This brings us to the other awkward point though: truthfully, I'm sure many New Zealanders, just like many Australians, neither want their housing prices/investments to drop in relative price or to return to closer relationships with local use.
Which leads us to the policy/political pantomime game so often involved in these areas where people want to have their cake and eat it too: "I want afforable housing for my children that doesn't make my property prices drop!"
Simply removing the capital gains tax discount would help to prevent speculative investments.
There has been much talk of negative gearing being the issue but those with a short memory don't realise it has been around since the 80s and operating with out much fuss. It was the CGT discount combined with negative gearing that really got the property snowball rolling.
Further, I believe a land tax would help to cool the market in perhaps a more controlled manner.
Not that I can really complain, as we just managed to do really quite well for ourselves off a single year's speculation. But I still think the system's broken.
So, someone who owns O(1) house, pays CGT, but that's compensated by O(1) less income tax.
Someone who is flipping houses is paying CGT but in the end, it's not offset by less income tax if they are flipping lots of houses. They pay tax O(N) on it just like everyone else, and they gain O(1) less income tax.
Would something like this work?
(Forgive my bastardisation of the O-notation :)
It's one of the few forms of income which is not taxed. Everyone else pays income tax.
I think the point of introducing CGT is to tax people who are buying and selling houses as their sole form of income.
Given two people, if one person earns 100k through hard work, and another earns 100k through flicking property, the first person would be at a major tax disadvantage, currently.
However, introducing CGT would essentially mean less money in everyone's pocket. It's possible by reducing income tax, that in the above scenario, hard work is encouraged over being a property middle-man while still maintaining some semblance of balance. I guess you could leave income tax where it is at, but that would make it even harder for people to climb up the property ladder after CGT was introduced, IMHO.
On board with you up until this point, but this is where I disagree with you; by smashing property prices you'd actually end up with more money in (almost) everyone's pocket. By pushing prices down and implementing policies that keep them there you're having no impact on most home owners and massively benefiting all non home owners (which is all future generations), as well as stimulating the economy by pushing money away from non productive real estate speculation and into other areas.
Putting income tax and CGT on the same level seems like the sane place to start to me. A CGT should be assessed annually on paper gains at the marginal income tax rate, then any corrections should be made when a transfer of ownership is made by calculating the total profit over the number of years held. This would mean that income from capital gains would be treated the same as income from other means and seems like a fair way to start.
I think by adding CGT, you increase everyones tax liability a bit, so by reducing income tax, you'd ensure that everyone was basically in the same place, except for people who were abusing the system in the first place.
I'm not an accountant so I should just defer to those who know better :)
I don't think offering an offset for capital gains tax is the right thing to do though; you're still essentially taxing capital gains at a lower rate, e.g. someone that earned a 100k from their job would pay more than someone that earned 50k from their job and 50k from capital gains. Instead the income tax brackets could be adjusted to account for the new income stream such that the total tax take remained the same, then both 100k earners would pay the same rate but on average nobody would be paying more.
Not sure if you're Kiwi or not, but TOP had a very interesting tax policy this election - http://www.top.org.nz/top1 - along those lines, no increase in tax take but a massive change to where it comes from, which would have meant large income tax reductions.
The "no sales to foreigners, let's curb immigration" is a sop to affronted New Zealanders of European and Māori descent, who are increasingly finding themselves outbid by recent (last 20-years) Chinese migrants who not only want a house for themselves but also want to participate in the only economically thriving part of the NZ economy that doesn't require a dairy farm: real estate.
Seems fair to me.
What you're actually going to see is a cottage industry of lawyers setting up citizen-owned shell corporations to funnel this money through -- minus their fees of course.
Just a few months ago, US govt started a program where if a foreigner buys real estate of a certain value ($4 million?) in certain hot markets like Los Angeles, NYC, they have to report it to Treasure or IRS. As of now, that value is too high to be effective imo, but there are ways.
