High Interest Rate and $NZ

[Bling_Bling]

Is it me or do you guys also think that the continue high interest rate and $NZ is gonna give us a hard landing in the future? The higher it goes the harder it will fall.

The fact that the current government is failing to cool down the property market, increase government spending and continue increase compliance cost will come back to bite us in the bottom. We borrow to spend more ! All the govt has to do is put a capital gains tax on property and you will see it come down, but we all know they wont do that.

Time for a break, time for a kit kat?

[OldRider]

BB:
I have thoughts that you are much closer to the mark than is comfortable.

It seems to me, rather ridiculous to be borrowing money from overseas to fund the purchase of overpriced housing, which then requires the sending of maybe close to SNZ1 billion in interest annually back overseas to fund what is essentially non existent value. Isn't this just chucking cash down the drain?

Yet still Government just talks, and produces a CGT on some overseas assets to "solve" the problem. A tax on those who are prudently saving and not adding to this real estate bubble, beggars belief.

For myself, I have almost always found that the carrot beats the stick, what is so impossible about reducing company taxation, perhaps going even further and reducing individual tax rates on company dividends?. Would this shift capital from consumption to production, and how much?

Is it completely just political myopia, or am I in my own little drean world?

In this world we can mostly do what we want, making what we will is more difficult, or put another way, to take the man out of the slums is not too difficult, to take the slums out of man is another story.

[I.T.Ancient]

A hard landing for sure. Don't forget also that high marginal tax rates coupled with increased labour market regulation and employment costs may appear benign at present, but once the economy comes off the boil these factors will stymie any revovery and make the recession much deeper than it need have been.

The housing market can be dampened by tightly closing the absurd loophole which allows speculators to claim 'depreciation' against an appreciating asset. That this isn't done tells you that they really don't care about property inflation. Why not? Borrowing ostensibly for housing masks the reality that people are actually borrowing to pay taxes to fund an increasingly large group of parasitic brigands. What Dr. Bollard can't say, if he want's to keep his job, is that the root of the inflation problem (and therefore the exchange rate problem) is that average salaries in Wellington are now higher than in Auckland. Get ready to suck it in folks: If you don't want to live in a country like France you will need to skip the Tassie.

[hiawatha]

USA housing prices are starting to fall, with dire consequences for their economy apparently. We seem to be in much the same position as them with high external debt (I understand it is something like 90% of GDP) and a housing bubble in progress. It looks like a hard landing for us when that bubble bursts, but what can one do about it? Reduce interest rates, perhaps, and let housing prices go where they will? Increase taxes?
hiawatha

[hairdresser]

Capital gains tax on investment property would help address the imbalances in the economy. As it would encourage saving and investment in productive assets.

Its Cullens last term so I think he will go for it before the election. House prices are now so high and rents are increasing so the tax would be popular with the majority of Kiwis if combined with lower marginal tax rates.

The current tax structure means that the lower income groups are subsidsing large tax free capital gains for the higher income groups.

The average Kiwi subsidising wealthy landlords is sellable at the next election and would win some votes. Greens Anderton and Maoris would all support to get it through and they could campign around the issue as National will obviously take the opposing view.

Bollards in a hard place he risks screwing the productive areas of the economy to get the non productive offshore debt funded residential property sector under control.


Say theres 100,000 investment properties at average price 4 years ago $200k. Prices doubled over the period giveing $20b in untaxed capital gain. I don't know the real numbers but it must be a large amount. I can understand why demand for investment properties keeps increasing and why we continue to see the distortions in the economy.

[hiawatha]

If a capital gains tax were introduced then, to be consistent, capital losses would need to be made deductible. This could result in government losing a lot of revenue in the event of the housing bubble bursting, as it surely will, sooner or later.
hiawatha

[BRICKS]

THE story is to easy the "wrong" people have borrow to much money on house prices with greed as there motive and the banks pushing as they don't care they get going up and take it back going down that's why N.S.W.AU. will be in official recession next week as its been already stated it started in DEC.2003.. [8D]

[Steve]

quote:Originally posted by hiawatha

If a capital gains tax were introduced then, to be consistent, capital losses would need to be made deductible. This could result in government losing a lot of revenue in the event of the housing bubble bursting, as it surely will, sooner or later.
hiawatha

A CTG could be introduced after the current housing bubble deflates.

The logic being that if capital losses were to be deductable, this would happen after the loss in value so there would be no effect to the tax base.

