes” to supposedly get things moving.

Mr Sherwin also said materials account for 55 per cent of the cost of a new house, and they are “significantly cheaper” in Australia. Although part of that was due to the small size of the Kiwi market, a lack of standardised products, combined with high domestic transportation costs, had hiked building costs in New Zealand.

Clearly, any investigation along those lines would sound a bit too much like intervention for this market-driven National-Act Government.

It’s also interesting how Mr Sherwin’s suggestion that the Commerce Commission “can investigate’ complaints about businesses fixing prices, carving up markets or abusing market positions has also gone completely unanswered.

In fact, the National-Act Government’s response will do nothing to get struggling Kiwi families into their first home.


35 Responses to “Housing response a sham”

  1. Quoth the Raven says:

    Mr Sherwin also said materials account for 55 per cent of the cost of a new house

    I can’t see where this number comes from. Every source I’ve looked at puts the cost of land as a larger component than materials in the cost of a new house. For instance, the Productivity Commission report puts land prices at 60% for Auckland and 40% for the rest of New Zealand of the cost of a new house. You add on labour costs, consents, infrastructure fees, and you can see that it doesn’t add up.

  2. Allyson says:

    Hi Raymond. Would you care to comment on the effect a Capital Gains Tax would have on housing affordability and rents?

    Conventional wisdom says taxes increase prices.

    God bless, Ally

  3. The Al1en says:

    Erm, taxing property portfolios would make having one an ineffective way to make money, and therefore pointless holding on to. So simple, even slumlords can do the math.
    In an instant, more stock on the shelves, at a lower the price, which would of course be of keen interest to first time buyers.

    Anything else you want to know, Allyson?

  4. Quoth the Raven says:

    Al1en – It certainly isn’t that simple. As the Productivity Commission’s housing affordability report says:

    The impacts of a capital gains tax on housing affordability is unclear and would depend on how the tax was designed, on how operational issues were resolved, and on key features of housing markets.

    One interesting piece of research they cite is the following:

    Coleman (2009) analyses the possible effects of CGT. In his model, landlords are assumed to bid for houses and set rents at levels that leave them indifferent between the after-tax returns from lending money and the after-tax returns from investing in residential property. The adjustment following the introduction of a CGT occurs through changes in both house prices and rents. Coleman considers four CGT schemes, with different tax rates and coverage. The results are sensitive to the CGT scheme and the assumed responsiveness of housing supply.

    For example, when the supply of housing is elastic and inflation is 2%, imposing a CGT at the top marginal tax rate on rental houses (but not owner-occupied houses), results in an 11% increase in rents. There is also a small rise in house prices, in the order of 0.6–0.8%, because higher rents encourage some people to switch from renting to buying a house. The results are slightly smaller if CGT is applied at a 20% flat rate. When the supply curve of housing is inelastic, house prices need to increase by more (around 4% or 5%), in order to reduce the total demand for housing. If CGT is applied to all housing on an accruals basis, either at a flat 20% or at marginal income tax rates (20%, 33%) and if housing supply is elastic, there is an increase in rents, but the price of large houses drops by about 0.5% (Coleman 2009).

    So I find it hard to believe that any could think figuring out the effect of a capital gains tax is as simple as you lay out.

  5. The Al1en says:

    “It certainly isn’t that simple.”

    Of course it isn’t, nothing ever really is, but greedy humans are pretty predictable.

    “So I find it hard to believe that any could think figuring out the effect of a capital gains tax is as simple as you lay out.”

    Just using logic, mate.
    Multiple property owning types are in it for the cash. Taking a chunk off each sale, limits it’s worth as an investment plan.
    If one can get higher returns from not buying up cheap homes, why hold on to the stock?
    Higher rents would expose landlords, and if I’m correct about more homes coming to market to beat a CGT deadline, probably price them well out of the market.

    I think all parties agree that property is an unproductive use of investment funds.
    A gains tax is a good start.

  6. indiana says:

    CGT in Australia has not made housing more affordable – many people continue to expand their property portfolios. A CGT will not make housing more affordable in NZ. House prices do not decline due to the introduction of a CGT, as people simply hold onto their property until they get the price they want or rent them out at higher rent levels in anticipation of the future tax they will pay IF they sell the house. In the end people wanting to buy their first home struggle even further.