It still took an additional 6 years (roughly) to sell, but throughout that whole process, 99% of the potential buyers, including the eventual purchasers, were Chinese nationals. I lived in that house and met everyone that came through (including the time Anna Chapman came through to show the house...wow).
There's an entire class of real estate here that just has no market without Chinese money coming in.
It would be nice if these laws were written in a less xenophobic fashion (i.e. allow ownership for citizens and permanent residents who've lived a certain number of years in country), but these kinds of policies have their purpose, even if they don't solve the housing affordability problem. It's in the interests of a city/country to have the people who own property in it be people who are committed to living there and caring about the community.
The numbers, at least historically, have always been hard to find, but the macro economic theory and indicators are generally quite boring and straight forward: employment stays high and household incomes improve, interest rates drop, lending and leveraging increases to household, supply is inelastic, house prices rise.
Everything lines up pretty well, so why look to blame foreigners (who, even at the most generous estimates on what data does exist, are still a minority).
The rba website would be my first stop in aus for aggregate finance stats available publicly. The Abs has some construction/hiding investment data, but there are some issues with definitions you'd need to take into account. And our neighbors across the pond, although I'm not a kiwi, I imagine will have very similar structures and data.
Additionally, such a simple model explains house prices quite well since the 1990s, across various markets with various levels of foreign investment, so we would need very good reasons to insert a "foreign investor" cause in there.
Many new condo developments in Vancouver and Toronto are offered for sale in Asian countries exclusively before Canadian citizens can even make an offer on them. If you drive around Toronto there are real estate signs openly advertising areas that don't have a 15% foreign buyer tax.
The RCMP recently busted an elaborate Chinese money laundering ring in Vancouver that was processing $500 million/year in foreign cash alone. Much of it was being used to purchase real estate in Canada. The last article I read mentioned Canadas laws are so lax the authorities couldn't even seize the real estate directly involved in the scam because it was owned by Chinese citizens through shell corps.
Also, Auckland has had probably more immigration than Australia, at least for the last few years.
That said, dropping prices by 10-20% would mean absolutely nothing for an average labourer.
Yet I've heard from one realtor that in some suburbs of Great Vancouver 15% of properties stay empty - pure investment.
Vancouver is not the city to live in anymore. Problem is that it is not the city to work in too. Too long commutes - 2 hours to spend on road. That means work day is not 8 hours but effectively 10. That means people asking and company offering higher salaries.
That housing situation hurts all other businesses except of real estate quite a lot.
But most foreign buyers in these markets are buying to profit, and rent out the properties, and so only really contribute to balancing rental and sale prices.
Sure, a few are left empty by owners who just don't care, but there's very little indication this number is high. Especially as in most countries there are rental management companies that makes it trivial to rent out a property even if you're an absentee landlord.
In Vancouver, the problem is so bad that local shops are going out of business for popular speculative properties because their just isn't enough residents to use them, even though prices are sky high and the developments are all bought out.
If you’re well capitalized it is often cheaper and less hassle to leave them empty. Renting is a pain in the ass and makes unloading the property harder.
Example: I want to hire 10 developers. There are no places to live with price tags less than 1.5 mln in 1 hour commute radii from here. What would be my options? To pay them enough salary so they can afford mortgages? Cheaper to move the whole business to Eastern Europe / Russia then.
The house market is split between people buying and renting. When people buy as an investment, it does drive up purchase prices, but unless they leave it empty rather than rent out, it drives down rental prices by increasing supply. Rental properties also tends to provide more density, as they are more likely to be occupied by sharers, and so increasing the rental supply is likely to soak up more demand than the reduction in purchase opportunities. Eventually the prices reach some degree of equilibrium, because bidding up the purchase prices much quickly becomes unprofitable as rental prices are pushed down.
Ultimately what is driving the cost up is mainly down to more people with enough money who wants to live in a given location, not investors, as if there wasn't demand to live there it'd quickly prove a bad investment.
Your solution to high real estate prices is to make the investment less attractive by increasing taxes? What does this gain for the new buyer?