This would also provide a political argument for introducing a CTG - to try and help prevent such a bubble in the future...

[BRICKS]

quote:Originally posted by Steve


quote:Originally posted by hiawatha

If a capital gains tax were introduced then, to be consistent, capital losses would need to be made deductible. This could result in government losing a lot of revenue in the event of the housing bubble bursting, as it surely will, sooner or later.
hiawatha

A CTG could be introduced after the current housing bubble deflates.

The logic being that if capital losses were to be deductable, this would happen after the loss in value so there would be no effect to the tax base.

This would also provide a political argument for introducing a CTG - to try and help prevent such a bubble in the future...



YOU have had CGT before in NZ did not work then and will not work now mate your country is not big enough to stand IT.. [8D]

[Bling_Bling]

The banks and finance companies are flooded with too much liquid cash. They need to put all those cash out to work. The reserve bank is gonna kill off the economy and pump more cash into the banking sector if they increase interest rate further. Alot of average kiwis gonna have very sore bottoms in the near future. PArty hard now and have a huge hanger the next day.

[hairdresser]

All they need to do is introduce CGT as a speacial tax at a relatively low level say 15% then creep it over time. This would minimise the intial impact both ways. People would see the writing on the wall and adjust their investment decisions accordingly.

The world didn't end when GST was introduced....

I dont remember CGT being in NZ before but it may have been back in the days when you had to enter a ballot to get a chance to get a mortgage. My parents told me about these times I find it quite unbelievable.

Now I think you just need to prove you are breathing to borrow 100%.

Cheers

[frostyboy]

dont think you want to high a capital gains tax on propety (unless you have complicated rules to avoid speculation - yuk), cause then less people will sell... did something like this similar happen in japan?

ya just want a little to discourage speculation - was that keynes or b graham. but yeah the public will be happy to capital gains tax if a 'crash' happens dam the evil speculators ha. is this to much media speculation looking at a possible capital gains tax in nz? duno if a CTG similar to shares happens (the catalyst) i'll start by selling a little nzd whilst the public can offset their losses against their income

[kura]

If this thread is represantative of public opinion, then a CGT is an election winner !

I also favour a CGT to remove distortions in economy, and see the Oz system as fairly benign (ie: Home exempt, inflation adjusted, 50% discount for assets held over 3 years)

[Enumerate]

Government spending is at the root of the problem!! Why is another tax (to raise government income even higher) considered a solution?!

Apart from infrastructure projects, the fact is that an increasing rate of government spending as a % of GDP or increasing government borrowing leads to higher inflation.

What does a rational person do in a high inflation environment? In NZ - they buy property.

The big problem for government monetary policy is that government fiscal policy is creating the single biggest problem - inflation. Ironic, really.

Who will pay the price for this mismanagement - why the productive investment sector, of course! This has the effect of crippling the element of the economy capable of digging the government out of its monetary hole. Further irony.

What is the prognosis - the imbalance will grow until something snaps.

How can you protect yourself - invest in Australia.

[duncan macgregor]

quote:Originally posted by Enumerate

Government spending is at the root of the problem!! Why is another tax (to raise government income even higher) considered a solution?!
How can you protect yourself - invest in Australia.
YES and YES then YES again, Thats what i have done. I might be wrong but it is a solution.
Bought In 3rd of jan 2007 MCR, AGM, SMY,SMM PEM. Look them up guys then tell me who the winner is.[8)][8)] macdunk laughing at you off shore.

[I.T.Ancient]

Phew. Thank you Enumerate. I was beginning to think that this thread was in a parallel dimension.

Like macdunk, I too have been gradually increasing my holdings in the lucky country; SMM, ATR, BHP, SHL, SLM, TAL, TAG.

[stephens.pc]

Totally agree with Enumerate, a lot of people in this thread dont seem to realise that Govt spending is just as inflationary as private spending. What this country really needs is a compulsory savings scheme, maybe with a requirement that the money has to be invested in areas other than property?

[hiawatha]

quote:Government spending is at the root of the problem!! Why is another tax (to raise government income even higher) considered a solution?!

Increased taxation would probably help. Classic keynsianism. Increase the surplus to counter inflation. What we seem to have is an inflationary problem with all the inflation going into the property market. Normal inflation is diguised by cheap goods from China etc. Reducing interest rates may also help by stemming to flow of money into the country, as this seems to be what's causing the inflation in the first place.
hiawatha

[kura]

quote:Originally posted by I.T.Ancient

Phew. Thank you Enumerate. I was beginning to think that this thread was in a parallel dimension.

