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Handle9
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  #2680631 25-Mar-2021 19:41
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I rather like Brian Fallows opinion piece in the herald (paywalled)

 

 

There is a tedious tendency to dismiss demand-side measures, which dominated this week's announcements, as irrelevant when "The Problem" is lack of supply. As if we were only allowed one problem and one solution.

 

 

 

Clearly the physical imbalance between the supply of, and demand for, housing is now extreme. It has been years in the making and will take years, and a raft of policy changes, to resolve.

 

 

 

In the meantime, upward pressure on prices and rents will persist. The question is how high those prices go before they burn off or frustrate that excess demand.

 

 

 

In a seller's market, how much the marginal buyer is able and willing to pay sets the price. At what point does the second highest bidder in an auction drop out?

 

 

 

So measures to curb that in the case of investors, who don't need to be in the market, are highly relevant.

 

 

 

The principled case for at least limiting deductibility of interest would be that you should only allow a deduction for costs incurred in earning income that is taxable.

 

 

 

Rents are taxable income; in general, capital gains are not. (Set aside the bright line test for a moment.) Typically these days, it is the capital gain that is the larger part of the expected return for someone buying an investment property.

 

 

 

For the tax system to treat that investor, who may well have engaged the services of a property manager to deal with the tenants, the same as someone building up a business to provide a livelihood for himself and other people is artificial.

 

 

 

The capital gain pocketed by an investor who sells is purely inflation. One who sells today a property bought five years ago — assuming its value rose in line with the national rate — would be looking at a 50 per cent profit at least, and mostly likely much more if amplified by leverage (a startlingly high share of which is in the form of interest-only loans).

 

 

 

But it is not like a proper business where a capital gain might represent the fruits of shrewd use of retained earnings resulting in an increase in the goods or services the business provides. The landlord is not likely to be housing 50 per cent more people in his rental property.

 

 

 

That invites the response that by extending the bright line test for when the profit on the sale of a property (other than the family home) is taxable income, from the National Government's original two years to five years and now to 10, the Labour Government has implemented the de facto equivalent of a capital gains tax on rental properties. To deny that is specious semantics.



tdgeek
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  #2680643 25-Mar-2021 20:03
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mattwnz:

 

It was actually the Finance Minister himself who referred to it as a tax loophole when he announce the changes with the PM.

 

The government should have implemented a debt to income ratio years ago when interest rates kept dropping. The low interest rates were supposed to go to business to stimulate the economy, but much ended up pumping house prices higher and higher. They look like they may finally bring them in after May, but the horse has well and truly bolted.

 

 

Thats true. Who predicted that? With the detraction of all economies, and the implementation of QE to support the economies, every economist said that houses will ease. All wrong.


Handle9
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  #2680644 25-Mar-2021 20:04
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alasta:

 

Landlords like to push a narrative whereby any additional costs they incur can be directly passed on to tenants. That's not quite how the market works, because rents are driven by demand and supply in the rental market and are ultimately constrained by how much tenants are able to pay. Redistributing houses between investors and owner-occupiers doesn't really affect the balance of demand and supply in the rental market, all other things being equal.

 

That doesn't mean that rents won't increase because of other market factors, and landlords will be quick to blame any government policy that they don't like. 

 

 

Yip. Rents aren't cost+, they based on what the market will bear. If they were cost plus then they would have dropped considerably in the last 2 years as interest rates dropped fast.




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  #2680647 25-Mar-2021 20:07
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tdgeek:

 

mattwnz:

 

It was actually the Finance Minister himself who referred to it as a tax loophole when he announce the changes with the PM.

 

The government should have implemented a debt to income ratio years ago when interest rates kept dropping. The low interest rates were supposed to go to business to stimulate the economy, but much ended up pumping house prices higher and higher. They look like they may finally bring them in after May, but the horse has well and truly bolted.

 

 

Thats true. Who predicted that? With the detraction of all economies, and the implementation of QE to support the economies, every economist said that houses will ease. All wrong.

 

 

Quite a number of people, including me in April last year. I expected a drop, which didn't happen, and then price growth. It's exactly what happened in the GFC, a price drop then fast growth fuelled by cheap money,


tdgeek
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  #2680651 25-Mar-2021 20:14
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Handle9:

 

It's really not safer than the sharemarket over any reasonable horizon. A diversified share portfolio will perform as well or better than property over the medium-long term. If you invest in a truly diversified portfolio you are lower risk in the sharemarket as you can spread risk across hundreds of companies and global markets. When you invest in one property you are absolutely pegged to that house in that market. If you screw it up you can take a hiding.