Obviously, it's very hard for me to be specific to each market, so those are high level principals.
It gains for the new buyer an average falling of house prices, under the assumption that we are talking about a later period market that has seen asset prices rise due to leveraged investment by primarily high net worth holding entities looking primarily for capital gains of of asset price movements in an illiquid and inelastic-supply market, rather than fundamental connections to longer term investment/income flows and local income opportunities. The logic is that this disproportionately targets the leveraged investors regressively compared to the local home buyers.
Now there's also an argument to be made that if you encounter a market that is not in such a state, it could be individually rational for a new buyer to buy into said market, then lobby for policies which increase demand while removing said policies/barriers for themselves, thus trying to turn such a market into our common current situation now they have become a property holder, but in short, we have to try for policies that allow openness for sensible new investment while still tying values to local incomes, services and infrastructure funding, and long run returns.
More generally, harmonising the tax rates between real estate and other asset classes would also lead to more efficient allocation of resources, benefitting everyone.
For new home buyers lower prices is great. For the economy lower prices is great (the initial massive losses will be rough, but going forward it means far less overhead on all Kiwis with that interest money going elsewhere in the economy, and in general the money going into non productive real estate speculation will go to more productive areas of the economy).
Increases taxes to "lower" the price doesn't lower the total cost of ownership, it just hides it by reducing the potential gains (which are _priced into_ the sale price).
I wonder how society functions at all, with the "solutions" I see ...
That is true, but you're missing the point. Given that the reduction in potential gains means that speculators will (to some extent) exit the market this means that demand and therefore prices will drop further.
Additionally non-investors cannot typically realise their "gains" (they don't exit the market to cash them in, they move to other houses which have had similar gains and so have no net gain) and so they're useless to them. Losing those gains doesn't harm them, but the lower price does help them.
I wonder how society functions at all, with all of the poorly "thought" out criticisms of solutions that I see...
Less competition from landlords
Agreed that capital gains and leverage have a lot more do to with it, but I don't think Australians are necessarily ready for "zone/invest appropriately" (and fair enough - so we have to watch our cities transformed to megacities?)
There is actually a very simple solution to this problem: build up.
Credit Suisse research indicates that "foreigners are acquiring 25 per cent of newly completed supply in NSW and 16 per cent in Melbourne, or 21 per cent if we combine the two states". The total value of new houses in both states was $39 billion over the relevant 12 months.
After the Chinese government cracked down on monetary restrictions (i.e. Citizens of China can normally only convert US$50,000 a year in foreign currency and have long been barred from buying property overseas), Lend Lease reported 30 to 40% of foreign purchases now being cash settled.
Transparency International consider Australia the worst money laundering property market in the world.
Foreign investment, especially for countries which avoided the 2007 housing bubble such as Australia, is a major issue.
A friend will be posting an article on the multiple bubbles he sees in the Australian economy, and property is potentially the most concerning of all given how exposed our banks are to housing loans. We may find Australia finally seeing their house bubble pop like the US in 2007.
http://www.smh.com.au/business/property/australian-property-...
https://www.transparency.org/whatwedo/publication/doors_wide...
Updated to include direct link to Credit Suisse: https://research-doc.credit-suisse.com/docView?language=ENG&...
Incidentally, I'm not saying foreign investment plays no part in such markets, but that its relative contribution has always been overstated. Adittionally, the policy responses I suggest which address house prices work irrespective of foreign/local mixes for most markets.
If anything it has been understated.
1) House pricing is incredibly demand sensitive. A sustained 10% drop in demand would crash house prices.
2) Local buyers expect capital gains. It is the reason they buy.
Rental returns on Sydney property for example are roughly the same as fixed deposit rates.
Where do buyers expect these capital gains to come from? For the most part from rich foreign investors (and to a lesser degree very wealthy immigrants).
This means a large fraction of the local investment market is also driven by foreign actors.
But I wonder what the percentages are for Sydney and Melbourne. My anecdotal evidence is that foreigners don't really buy outside the capitals, so I expect it to be much higher.