Like macdunk, I too have been gradually increasing my holdings in the lucky country; SMM, ATR, BHP, SHL, SLM, TAL, TAG.


I agree with Enumerate in the sense of govt spending being the source of problem, however dissagree with him in his conclusions, in a high inflation enviroment people should buy "things" (weather they be shares, property, stamps etc, does it really matter ? ) A CGT would merely put the taxation of "various things" on an equal footing, if you want to address the problems in our economy (high dollar & interest rate) which hinder the productive sector, then a level playing field is essential.

Disc: I'm old enough to remember my mortgage rate going up from 11% pa up to 20% pa (thank you Roger Douglas) so in a way our interest rates arn't that high on a historical basis, (just high in a international comparison)

[kura]

quote:Originally posted by stephens.pc

Totally agree with Enumerate, a lot of people in this thread dont seem to realise that Govt spending is just as inflationary as private spending. What this country really needs is a compulsory savings scheme, maybe with a requirement that the money has to be invested in areas other than property?

Just a minor point Stephens, after you acknowledge that source of problem is govt spending, how does a compulsory saving scheme rectify the problem ? (my limited mind can't see the link) But making investment in govt stock compulsory would of course solve the problem ? Is that what you would prefer ?

However to address real problem, is that the increase in overseas borrowing, is mostly due to the private sector, not the govt, with the associated risk of creating a bubble in the property market, while our productive export sector is screwed in the meantime.

[coge]

CGT would increase rents & house prices. People would hold off selling to avoid paying the tax, limiting supply & increasing prices. Landlords would seek over time to cover the extra expense through higher rents. Screwing the folk Labour claim to represent. Compared with property prices rents are very reasonable right now, which is good for Labour.

The best way to cool the market down would be an induced credit squeeze.
So Bollard should drop rates by .5 % & state a further reduction is likely in the coming months. That would dry up the foreign lending capital, & would mean some would delay purchasing waiting for further rate reductions. Sort of heating it up in preparation for a cool down.
It would also reduce the NZD which would be good for the economy. This method would make it harder to get a mortgage. Increasing rates has the opposite effect to what is intended.

Overall construction & compliance costs are rocketing ahead meaning it's more & more expensive to buy a new house. This fact also spills over into the existing housing stock. I've experienced this & it is not an insignificant driver. CGT will have little impact on this fact.

[stephens.pc]

Kura, I never suggested the funds would be administered by the Government. A compulsory savings scheme funnelling investment dollars into local industry would decrease our reliance on foreign money.

[kura]

quote:Originally posted by coge


The best way to cool the market down would be an induced credit squeeze.
So Bollard should drop rates by .5 % & state a further reduction is likely in the coming months. That would dry up the foreign lending capital, & would mean some would delay purchasing waiting for further rate reductions. Sort of heating it up in preparation for a cool down.
It would also reduce the NZD which would be good for the economy. This method would make it harder to get a mortgage. Increasing rates has the opposite effect to what is intended.



Gee, inducing a credit squeeze by reducing rates ? Silly old me thought a credit squeeze would be induced by increasing rates, surely reduced rates would just encourage people to borrow more to speculate on "things" ? Would love to be proved wrong here !

[kura]

quote:Originally posted by stephens.pc

Kura, I never suggested the funds would be administered by the Government. A compulsory savings scheme funnelling investment dollars into local industry would decrease our reliance on foreign money.


Stephens, I never suggested it be administered by the govt either, I merely suggested that if govt required a certian % (say 100%, to be extreme) of everyones compulsory savings were invested in govt securities, then it would surely avoid these savings being channeled into the overheated property sector.

You may think this strange, but once apon a time, all financial institutions had to invest a certain % of their assets into govt stock, by varying this % it let the authorities slow down the economy as they saw fit. I was just another weapon in their armoury, in addition to the main one of interest rates, however with the globalisation of economy, it kind of made that particular weapon less than efficient.

No, I'm not having a go at you, I'm only trying to point out that their are a number of mutually exclusive outcomes, in an economic sence (ie you can't have your cake and eat it too )

All I'm trying to suggest is that we have a level playing field, for whatever "asset class" we want to invest in for long term growth, and at present the field is tilted in favour of property


Disc: I'm in Akld, my computer just wobbled sideways, and my doggie went ballistic, think there was just a small earth tremor !