  7. Quoth the Raven says:

    Al1en – You seem to be far more sure of what the response of landlords and property investors to a capital gains tax would be than those who spend a large proportion of their professional career trying to disentangle all factors of an incredibly complex topic.

    Other nations which have a capital gains tax have had as marked a property boom as New Zealand and many of them do poorer on housing affordability scales. For instance, Australia does worse than New Zealand on Demographia’s housing affordability scale.

    If one can get higher returns from not buying up cheap homes, why hold on to the stock?

    The return on property investment with a CGT would depend on many factors; how much house prices would be expected to appreciate in the future, housing supply, what the return on other assets are expected to be which depends on whether the capital gains tax were applied only to housing (Labour would excule two thirds of homes – owner occupied homes) or (as Labour plans to do) to other classes of assets as well.

    I think all parties agree that property is an unproductive use of investment funds.

    No, I don’t think they would. Housing is a productive investment. It is more relevant to ask how productive is housing compared to other types of investment.

  8. Richard says:

    We already pay a capital gains tax. It’s called rates, and is paid to local government. These leeches spend money as though it is going out of fashion and get more to spend every three years when rating valuations are carried out. I am at a loss to find any connection between the land or capital value of a property, and the value of the services provided by any council. So call it a CGT or even a wealth tax, and the councils win every time, and what’s more, they collect it annually.

  9. bbfloyd says:

    Not to disagree with you QTR, but I’m sure there are better examples to quote than australia… The property boom there was fueled largely on a $14,000 handout towards new house building introduced by the howard government… and only phased out after he left office… (indeed, if it has been totally wiped)…

    The first two, or three years, the scheme was such a free for all that people were getting money in the names of their children,(one reported case was the family dog), etc…

    My scant knowledge of real estate pricing tells me that the price of real estate in any area should reflect the level of economic activity in that area/city…

    It strikes me that a cgt set at the right levels shouldn’t interfere with that…

  10. Quoth the Raven says:

    bbfloyd – Remember the Labour party introduced a first-home deposit subsidy here through kiwisaver.

    The first-home buyer grant in Australia probably would have been a factor, but obviously not the whole story. What is interesting is that the first-time home buyer grant was a policy sold on making housing more affordable. However, like you point out it probably had the opposite effect. Much like all those policies in the United States designed to make housing more affordable which had the unintended consequence of contributing the subprime mortgage crisis. For instance, the change to the Community Reinvestment Act (CRA) (the first private securitization of loans were of CRA loans), to make banks prove they were making efforts at lending to the ‘underprivileged”, which led to the creation of the subprime mortgage market in the US.

    That is why it is important to remember that government interference in the market more often than not ends up doing more harm than good and why we should be especially skeptical of those grandstanding politicians who are so confident in the grand schemes they offer us.

  11. indiana says:

    “unintended consequence”

    This is the backbone of any government policy making…

    Labour also introduced LAQC’s, who primary aim was to assist small business operators in being able to include their personal income loss against a business and hence pay less personal income tax. Instead many property speculators took advantage of LAQC’s negative gearing their portfolios and fueling the housing boom. National has at least done the tight thing here and removed the ability to claim depreciation on the property, nullifying the “unintended consequence”

  12. bbfloyd says:

    Thanks for that QTR…. I was in perth during period when the “bubble” really started expanding…. Small distinction here.. the “gift”(as it didn’t have to be repaid), was only applicable if one built a new house… Which led to new suberbs springing up at an unprecedented rate….$7k towards the house, $7k towards the price of the land…

    It was only supposed to be a “stopgap”, but the politics dictated it become “open ended”, as long as it kept the government popular, that is… So your point regarding the “unintended consequences” is well made…

    The city was already expanding rapidly, but as of 1998, you could still buy a four bedroom house with aircon, and an inground pool for $150k… By 2003, that same house was going for over $400k…And perth had become a vast wasteland of walled suberbs….

    The only thing saving WA from a property crash has been Barrow island, and a couple of new mines…

    This might sound a bit “old”, but If the government did no more than introduce a relatively low cgt, and then started building state houses again… what would be the likely flow on ??