Which would have a stronger effect on property prices, as the capitals tend to drive prices for the smaller towns.
They might not be interested in country towns but they are very interested in booming coastal towns like Gold/Sunshine Coast in Queensland, I'd assume the some would hold in places like Byron Bay and Coffs Harbor.
Nothing like huge population growth to keep the demand for housing up. Sadly the discussion has been so poisoned by the racists and xenophobes (like One Nation etc.) that we can no longer have a rational conversation about it...
The only problem I have with foreigners buying property here is that they are not in our economy they take any gains out of our economy. It increases the cost of living here without adding value.
Instead of changing the assessed value, it lowers the percentage of tax paid on the value.
There's actually lots of evidence that hot foreign money is driving the prices up. There's also been a trend by developers to develop properties to attract this type of buyer.
See:
https://www.nytimes.com/news-event/shell-company-towers-of-s...
and
https://www.theguardian.com/commentisfree/2015/jan/25/planne...
and
http://www.miamiherald.com/news/business/real-estate-news/ar...
New Zealand is a classic case where housing prices have far exceeded normal incomes. When asked to consider NZ for a job, I ask is the pay better (no); is the cost of living cheaper (also no....). It definitely isn't tech salaries driving the housing bubble there!
The cost of living calculator they put up[1] suggested that I'd be losing money as a single income earner for my wife and daughter in Auckland, while I can support them here and bank literally 1000s on top of my living costs and mortgage here.
I don't know exactly what I'd get in Auckland though, I assume it's estimates are middle of the range, so it's not quite a fair comparison but the general picture fits; in general living costs in NZ are a bit lower (excluding Auckland housing, which is more expensive than anywhere in AU except for Sydney) and the median salary is _far_ lower.
Also, preferences may differ, but I grew up in rural NZ and inner Melbourne is a much more interesting place to live as an adult; the country was pretty fun as a kid though.
[1] https://www.newzealandnow.govt.nz/living-in-nz/money-tax/com...
The reality is that most foreign buyers here rent out their properties - it's an investment after all - and it's only on the very, very high end of the market that people leave their properties empty for any amount of time, and that's a very tiny proportion of the total market.
But it is convenient to be able to blame someone else and avoid making the hard policy decisions requires to boost construction.
(while I agree leveraging makes it worse, though, the underlying problem is still competition for a too constrained supply of housing - I don't know about Australia, but in the UK house-building has trailed demand for decades at this point; to a large extent because of short-sighted policies which focuses infrastructure investments in already overheated areas and makes it even more attractive to move there, coupled with lack of willingness to open new areas for construction or relaxing restrictions on new developments in terms of height etc. outside of very small areas)
That shouldn't matter. Foreign investors bidding up property in place A forces English buyers into place B, and prices naturally rise there as a result.
It's the 90% of Canadians with access to cheap debt and fueled by "real estate never goes down! It's now or never" that pushed prices so high.
That new demand is on top of already high demand. It’s probably magnified as foreign investors want premium property and drive the top of the market up.
Note that the 10% was in the hottest Vancouver neighborhoods. It was much lower in the suburbs and those prices were still ridiculous.
I'm not arguing foreign purchases had zero impact on prices. I'm just arguing compared to domestic purchases, they are pretty small.
10-14% of buyers SELF REPORTED as foreign, across METRO VANCOUVER, not some fancy neighbourhoods. That's the base minimum possible percentage of foreign buyers.
Then the 15% tax was introduced and dropped foreign purchases down to to 3-4%. Do you really think the ~8% stopped buying? No, they just used one of the trivially available loopholes like sending in their astronaut family or buying through a trust company. And many buyers were doing that even before the tax was introduced.
I would love a portal to that universe in which Vancouver housing prices are dropping.
There was a short drop due to uncertainty around the tax and the elections / new government, but it is over, and it was tiny compared to insane price increases that immediately preceded it.
I don't know why you keep saying things that aren't true and yet can be checked online in under a minute.