[Footsie]

we had two quakes.... i felt them here on the shore

[coge]

quote:Originally posted by kura


quote:Originally posted by coge


The best way to cool the market down would be an induced credit squeeze.
So Bollard should drop rates by .5 % & state a further reduction is likely in the coming months. That would dry up the foreign lending capital, & would mean some would delay purchasing waiting for further rate reductions. Sort of heating it up in preparation for a cool down.
It would also reduce the NZD which would be good for the economy. This method would make it harder to get a mortgage. Increasing rates has the opposite effect to what is intended.



Gee, inducing a credit squeeze by reducing rates ? Silly old me thought a credit squeeze would be induced by increasing rates, surely reduced rates would just encourage people to borrow more to speculate on "things" ? Would love to be proved wrong here !



Kura, the idea is to reduce availability of finance. By reducing foreign demand for NZD from Japan etc. Where do you think all the money comes from? They only invest here 'cos the high interest rates are so high.
You put 'em up & they will invest even more. Even more money to borrow.
If you want to stop NZ'ers borrowing the availability of lending finance must be tightened. I believe Dr Bollard understands this despite all his tub-thumping. Perhaps you could explain to us why the rate hikes of the last two years have failed in their objective? It's abundantly clear the method you suggest isn't working.

[kura]

OK Coge, say we reduce our domestic interest rates down to Japanese levels (ie next to nothing) So interest is cheap, why wouldn't everyone mortgage themselves up to the eyeballs, and let inflation do all the hard work for them ? (You need to reasise that Japan is recovering from a "bubble" in property, and the locals have come to see "deflation" as the norm.

Are you suggesting we prohibit overseas borrowing ?

What rate hikes of the last 2 years do you refer to ? minor rebalancing in line with our trading partners, that's all wev'e had.

But go on, regulate the availability of finance that's what you are suggesting, sorry, I just recall Rob Muldoon almost destroying the country through his regulatory inclinations (albeit well intentioned)

Goodnight

[hiawatha]

quote:OK Coge, say we reduce our domestic interest rates down to Japanese levels (ie next to nothing) So interest is cheap, why wouldn't everyone mortgage themselves up to the eyeballs, and let inflation do all the hard work for them ? (You need to reasise that Japan is recovering from a "bubble" in property, and the locals have come to see "deflation" as the norm.

Borrowers could only mortgage themselves "up to the eyeballs" if someone was willing to lend. Who is going to be willing to lend if interest rates are next to nothing?
hiawatha

[Base Trader]

Coge is not quite correct in his assumptions. The key thing is that the RBNZ does not act as a bulletin board posting the overnight rate but infact acts as a liquidity provider to the market. That is if they reduce rates and this reduces the carry trade in NZD they would then need to fund the lending/borrowing requirements if there were no other lenders.

The market has a funny way of working around artificial levels of interest rates such as currency changes or seeing the forward curve change. You did not expect the 2 year swap rate was substantially lower than the OCR for the past 3 years because the market was picking an OCR decline of that magnitude?

My take is that NZ inflation is running above target and I suspect the actual figure for NZ families is higher with increased prices in staples (energy, food and housing) rather than the official figures which includes consumer goods that have declined in prices due to exchange rates and the China Effect. Hence, this needs to be tempered. Housing is the key as house price inflation appears out of control with a slowing economy.

This brings me to one of Coge's other points. Why have the increases over the past 2 years not had the desired effect? First and most importantly is employment has remained robust which is good for confidence and obviously cashflows. Secondly, the effect of the fixed rate lending has a longer lag and this is the key borrowing product used by consumers. Still the fixed rates remain low in historic terms.

The house price inflation issue is one faced everywhere in the OECD world at present and not just NZ. The real issue for NZ is the extremely low levels of financial assets relative to property for most NZers and this provides a limited buffer to manage a slowdown.

This is the end of the summer for this property cycle in my opinion. We will get an increase this month in the OCR (again my opinion) and the respite from lower imported commodity prices (especially petrol) will be relatively short lived. These pressures will again place pressure on the RBNZ to continue increasing floating rates.

It is not all doom and gloom as NZ is benefiting from improved commodity returns but there needs to be a currency filip too and this will not happen until the view on NZ changes from rating agencies or the OCR looks to fall.

