Is it a property tax on capital gains or a capital gains tax on property? The Jesuitical distinctions in the government’s spin about its latest moves on property speculators are all about whether the government can claim that it jumped, or confess that it was pushed, into a response. Calling it a property tax means that it was an extension of existing provisions – while calling it a capital gains would be to ’fess up to sleeping with the enemy.
Definitional issues aside – and since this new tax walks and talks like a capital gains tax, lets call it that – there is no doubt that the government has had to be dragged reluctantly to this position. Clearly, a politician can live in denial for only so long. For months, Finance Minister Bill English had been peddling the line that governments can’t really do much to dampen down the demand side of speculation in housing. Australia, English liked to point out, had (a) a stiffer capital gains tax and (b) strict rules against foreign speculators buying existing houses …but regardless, English claimed, they still have a housing price bubble in Sydney ! .
It was never a convincing argument. (Hey, we still have fires too, but no one thinks it would be good idea to live without the Fire Service.) Reserve Bank governor Graeme Wheeler for one, didn’t buy it. Last week, the RB signalled that our Wild West stance towards housing speculation in Auckland is putting the New Zealand economy at serious risk, if and when the price bubble eventually bursts. Speculators account for some 41% of Auckland house sales. Come October, the RB decreed, such people will need to stump up with a 30% deposit before they can get a bank loan.
With refreshing honesty, Wheeler has since explained what a “modest” impact these moves would have, and he cited a recent ANZ survey that Auckland house prices are expected to rise by 75% over the next 5 years. That’s a price bubble, by any standard. Yet by Wheeler’s own reckoning, the RB’s new counter-measures would achieve only an 8% decline in house sales, and a 2-4% decline in house prices. Given that Auckland house prices have risen 9.5% in the past three months, a 2-4% reduction is better than nothing, but would hardly be a game-changer. What the RB was issuing was a none-too-subtle invitation to the government to step up, and do more.
Ion passing, its worth noting the main reason for the modest effect of the RB’s moves. The RB’s tougher lending requirements will constrain only those speculators who borrow from local banks. Foreigners who pay cash, or who access their mortgage money from Singapore and China (at only 2.5 % rates of interest) would be unaffected. As Lyndon Fairbairn, a New Zealand developer based in Singapore told RNZ, we’re a very attractive place for foreign investors in property to do their business.
We offer high yields on rental property – roughly four times above those currently available in Sydney, New York or Singapore, Fairbairn claimed, and our compliance costs are minimal. “We don’t have stamp duties, or [until now] a capital gains tax. It’s a very easy place to transact…”
With his back pushed to the wall, English has finally acted. Yesterday, the government announced that the Budget will unveil a new regime that’s likely to include such things as (a) a de facto registration system for foreign speculators which will among other things, make money laundering more difficult (b) a capital gains tax on property on-sold within two years, with a few exceptions for the likes of family – inherited property and (c) possibly, a withholding tax for foreign investors.
For now, foreigners will still be able to buy existing homes in New Zealand. In Australia by contrast, foreigners are barred from buying existing houses and thus, they can’t fuel the price inflation spiral in the ‘secondary’ housing market. Since they can buy only new houses, this means that foreign investors add to Australia’s housing stock, and they create jobs in the construction industry in the process. It seems like a no-brainer for New Zealand to do likewise, but so far, we’ve chosen not to follow suit.
Until yesterday in fact, Bill English had seemed to be fixated solely on the supply side of the housing equation. Freeing up land and building houses is a worthy long-term goal, but it can also look like you’re doing nothing in the meantime. In that respect, these new taxation-based attempts to dampen down demand should be seen as a belated response to an inertia that was no longer politically viable.
For The Love of Money
Quite a few songs deal with taxes and money….starting all the way back in the 1920s with Fiddlin’ John Carson’s anthem “Taxes On The Farmer Feeds Them All.” From Philadelphia in the early 1970s, here’s Eddie Levert and the O’Jays doing their classic “For The Love of Money” on what looks like the Soul Train television show. It’s a world of flares, loud checks, snappy dance moves…and a cautionary message besides. Given that both of Levert’s sons – the musicians Gerald and Sean Levert – have since died from drug-related overdoses and withdrawals, the lyrics probably carry a personal weight for him now that they may not have, back in the day.
For the love of money
People will lie, Lord, they will cheat
For the love of money
People don’t care who they hurt or beat….
For a small piece of paper
It carries a lot of weight
Call it lean, mean, mean green