I've shown very clearly that a temp drop in prices does not support your narrative. And that the prices are now back to an all time high.
You can stop pretending that you opinion is based on facts now, not fooling anyone.
My understanding is that condo sales and prices are still strong. So I'd ask if foreign purchases were the cause, why are condo sales still going up?
Agreed that foreign speculation is at most only part of the problem and that the drivers you mention are a large part of it, but you missed out the other significant factor in the "cultural" inclination to invest in property, which is that the favourable taxation policies (CGT discount, negative gearing, family home CGT exemption) and benefit policies (family home exemption from pension means tests) drive money into property.
In NZ's case it's even worse as there's close to no capital gains tax on any property speculation (no requirement to actually live in a property to claim it as an owner/occupier style non-investment property).
But how do you enforce it?
That said, occupancy requirements are reasonably common elsewhere (e.g. to claim first home buyer benefits in AU, to prove that it's your primary residence to avoid capital gains taxes in AU, to get owner/occupier interest rates in AU) so I assume that they have some means of enforcement, but haven't really looked.
Tying it to appreciation and paper profits could quickly drive someone out of their home (e.g. Seniors). Heck, this is why prop 13 was initiated in the first place, for all the damage it did.
So we end up with this bizarre situation where people in multimillion dollar houses can and do claim the aged pension.
See the other comment re: multi millionaires collecting the pension; my taxes paying for benefits with far more wealth than I'll ever have, it's a frustrating situation.
I lament that lack of business in Australia because everyone is fighting over the scraps of our property market.
A quarter of new NSW properties were sold to foreigners the past year and 89% of those foreigners are Chinese [1]
70% of Chinese are buying property with 100% cash [2]
$3.8 TRILLION USD of "capital flight" escaped from China in the past decade [3]
Australia's property prices doubled this past decade, from an already high base [4]
Australia has no Anti Money Laundering laws for Realestate Agents, Lawyers and Accountants, despite a committee "considering" implementation every two years for over a decade. Transparency International ranks Australia as having the weakest anti-money laundering (AML) laws in the Anglosphere, failing all 10 priority areas [5]
Prices for property are set at the margins (recent sales are used for valuation of upcoming sales) [6]
Read more:
[1] http://mobile.abc.net.au/news/2017-10-11/foreign-buyers-not-...
[2] https://amp.afr.com/real-estate/residential/70pc-of-chinese-...
[3] https://www.forbes.com/sites/insideasia/2017/02/22/china-cap...
[4] https://about.homely.com.au/blog/2017/3/23/what-we-can-learn...
[5] https://www.macrobusiness.com.au/2017/03/report-australia-wo...
[6] https://www.macrobusiness.com.au/2017/04/foreign-buying-can-...
But let's accept some of those reports on face value. In Australia, you have to take into account both that we have laws that limit foreign purchasing of established properties, and that those figures are commonly for newly established properties.
Firstly, that's exactly what the policies were supposed to cause.
Secondly, new sales need to be measured relative to turnover and funding within the local established market. This gives you an idea as to the relative scales. Under the observation that many of these investments will be in high rise inner city apartments, again, it's not necessarily such an alarming figure, and arguably, might even be what policy was set out to achieve.
The most feasible take away I think is your link no 6:pointing out that the price set in a market is a complex play of expectations and marginal prices.
But, as with most of these articles and points, this all had to be taken in context of the behavior of locals and he size of their operations.
I don't say that foreign investment plays no part. While no rain drop considers itself responsible for the flood, I think it's a curious analysis and interpretation that focuses on the 10% and blames them, when there is enough explanation to be found in the behavior of the local 90%, given that obviously market outcomes are in truth an interplay of both.
It doesn't matter if it is the primary cause, it is one of the causes. And it is the one to change that causes the least problems to the people of the country you represent.
In Australia, things are compounded by the incredibly greedy negative gearing rule, which also needs to be banned.
Edit: from an American
That would be when the rent doesn't cover the mortgage interest + maintenance costs.