  13. The Al1en says:

    “Al1en – You seem to be far more sure of what the response of landlords and property investors to a capital gains tax would be than those who spend a large proportion of their professional career trying to disentangle all factors of an incredibly complex topic.”

    And all for free ;)

    “No, I don’t think they would.”

    I’m sure I’ve heard all parties say they want the money invested in property to be spent more productively elsewhere.

  14. Quoth the Raven says:

    This might sound a bit “old”, but If the government did no more than introduce a relatively low cgt, and then started building state houses again… what would be the likely flow on ??

    The government does build state houses.

    The point is is that, as with so much policy, it is hard to know what the effect might be. Which is why it would be nice for our self-aggrandizing politicians who continually seek more power over the lives of others to be a little more humble. On occassion they could say “I don’t know” or “I don’t have all the answers”. However, I’m sure they’ll keep telling us they know what is best for others and things will be better if we just give more of what they so desire – power. And there will always be those useful idiots who embrace the shallow authoritarianism of “government should do something”.

    As George MacDonald said “It is not in the nature of politics that the best men should be elected. The best men do not want to govern their fellowmen”.

    It would also do us well to remember what Winston Churchill said “for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

    I’m sure I’ve heard all parties say they want the money invested in property to be spent more productively elsewhere.

    Which is different to saying that housing is an unproductive investment. As I said “Housing is a productive investment. It is more relevant to ask how productive is housing compared to other types of investment”.

  15. The Al1en says:

    Winston also said “dribble, dribble, pour me another before I pass out”.
    He can spin on one, in his grave for all I care, bruv.

    “Which is different to saying that housing is an unproductive investment.”

    Of course, which is why I wrote.

    “I think all parties agree that property is an unproductive use of investment funds.”

    See? Not the same. But good on you for having a go anyway.

  16. bbfloyd says:

    “It is more relevant to ask how productive is housing compared to other types of investment”.

    A good question… My take on that is that, the building of houses has obvious benefits, felt in the communities where building is occuring….From the local shops, and suppliers, throught to the wider community through taxation, the buying/replacing/maintinence of stock, & plant/machinery…etc…the list is long ….

    Once the houses have been built though… now that’s where the question has to be asked….

    is the buying, and selling of existing houses a productive way of generation wealth? Does the “trader economy” represented here benefit the wider community?

    Does it build resources that are useful in the long term?

    My original premise of “real estate reflecting the level of economic activity”… So to me, that means that house building should be needs driven…..

    So, without economic activity to generate the wealth to start with, houses are superfluous…(trite, but I’m cutting a long story short)

    So……….Activities that actually create wealth where there was none before, and can be added to constantly… (as in repeated sales of newly made product, etc).. would seem to be the desirable investment, for without it, the real estate market can’t exist…

    Have I stumbled on an egg V chicken riddle?

  17. Quoth the Raven says:

    “Which is different to saying that housing is an unproductive investment.”

    Of course, which is why I wrote.

    “I think all parties agree that property is an unproductive use of investment funds.”

    See? Not the same. But good on you for having a go anyway.

    Perhaps my confusion comes from not knowing what is it precisely that you are trying to say by “property”? Are you trying to say that “vacant land is not a productive investment”? Maybe, but that wouldn’t be particularly relevant. Housing is the topic and housing is a productive investment. I thought you were trying to say that “housing is an unproductive investment”. Which a lot of people try to do. People who probably don’t know how to define ‘productive investment’ or are confusing it with something like ‘producers’ goods’.

  18. indiana says:

    If people like Kate Sutton believe that overnight house prices will drop like a rock with the introduction of a CGT and make housing more affordable then she needs to ask David Cunliffe how much his house in Grey Lynn will be valued for the very night Labour one day gets to bring in this policy. I’m pretty certain that when that day comes, she will still be going around the local neighbourhood begging people to put their houses on the market.

  19. The Al1en says:

    “Are you trying to say that “vacant land is not a productive investment”?”

    No, not mentioned vacant land.

    “I thought you were trying to say that “housing is an unproductive investment””

    Obviously not with so many doing it, and with tax free lump sums at the end of it, for some it’s very ‘productive’.
    I said, quite clearly, I believe all parties have said property is an ineffective use of those investment dollars.