 

Property has certain advantages, with leverage and tax being the main ones. 

 

 

Thats a very fair comment. Ive invested in both. Many share detractors look at the gambling side of it (excess P/E ratios) , but if you invest in companies that you feel will grow and thats diversified, then I fully agree. Asset backing, earnings per share and growth will reward you. Boring = low P/E, proven over time = high P/E.

 

Unlike shares, a house is ONE BIG SHARE. Assuming its not the over priced best house in a worst street, and its not in a 450 population town south of Gore, it will perform ok, but we don't usually buy a house as an investment, its a home. And overall it will do ok, especially if you live in the same general area. If we wish to use homes as a residential sharemarket, let's all get in, Ill start I'm Auckland first, then sell at a profit and buy Hamilton next. Thats whats happening. Plenty of other stuff to invest n, IMHO, homes need to be kept seperate, as a 20yo, with a new job out has no show now.


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  #2680655 25-Mar-2021 20:18
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tdgeek:

 

sbiddle:

 

The tax changes are a major potential threat for any business. Some media yesterday kept referring to this as a "tax loophole" but it was anything but - it's a legitimate way of calculating taxes on earnings and expenses (including interest) for any business in NZ, and it's also pretty common across the world. If they're willing to make a change to this for property, what could come next?

 

I just don't know what will happen is house prices keep rising - if they're another 20% higher by the end of the year what will happen?

 

 

It all depends if you wish homes to be seen as businesses. If so count me and everyone else in. Safer than the sharemarket, and like the ever present excess P/E ratios, I;ll bet on homes. Unlike share prices, you actually have a real asset as distinct from a "hope it thrives" asset

 

 

Of course renting property is a business. I've yet to see anybody argue it's not.

 

Even MBIE says it is

 


tdgeek
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  #2680656 25-Mar-2021 20:19
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mattwnz:

 

This is part of the problem, people don't see shares as actually owning part of a company. Anyone who has money in kiwisaver likely has much of that money in shares, and many have done very well.

 

 

I agree. Keep gambling (which share market is for some, its actually reliable if you "invest") out of homes. Do the 8% in Kiwisaver and fill your boots


 
 
 

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  #2680657 25-Mar-2021 20:24
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tdgeek:

 

mattwnz:

 

It was actually the Finance Minister himself who referred to it as a tax loophole when he announce the changes with the PM.

 

The government should have implemented a debt to income ratio years ago when interest rates kept dropping. The low interest rates were supposed to go to business to stimulate the economy, but much ended up pumping house prices higher and higher. They look like they may finally bring them in after May, but the horse has well and truly bolted.

 

 

Thats true. Who predicted that? With the detraction of all economies, and the implementation of QE to support the economies, every economist said that houses will ease. All wrong.

 

 

I was actually just looking back at a few stories from a year ago. Yes it's true that many economists predicted prices to fall, but that was based on the uncertainly of what was going to happen. What is pretty consistent however is that most expected a pretty quick recovery of prices once the economy recovered, fueled by cheap money which was just throwing fuel on the fire.

 

We didn't see the fall because the economic impact of Covid was in many ways less than some predicted, so we basically just saw the effects of cheap money kick in straight away.

 

 


tdgeek
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  #2680658 25-Mar-2021 20:26
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Handle9:

 

 

 

Quite a number of people, including me in April last year. I expected a drop, which didn't happen, and then price growth. It's exactly what happened in the GFC, a price drop then fast growth fuelled by cheap money,

 

 

Same here. Unemployment, and lack of certainty for those employed, sit on hands, wait .Once we think its passed, spend up. But the cheap money has really taken over. That wont last, and then it will hurt some. But I get the feeling that cheap money will be here for a couple of years, then the narrative will be "who is screwing me, I saved hard and bought a home now I can't afford it"


tdgeek
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  #2680660 25-Mar-2021 20:29
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sbiddle:

 

 

 

Of course renting property is a business. I've yet to see anybody argue it's not.

 

Even MBIE says it is

 

 

 

Ok, I'm busted. yes it is. What I meant was its not a sharemarket

 

A traditional business (like a landlord) is a business. Its  valued and needed. But its not a sharemarket of sorts.