The benefit is that the dominant form of income in the investment is the capital gains, which is under your control to take at a later date when you'll pay a lower tax rate.
The general strategy is to pump money into a property at a technical loss and make it up the difference on capital gains later.
The original idea was that people would lower the rent to make renting more affordable. This rarely ever happens in practice because tweaks to the law mean that you can claim interest and expenses without actually renting the property (set the rental at an unaffordable price point and leave the house vacant).
The negative gearing only applies to ongoing expenses (e.g. maintenance, interest, depreciation) not to capital expenses.
That doesn’t mean that overseas speculators aren’t part of the cause this problem.
There may be some houses that are left vacant, the owner could be in NZ or somewhere else. Perhaps it would have been more useful to take measures against that instead.
Correct.
The primary cause has always been local steady employment, low interest rates combined with liberal access to debt with households culturally disposed to pumping that into housing.
This part is incorrect; the primary cause in the last 40 years has been supply restrictions: https://jakeseliger.com/2015/09/24/do-millennials-have-a-fut...
Tokyo is a notable exception: https://www.vox.com/2016/8/8/12390048/san-francisco-housing-...
If you access the ABS web-site and download the house price index for each state and capital and map out long term growth excluding the years after 2000. Then calculate the growth of housing that has been typically matching inflation or 3.3% per year (depending on state).
Then you over-lay immigration, births, deaths, and interest rates. You will find that that most of them don't really correlate with the boom in house prices.
Even accounting for the Negative gearing introduction it didn't have `that` much of a impact.
The only correlation I have found that triggered the whole entire cluster f we have now. Is if you go back and look at the introduction of Capital Gains Tax Discount.
After the introduction of CGT Discount that is when the vast majority of high to middle income earners turned to housing as a investment stream to avoid tax. Then on-top of this you had the Howard Government introducing the `User Pay` system where instead of the tax payer fitting the bill for new suburbs and infrastructure for housing, the developer and home owner now has to pay for housing infrastructure.
I live in Darwin, and did recently purchase a house.
Additionally, we have to explain why house price rises correlated strongly across particular international areas at particular times (and that's one area where international investment should not be struck off the initially unfeasible list of options until our data/theory suggests otherwise).
And additionally, if house prices are increasing, why these cities/areas and not others. If there is a reason money and investment is flowing to these places, do these policies address those fundamental reasons. If not, policies may just have to watch effects flow around policy like water flows around obstructions.
If budgets/demand increases, and supply does not adjust, then prices rise. It's Econ 101, and it's technically true. But like most technically true answers, there something unsatisfyingly unhelpful about it.
Tokyo is likely strange due to the particular timing and history of housing and economic bubbles in Japan, vis a vis the millenium bubble and post gfc story that's been playing out for most English speaking nations.
From a later year Economics point of view though, we can start asking some bigger questions:
-what factors contribute to increased demand -should supply increase to match demand? -could any market have increased supply sufficiently to avoid price increases in any meaningful way given the relative liquidity and elasticity of funds and demand increasing policies vs the structural inelastic nature of housing supply - are lagged over/under supply problems possible? - from a public policy and prudential perspective, what should we be doing to manage these issues? should policy be set by locals or by money flows (and I don't think there's an easy or universal answer to that last one)
Take for example Australia. We have one of the most highly regulated land zoning regulations in the world. That and the high price of land where you can build a house on. If you track construction cost vs land prices you will find that land is one of the major contributing factor's to the price of houses.
For example, the house I recently purchase I purchased for $330,000 AUD, but the land is worth valuation is $315,000.
There's limited evidence available that it's foreign buyers primarily responsible for our high house prices :/
The primary cause has always been local steady employment, low interest rates combined with liberal access to debt with households culturally disposed to pumping that into housing.
It's very easy to blame this on Chinese money (which I'm sure is a common story in many parts of the world where house prices are taking off), but the far bigger cause had always been leveraging afforded by local households combined with a low interest rate environment.