    A CGT will help remove the incentive, well 30% of it anyway.

  20. The Al1en says:

    “then she needs to ask David Cunliffe”

    Why don’t you ask him yourself? He’s an approachable bloke.

  21. Allyson says:

    Borrowing a couple of hundy more million to implement a new tax that takes how many years to break even. In the meantime poor mums and dads pay the bill with higher rent and inflation, while home owners enjoy another spike in their property value.
    Is there a plan B for greater social equality?

  22. Herodotus says:

    http://www.interest.co.nz/property/home-loan-affordability
    There is nothing in National’s response today that will make housing more affordable. It will do nothing to put the missing rung of the housing ladder in place and give people a leg up to it. The Government is in denial and is condemning the housing sector to a path of decline.”
    The sad thing is that housing is more affordable today than say 5-8 years ago.
    So we see Lab & Nat pointing the finger blaming each other yet again the public suffers. As someone involved in the industry I can only laugh at the suggestions that have been put forward by all parties, many resulting from lack of understanding an knowledge of the industry and the banking sector.
    Pity that so many in parliament already have vested interest in the property market continual escalation. Until some in the beltway take an active part and ownership in the problem all we will continue to have is posturing, and the decline in our egalitarian society.

  23. SPC says:

    QTR, the 55% figure used by Sherwin refers to the cost of building a house (55% of this cost being the materials), not the price for a property on the market (does not include land etc).

  24. SPC says:

    The purpose of a CGT is to tax this income – realised when a CG is made. Not doing so, distorts the economic market (excessive reliance on taxation of other income or other forms of taxation, and impacts on the use of investment money).

    A CGT fits the ambition to have a taxation regime that is broad and low rate.

    The Natonal Party’s (government) resistance to a CGT despite their stated commitment to this ideal tax model speaks to the self-interest of rental property investors and their influence within that party (and possibly the influence of other investors who invest in shares and receive those returns without paying any tax on their CG – this speaks to the sale of power company shares to such investors).

  25. Allyson says:

    If you wanna tax ‘em to redistribute wealth, increase benefits or whatever you will find enough tax tools in the toolbox to satisfy every lefty dream, from trotter to trotsky.
    Just use them.
    Sometimes in business the workshop will ask for a new tool just because it exists or cos they think it may do a better job. Often, a manager will tell ‘em to stop moaning and use the bloomin’ tools they got and get on with it.
    I find this “business model” approach preferable to borrowing a couple of hundy million to set up a new tax, bringing higher rents, inflation and causing a spike in house prices.
    Planning a new tax is liberal effetism at its worst.

  26. SPC says:

    So doing the same old thing is better than a taxation regime that is broad and low rate? Why not return to higher levels of company tax and more progressive income tax and do away with GST – they were truly the old ways?

    Tax reform here stalled in the 80′s. Without CCG, floating the dollar merely enabled offshore borrowing to bid up the value of housing – and this led to a rising dollar. This harmed the productive sector and has led to an unsustainable rise in foreign debt. Continuing on this course is not an option.

    The arguement for accepting the perpetuation of a flawed taxation model – the same old method, would explain our low level of productivity here – the same old methods, low wages, less invested in R and D, the lack of venture capital while speculative options such as housing get the attention. The rest of the world continuing to out perform us because of such insular she’ll be right chauvinism.

    The OECD is full of natons with CGT and full of nations with lower house prices relative to incomes than us. There is no empirical evidence to support the claim that a CGT leads to high house prices or a rise in rents. No naton with a CGT is proposing to remove it and that says it all.

  27. Herodotus says:

    On what is the tsx earnt by a cgt going to be used for ?
    There are 3 means of IMO controlling the price of property. Supply, demand and the availability of finance. National is doing a great job in freeing up housing. 50k emmigration p.a. the problem is that these ex pat kiwis are being replaced by immigrants. And these immigrants are residing in Auckland whilst the ex pats have left from all over nz. Giving the impression of an urban drift towards Auckland, and resulting in high prices for Aukland are depressed market elsewhere.
    http://www.stuff.co.nz/business/money/7928090/House-prices-extend-record-high
    Limit the banks ability to loan with the likes of debt:equity ratios or use the reserve bank to stiffen the banking ratios of reserves held to loans.
    And why is this childish censorship persisting, especially as Clare Curren had made an undertaking when Phil Goff was the leader. :-(

  28. The Al1en says:

    “bringing higher rents, inflation and causing a spike in house prices.”