Also the lag from the farm to the general economy is also 2-3 years. Farmers - short arms and deep pockets.

[hairdresser]

1. Increasing tax take wont affect inflationary pressures as the got will spend the monsy instead of us. Usually a bad idea execpting infrastruture.

2. Base trader is bang on other countries have more balance in their economy ie higher %age of financial assets vs property assets.

3. Raising interest rates is supposed to work by increasing cost of mortgages and reducing net rental yields

The problem with a) this is that most people no longer buy property for the rental yield. When10% price growth tax free vs 8% interest [net 5% after tax]. It is a no braniner to put your money in property. You dont even need tenants to make money under these conditions. Compare this to starting a business.

4. What higher real interest rates do is slow down the productive areas of the economy and push down economic growth. They do this by increasing business financing costs suppress retail spending by and They initially hurt owner occupiers rather than investors as investors have the tax shield whereas owner occupiers do not.

When the higher rates have have the effct of throttling the economy and people are losing their jobs and leaving the country it becomes unattractive to invest in property. If you have no income you cannot afford to put in cash and you have no beneift from the tax shield so people sell and the property bubble deflates.

5. The probelm with this is that NZ's economic growth lags the rest of world proabaly because of high interest rates pushing up the dollar and regularly stuffing our exporters and imbalance of assets in unrpoductive sectors like property.

6. Real interest rates [rate vs inflation] in NZ are historically high and the gap between return on productive investment and real risk free rates is small compared with other countries. An average 7% sharemarket return is not much higher than the average returns on bonds. Why bother investing in something risky when there is good safe moey around.

7. If you look at the graphs of real interest rates with economic growth you see a good correlation between the slopes with a lag of around 2 years.

8. A credit squeeze would only be triggered by a sudden say 15-20% decline in property prices, banks currently view lending on property as virtually risk free as defults in recent times have been negligible. I think all the people in banks who remeber the 1987 crash have just about all retired...

Summary
Higher interest rates do not discourage real estate booms in themselves but they work by slowing down the whole economy. This is not a good outcome for the country. This is what Bollard wants to avoid.

I would rather have a level [or at least a leveller] playing field. It will not stop the pattern of boom bust real estate prices [this ocurs everywhere], however, it will reduce property returns and this over time should help rebalance the economy.

[hiawatha]

quote:1. Increasing tax take wont affect inflationary pressures as the got will spend the monsy instead of us. Usually a bad idea execpting infrastruture.

It would be illogical of the government to spend the extra revenue if the purpose of any tax increase was to counter inflation. Therefore I suspect they wouldn't. After all they seem happy to run a surplus at the present time in spite of calls from idiots like John Keys and Rodney Hide to implement tax cuts.
hiawatha

[Bling_Bling]

Immigration and a good economy is keeping our property market up. Maybe slow down immigration for a period with a tight monetary condition to help slow down the housing bubble?

[stephens.pc]

Well between us we seem to have a heck of a lot of ideas compared to the govt!

[Bling_Bling]

This govt will only implement out ideas that will benefit them in the next coming election.

[redzone]

I thought it would be quite easy to sort it all out.....just make it that you have to have say 20% cash before you can put anything on hock...be it a house ...tele ...car or what ever....watch inflation and the dollar drop then

[Jess9]

quote:Originally posted by coge


quote:Originally posted by kura


quote:Originally posted by coge


The best way to cool the market down would be an induced credit squeeze.
So Bollard should drop rates by .5 % & state a further reduction is likely in the coming months. That would dry up the foreign lending capital, & would mean some would delay purchasing waiting for further rate reductions. Sort of heating it up in preparation for a cool down.
It would also reduce the NZD which would be good for the economy.

This method would make it harder to get a mortgage. Increasing rates has the opposite effect to what is intended.



Gee, inducing a credit squeeze by reducing rates ? Silly old me thought a credit squeeze would be induced by increasing rates, surely reduced rates would just encourage people to borrow more to speculate on "things" ? Would love to be proved wrong here !



Kura, the idea is to reduce availability of finance. By reducing foreign demand for NZD from Japan etc. Where do you think all the money comes from? They only invest here 'cos the high interest rates are so high.
You put 'em up & they will invest even more. Even more money to borrow.
If you want to stop NZ'ers borrowing the availability of lending finance must be tightened. I believe Dr Bollard understands this despite all his tub-thumping. Perhaps you could explain to us why the rate hikes of the last two years have failed in their objective? It's abundantly clear the method you suggest isn't working.