 

 


tdgeek
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  #2680662 25-Mar-2021 20:33
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sbiddle:

 

 

 

I was actually just looking back at a few stories from a year ago. Yes it's true that many economists predicted prices to fall, but that was based on the uncertainly of what was going to happen. What is pretty consistent however is that most expected a pretty quick recovery of prices once the economy recovered, fueled by cheap mone which was just throwing fuel on the fire.

 

We didn't see the fall because the economic impact of Covid was in many ways less than some predicted, so we basically just saw the effects of cheap money kick in straight away.

 

 

 

 

100% It was a double edged sword except one side ended up blunt (Covid efforts were very good) and the other ended up sharp (super low interest rates)

 

1 +1 = 4 so to speak.


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  #2680678 25-Mar-2021 21:09
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alasta:

 

quickymart:

 

Right, so in your way of thinking I should just completely give up and accept everything is what it is, because (in your eyes) it's never, ever, ever going to change or improve.

 

Sorry but I don't subscribe to such a defeatist attitude as that. Yes I'm frustrated but also optimistic that there may be any improvement to the property market. Also, you don't know my entire situation - only what I've shared on here - and yes while the current situation does suck (I fully agree with you on that one) I find your comments frankly unhelpful (and borderline patronising).

 

 

I have read a lot of your posts and I have never been entirely clear about your motivation for wanting to own property. Is it for security of tenure? Financial security in retirement? A problematic relationship with your current landlord? Poor returns on bank deposits?

 

If you can be more specific then people may be better able to make constructive suggestions to improve your situation.

 

 

Closest would be the first one - a property I can call my own, and somewhere for me to settle with my kids.

 

My landlord is great (a relative, actually) so no problems there :) I'd just like to have a place to call my own. I wish I'd done this at least 10-15 years ago but the timing/my life situation just wasn't right. Unfortunately now I'm ready to settle down, everything else is the issue :D


mattwnz
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  #2680679 25-Mar-2021 21:17
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Handle9:

 

alasta:

 

Landlords like to push a narrative whereby any additional costs they incur can be directly passed on to tenants. That's not quite how the market works, because rents are driven by demand and supply in the rental market and are ultimately constrained by how much tenants are able to pay. Redistributing houses between investors and owner-occupiers doesn't really affect the balance of demand and supply in the rental market, all other things being equal.

 

That doesn't mean that rents won't increase because of other market factors, and landlords will be quick to blame any government policy that they don't like. 

 

 

Yip. Rents aren't cost+, they based on what the market will bear. If they were cost plus then they would have dropped considerably in the last 2 years as interest rates dropped fast.

 

 

The problem at the moment is there is a lack of good rentals, and rents increased 10% in just a year. Therefore there is more demand than supply, and renters could get screwed by this change. So that is why I wonder if the government won't bring in some form of rent control. But guessing they are doing a 'wait and see' approach, so they have some evidence.


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  #2680684 25-Mar-2021 21:21
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quickymart:

 

 

 

 

 

Closest would be the first one - a property I can call my own, and somewhere for me to settle with my kids.

 

My landlord is great (a relative, actually) so no problems there :) I'd just like to have a place to call my own. I wish I'd done this at least 10-15 years ago but the timing/my life situation just wasn't right. Unfortunately now I'm ready to settle down, everything else is the issue :D

 

 

 

 

I have heard that a lot of peoples reasons for buying up lots of houses, is that they want to make sure their children are also set up well. But IMO this is a bit of an odd one, because don't they want their children to make their own way in the world? Or are they thinking that they could sell it to pay for university fees etc. It isn't something that was ever thought about I don't think, when I was a child.


quickymart
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  #2680730 25-Mar-2021 21:26
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Sorry, I should have explained that a bit better. This is just a place for me, not an investment property. I don't have any family in Auckland and would only be wanting to buy one property - not really interested in becoming a property investor, just want a place (only one) to call my own and that my kids can do the same to. That's all :) They can buy their own when they get older, but they would always have somewhere to call home (my place).

 

Problem is, a lot of other people are seeking the same thing these days, and there simply aren't the number of houses that were available 15-20 years ago that allowed people to do this more easily, like they could back then.

 

A former manager of mine bought a place in Albany in 2011, he reckoned that was the last "good" year for house prices (ie, realistically affordable), before they went completely "off the wall" (his words), leading to where they are today.


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