    Prove it!

    “Planning a new tax is liberal effetism at its worst.”

    :lol:

  29. SPC says:

    Herodotus, you missed some factors.

    The opportunity to make untaxed CG is one reason for the rise in the number of rentals. Others are the cost of building a home and the nature of the homes being built. The latter factor is because the population has increased but public housing stock has not. The market demand is for larger property for the top end of the market. Some decades ago it was common for people to buy first homes that were new (and extend them as the family grew in size), now most first home buyers buy existing property.

    Of course you are right that loan to value ratios are the way to go – particularly important is to set higher ratios for rental property (otherwise the landlord uses the mortgage cost writeoff to subsidise their speculation in an untaxed CG opportunity). I would start with 25% and signal in advance the intention to increase this to 50%. This should lower demand for offshore finance to speculate with (constrain the rise in the level of our foreign debt) – bid up the price of housing for owner occupiers. A lower level, say 10% applying for first home buyers and say 10% rising to 20% for homeowners buying or in their second home.

    There should be an exemption for business owners who mortgage their family home to finance their business.

    The merits of a CGT do not depend on how the tax money is used. We have a budget deficit now and we have to save more money to support the future cost of tax paid super. That is reason enough to close this tax loophole, so that there is equity in taxing realised income.

    PS as a general point, some propose CGT on all housing (not done anywhere in the world) to make this unpopular with homeowners. Some propose a flat rate rate deposit requirment, the same for landlords and first home buyers, (thus so low for landlords as to be enable continued leveraging and yet more onerous on home buyers than it should be or needs to be) and use this to undermine support. Differing rates overcomes this.

  30. SPC says:

    One “liberal effitism” we need to look at is a wealth tax on land banking. One on land available for, but yet to be used for housing. Sending a message – aren’t yet ready to develop the land for housing, then pay a price for cutting off supply to others who are!

  31. Allyson says:

    Labour Housing response a sham.

    More borrowing . . . . . . . . . . . .check
    Not targeted to those in need . . . . check
    Able to be rorted by those who can . . check

    Should we build em ?

  32. SPC says:

    Allyson, the current government is doing the same thing but restricting this to Christchurch – that is it intends to borrw money to build houses then sell them to the public.

    There is a current housing shortage in Auckland – there have been warnings about this for years but the market did not respond so the government has to act to prevent homelessness, rising rents and escalation in property values.

    How can one target home building for those who cannot afford to buy them? Just renting them means the government holding the debt – the policy is to build homes and create jobs without increasing public debt.

    More homes means lower rents for those who cannot afford to buy and who are struggling to pay rent now because of a shortage of property.

  33. indiana says:

    @SPC “More homes means lower rents for those who cannot afford to buy and who are struggling to pay rent now because of a shortage of property.”

    It depends on who the landlord is. If its the Govt, then perhaps you are right, rent may be lower – but that may just further increase the number of generations that live in state homes, as there is no incentive for them to buy their own home, when they can rent so cheaply. If its a private landlord, rent may not be cheaper, but people soon work out if it is cheaper to own your own home or continue renting, without being exposed to drastic increases in rates, insurance etc that go with owning a home.

  34. SPC says:

    indiana, state house rent is based on income. If they have a well paid job (thus could afford to buy), they pay a rent similar to a private sector rental.

    More houses should reduce the price of housing to BOTH own AND rent. The variable between being better off owning or renting is the cost of the loan to buy (the current and forecast future cost). The annual cost of rates and insurance at c$60 a week is about 1% of a $300,000 mortgage. This mortgage is cheap at 5%, more common between 6 and 7%, and expensive above this level. A 1% increase in mortgage cost is $60 a week.

  35. Jack Ramaka says:

    With the demand for new houses in Auckland estimated to be 12,000 per annum and only 4,000 per annumm being built, we have a major shortfall, add in Leaky Homes which need recladding or replacing the number increases again.

    We need to do something and the only people with the financial clout are the Government.

    In a first world country, housing, education and health should be seen as priorities for the general population.