Hi Coge. Liquidity in NZ of NZD's is the problem, agree, therefore the rate hike in Japan today will be shutting off the tap from that source - unless Bollard ups the NZ rate by same, next review ; )

Maybe NZ rates wont rise.

Specifically on property prices - per Kieran Trass, int rates are not a driver, rather a market influencer.

[coge]

Jess9, I don't think Dr Bollard will raise rates either. Besides he's charged with keeping inflation at bay, why fuel the fire?

[etnom]

From a letter sent out by Kelvyn Alp (Direct Democracy Party) with mostly ramblings found this little example.


**********
The following illustration will comically show what a fruitless exercise our application of banking has become (leaving the interest component out of the equation until the end);

We all decide we are going to sit around a table and play cards, so we all borrow $1000.00 from our friendly banker and set our sites on striking it rich by out witting our opponents with our refined skills and poker-face. At the opening of each hand, we of course each place $1.00 into the centre of the table for the banker that loaned us the money and then the cards are dealt. As the game progresses some of us will be up in our money count and some will be down. However, every hand we play, we are giving the banker the $1.00 so if we continue to apply this method of cards, it will not matter how lucky any particular player is, because at the end of that game, the banker will end up with it all. He risked nothing in the game and did not even play a hand, yet there he is holding all of the money and to make matters worse, we are now all in debt to him with no way to pay because of the interest he charged at the time we borrowed that money.

So how do we pay the banker that which he says we owe when we have no means by which to satisfy the debt? Simple we must forfeit assets, property, or some other form of wealth to discharge the debt.

************************

[Bling_Bling]

This market aint looking so **** hot. Is it a sign or is it buying opportunity? The next interest rise does concern me.

[Nevl]

7.5% it will not work. When will Bollard learn this. NZ needs to see some mass layoffs making people afraid about their jobs to acheive what he wants. Unfortunantly these will happen in the export center if he keeps up with this silly policy. Kiwis want property!!! Hopefully the unwinding of the carry trade will negate any of the upward movement in the exchange rate. Need a few more external shocks to force people to take their money home. Maybe a tax on offshore investors in Bonds. Something like a non resident withholding tax. Would not affect NZers and would stop people just parking their money in NZ either forcing them to take money home or invest directly in NZ business if they really want to be here.

[I.T.Ancient]

He did the right thing, and he had the guts to mention "an expansionary fiscal policy", even if he mentioned the housing market in the same breath to avoid falling out with his bosses. Full marks.

It strikes me that it is the government surplus which is confusing may folk. Particluarly as whenever Cullen doesn't want to spend money (because the proposed spending doesn't buy enough votes per $) he talks about avoiding fueling inflation as if he is prudent. This government has substantially increased it's spending year by year. The surplus is there because the government's income has increased just as rapidly as it's spending. This isn't prudent, it is stupid because it is not sustainable. In the medium/long term the consequence will be far worse than having to live with high interest rates.

[Nevl]

not saying it wasn't right just that it won't work. Interest rates as a policy instrument have done their day. They have their moment in the sun but now capitial markets and speculative flows have negated their effect as a brake on inflation and asset bubbles. A new policy instrument needs to be found. As IT says it needs to be back on the governments fiscal policy.Keynes may be back in Business

[hiawatha]

quote:not saying it wasn't right just that it won't work. Interest rates as a policy instrument have done their day. They have their moment in the sun but now capitial markets and speculative flows have negated their effect as a brake on inflation and asset bubbles. A new policy instrument needs to be found. As IT says it needs to be back on the governments fiscal policy.Keynes may be back in Business

Agree wholeheartedly. Increasing taxes is the way to go, but not necessarily income taxes. Increased taxes on motor fuels would dampen things a bit and at the same time keep greenies happy. Taxing property investment may also help (I think Bollard made mention of this)
hiawatha

[Bling_Bling]

Put a capital gains tax on foreign investors and slow down immigration and you will see the propery consolidate very quickly.

[thereslifeafter87]

quote:Originally posted by hiawatha

If a capital gains tax were introduced then, to be consistent, capital losses would need to be made deductible. This could result in government losing a lot of revenue in the event of the housing bubble bursting, as it surely will, sooner or later.
hiawatha


Nah, you just ring-fence the capital losses, only allowing them to be offset against future capital gains.

