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Should the rules around property change?

Friday, August 8th 2008, 1:06PM 11 Comments

by Philip Macalister

The housing market tends to go into a boom and bust cycle. While it’s looking a bit sad at the moment, expect it to come back again. If you believe the Reserve Bank governor then it’s all the fault of politicians.

Reserve Bank governor Alan Bollard did a lengthy (18 mins) interview on radio this week where he discussed a number of things including the state of the housing market and his ability to influence it.

He maintains there are still fundamental distortions in the economy which favour investment in housing and there is little he can do about it.

Commentators often point to monetary policy as being the tool the bank can use to influence the market. Bollard made the point that he has been pushing up interest rates to get the market to come off. It has done that with a “thump” he says.

However he also points out that monetary policy is not, and I love this, “perfect technology”.

It appears he is a tad frustrated that politicians haven’t done anything to stop the Kiwi love affair with property.

His frustration is that the bank has proposed ideas such as mortgage levies and ringfencing, but he says nothing proposed has “been taken up in a serious policy way”.

Reading between the lines it seems that Bollard is saying there will be another housing boom because politicians are too scared to change the rules.

I’d be interested in hearing readers’ thoughts on whether the politicians should do anything, or whether they think property investment will be much of an election issue. Leave a comment below.
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Comments from our readers

On 8 August 2008 at 1:52 pm Jeremy said:
I think Bollard should not overly concern himself with the housing market or house prices. It is a relatively small factor in 'inflation' (which he is employed to control). After all, he is NOT the Minister of Housing Prices. I can't see any problem with letting market forces determine house prices. The notion 'but some people cant afford houses if they get too expensive' is silly. There will always be property owners and tennants. Its true - people with low savings, low wages or a single household income probably wont be able to afford a big home near the city centre. That is reality.
On 8 August 2008 at 2:29 pm RGH said:
Property is such an attractive form of investment in N.Z. that it is hardly surprising there is such a "love affair" with it.
When politicians 'restructured" the N.Z. economy in the 80s/90s and took away tax advantages for superannuation, and destroyed many peoples' livelihoods with privatisation and corporatisation (often only to feed dividend-hungry American shareholders), property became the easiest and quickest way for people to protect their futures. Share-Markets are scary for the inexperienced, and with no capital-gains taxes or stamp duty (as in Aussie) on property to worry about, and with Banks loaning like drunken-sailors, what else would you do?
On 8 August 2008 at 3:21 pm User said:
Bollards job is to maintian stability in the financial markets, he is doing this rather prudently even though people are crying about high rates.
Although before people start trying to crucify Alan for doing his job well (in my opinion) they need to understand the consequences of not doing so
A few facts to consider
1) House prices are up mainly due to credit expansion - between 2000-2008 the M3 (broadest form of money) money supply in NZ has roughly doubled and has roughly done so since the world went off the gold standard in 1971. Currently credit is expanding at 7.45% in NZ (2008) although the 'official' inflation rate is ~4.0%
2) Purchasing power of everyones dollars are dropping daily as more money is printed. US$1 in 1920's now worth equiv. $25 in purchasing power parity
3) Hard assets are being revalued accordingly
4) Wages are not keeping up with inflation minus tax
5) We have tax laws that strongly favour property over other assets, no incentive to invest elsewhere creating an imbalance from productive (i.e. businesses creating jobs/ tax) to non-productive (i.e. real estate)
6) Consequences of asset price instability are possibly hyperinflation, deflation, stagflation and other undesirables

Over 2000 years of economic history prove that excessive growth rates are unsustainable and need to be constrained to sustainable levels (i.e. wage growth) to avoid bubbles and the associated problems that follow
On 8 August 2008 at 3:50 pm Jeremy said:
Also, I cant see why the Govt (apparently) wants us to dabble in the sharemarket. Isn't that a particularly hazardous thing to do with your hard earned cash? I guess quite a few quite rational and careful people invested in the likes of Enron. If the Govt wants us all to play on the sharemarket, why is 'How to invest wisely in the sharemarket' not a strand in the school curiculum?
On 8 August 2008 at 5:50 pm User said:
First of all, I'm not at all against Property
Quite the contrary.. but...

Seeing most of this created credit has been used in NZ property it seems fair to try and curb the increase in credit and associated asset values caused through speculation and 'tax incentives' i.e. negative gearing, no cap gains tax etc

The basic goal of raising interest rates is to constrict the credit/ money supply, unfortunately it is a blunt instrument and has many negative side effects, namely:
- Pushes up the NZ dollar (carry trade) hurting exporters/ GDP producers
- Decreases cost of imports spurring more consumption/ household consumer credit
- Creates trade imbalances relating to the currency and more net outflows (barring inflation to commodities which is currently happening and offsetting deficits)

Changes to the tax law would reduce the speculative part of property investing which has contributed (albeit not all) to the exponential growth,
The truth is if you can make money easily in propoerty with no capital gains tax and negative gear your income as a tax avoidance scheme. why wouldn't you?

However, please refer US 1986 tax reform act, where negative gearing was rampant... then got stamped out for individuals and self employed people... contributing to the 1987 savings and loans crash...

History repeats, and those who do not learn the lessons are doomed to repeat them
On 8 August 2008 at 10:04 pm Alan Pitts said:
In the 70's when you went to a bank in the UK to get a mortgage you had to have !0% deposit and the banks would lend you 3 1/2 times the main earner's salary and 1/2 the second earner. Go back to that and it will automatically control house prices. For rentals the income is the rent so just make the banks use the 3 1/2 times formula. Its the greedy banks that have changed the lending criteria. In the UK the banks have been lending 125% of value, those responsible should be banned from banking.
On 9 August 2008 at 12:12 pm Hamish said:
The tax benefits of investing in property are too good.

If we had an economy that encouraged enterprise and businesses than maybe we would have other things to invest in. Maybe tax benefits for these sorts of activities would be a positive way to encourage change.
On 11 August 2008 at 11:19 am Jeremy said:
I find people are so negative about inflation. Personally I like it. It diminishes my debt and increases my wage.
On 15 August 2008 at 10:56 am John said:
Just like to point out that no one is going to suggest rule changes here on this blog because we are all property investors. If we weren't, we might suggest changes like: having GST on rent, capital gains tax on house price increases etc. We like the way things are now. You can buy an investment house without involving middlemen, if you make a loss you get it off tax and if you make a profit one day you dont have to pay tax on it. Cool...
On 22 August 2008 at 8:40 pm cathy said:
i may be behind the eight-ball on this, but we have no capital gains tax, right? so what about income tax on the increase in capital value? is that just a sneaky way of taxing capital gains without taxing capital gains? or have i missed something
On 25 August 2008 at 10:39 am Melanie said:
I agree with Jeremy's comments. I don't think think house prices should be a political issue & I don't think that responsible property investors are the problem with excessive debt/inflation. It is the people who keep racking up their mortgages to the limit to buy toys such as boats, motorhomes, cars & plasma TVs that should suffer the consequences (& I think a lot are!) If the government wants to interfere, then imposing rules/limits on banks lending on property is the only effective answer. Stop the toy buyers but still enable responsible property investment - after all someone has to be a landlord to the sector of society who will never be able to own their own homes.
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