[thereslifeafter87]

quote:Originally posted by Enumerate

Government spending is at the root of the problem!! Why is another tax (to raise government income even higher) considered a solution?!

Apart from infrastructure projects, the fact is that an increasing rate of government spending as a % of GDP or increasing government borrowing leads to higher inflation.

What does a rational person do in a high inflation environment? In NZ - they buy property.

The big problem for government monetary policy is that government fiscal policy is creating the single biggest problem - inflation. Ironic, really.

Who will pay the price for this mismanagement - why the productive investment sector, of course! This has the effect of crippling the element of the economy capable of digging the government out of its monetary hole. Further irony.

What is the prognosis - the imbalance will grow until something snaps.

How can you protect yourself - invest in Australia.


The idea isn't to increase government spending, it's to create a more neutral tax system, removing distortions that currently exist. Any CGT should be offset by a reduction in income tax rates - or an increase in the bands.

I'd be in favour of providing a tax-free allowance, say for the first $10k of income. Then everyone gets the allowance, but the poor are much better off percentagewise (they get to keep a higher proportion of their income).

[thereslifeafter87]

quote:Originally posted by etnom

From a letter sent out by Kelvyn Alp (Direct Democracy Party) with mostly ramblings found this little example.


**********
The following illustration will comically show what a fruitless exercise our application of banking has become (leaving the interest component out of the equation until the end);

We all decide we are going to sit around a table and play cards, so we all borrow $1000.00 from our friendly banker and set our sites on striking it rich by out witting our opponents with our refined skills and poker-face. At the opening of each hand, we of course each place $1.00 into the centre of the table for the banker that loaned us the money and then the cards are dealt. As the game progresses some of us will be up in our money count and some will be down. However, every hand we play, we are giving the banker the $1.00 so if we continue to apply this method of cards, it will not matter how lucky any particular player is, because at the end of that game, the banker will end up with it all. He risked nothing in the game and did not even play a hand, yet there he is holding all of the money and to make matters worse, we are now all in debt to him with no way to pay because of the interest he charged at the time we borrowed that money.

So how do we pay the banker that which he says we owe when we have no means by which to satisfy the debt? Simple we must forfeit assets, property, or some other form of wealth to discharge the debt.

************************



That example shows a poor understanding of economics. Firstly, investing in assets such as housing is not a zero sum game. Prices can keep rising, and over time have done so. Also, the banker is never going to demand all his money back. In fact, the banker wants to continue to make profits, so will keep lending, and will increase his lending as his capital base grows.

[thereslifeafter87]

Getting back to the original question, I can't see how high interest rates will make us head toward a hard landing. Surely higher interest rates give the Reserve Bank more flexibility to stimulate the economy in the event of a downturn (ie: by lowering interest rates and making money cheaper).

[Enumerate]

quote:Originally posted by thereslifeafter87
The idea isn't to increase government spending, it's to create a more neutral tax system, removing distortions that currently exist. Any CGT should be offset by a reduction in income tax rates - or an increase in the bands.


We have already seen the introduction of a limited CGT - and have yet to see hide or hair of any reduction in taxation.

Meanwhile - the expansion of the non-productive sector continues ....

There is only one way this can end .... badly.

Meanwhile, in sunny Australia - the Enumerate is enjoying both the commodities and biotech booms!

[Enumerate]

The only effect of the rate hike will be to increase the value of the currency (which is already overvalued as a home for speculative, high rate, "hot money").

Bollard is stuffing the basement full of powder kegs of gunpowder. The Japanese housewives and Belgian dentists are snooping around in the dark with naked flame candles ....

Pity the poor farmer - inflation is holding up the value of farm properties and making working capital expensive. However, prices are constrained by the high value of the currency. The people being squeezed the most are in the engine room of our economy. The people getting the free ride are high priced staffers of our burgeoning government departments ....

Farmers, I suppose, generally don't vote Labour.

[hiawatha]

quote:Originally posted by thereslifeafter87

Getting back to the original question, I can't see how high interest rates will make us head toward a hard landing. Surely higher interest rates give the Reserve Bank more flexibility to stimulate the economy in the event of a downturn (ie: by lowering interest rates and making money cheaper).



This is probably right but, given that high interest rates seem to be propping up the kiwi dollar, one has to wonder if greater emphasis shouldn't be placed on fiscal policy.

[redzone]

Hell all these guys need to do is make it that no one can get hp or buy a house,car or what ever without a deposit of say 20%....watch inflation and prices drop across the board then...fiance companies would disappear over night....bludgers

[Bilo]

i liked this piece by BERNARD HICKEY is close to the truth behind the statement:
http://www.stuff.co.nz/3986026a1865.html


Bollard said the Reserve Bank was separately working with other government agencies to tighten the tax rules applying to housing investment. The Reserve Bank itself was also looking at ways to change bank capital requirements to moderate the housing cycle.

“The weakness in the New Zealand dollar following the statement is most likely due to the specific reference to these measures. We think the market sees this as a clear signal about the bank's reluctance to raise rates further," said Deutsche Bank chief economist Darren Gibbs.

Darren Gibbs could have added that he agreed with the RBNZ that the assortment of taxation and bank reserve deposit measures proposed by the RBNZ look like providing short sharp and effective triggers to encourage desirable behaviours and discourage undesirable behaviours.

The Labour party may yet rue the photo of Cullen in this mornings Herald; laid back, pathetically smug, laughing at the productive Kiwis he is supposed to represent. Cullen's super is well provided for.

[Shrewd Crude]

quote:
hiawatha
Posted - 08/03/2007 : 1:38:43 PM


quote:
nevl.....not saying it wasn't right just that it won't work.
1.....Interest rates as a policy instrument have done their day.
2......They have their moment in the sun but now capitial markets and speculative flows have negated their effect as a brake on inflation and asset bubbles. A new policy instrument needs to be found. As IT says it needs to be back on the governments fiscal policy.Keynes may be back in Business

Agree wholeheartedly.
3.....Increasing taxes is the way to go, but not necessarily income taxes.
4..... Increased taxes on motor fuels would dampen things a bit and at the same time keep greenies happy.
5.....Taxing property investment may also help (I think Bollard made mention of this)
hiawatha

1.....interest rate policy is the yard stick and the only real way to control inflation....
NZ has only ever had controlled inflation through Interest rate policy....
To take it away and risk the consequenes of high inflation is far worse as in the short term it impacts GDP growth little, but in Medium to long term has a major impact....
NZ has only in the last 10 years gotten back those growth rates that inflation took off us 10 years before that...

2....inflation is not solely driven by capital markets at all...
Oil prices are high...which drives plastics, so pushes up supermarket prices, resource prices are high.... which pushes up building costs....
Environmental issues are pushing prices up in Auzzie, as fruits veges become more expensive... they buy our goods and push ours up...
businesses then push their prices up and the cycle continues....
we are in one of those cycles driven by baby boomers who are spending large and pushing up/bidding up prices...
its almost as if markets dont even feel the pinch of high oil prices as BB's push growth...

3...Taxing is not the answer either.... we pay far too much tax as it is.... tax errodes away at growth as well....You see, Interest rates are a tool to control inflation.... inflation is one of the key determinates of Growth... which is the most important goal really...

4.....hiawatha....Do you know how much Americans pay per litre for their fuel?.... about 66 US cents per litre.... we pay 50% more as it is.... I am all for the environment but dont tax cars much more....it just goes into the tax pool, rather than environmental iniatives...
5.... yes this is correct....
[8D]
.^sc

[Steve]

quote:Originally posted by Shrewd Crude
[br1.....interest rate policy is the yard stick and the only real way to control inflation....
NZ has only ever had controlled inflation through Interest rate policy....

Bit before my time, but didn't Muldoon control inflation with a price freeze in the late 70's? Of course, in the long term this didn't work as the excess of the 80's showed us...

[hiawatha]

quote:4.....hiawatha....Do you know how much Americans pay per litre for their fuel?.... about 66 US cents per litre.... we pay 50% more as it is.... I am all for the environment but dont tax cars much more....it just goes into the tax pool, rather than environmental iniatives...

The Americans apparently use 20% of the world's petroleum, a figure way out of proportion to their population numbers. Europeans, who tax motor fuels even more heavily than we do, have a much lower per capita usage. Given that oil is not an unlimited resource and will run out sooner or later, I think I prefer the European approach.
The low inflation that we have enjoyed in recent years has, I believe, little to do with interest rates but more to do with the rationalizations, downsizings, etc (particularly in the public sector) that went on during the eighties and nineties, as well as an overvalued exchange rate and cheap goods from China, etc.
Interest rate policy attempts to control the level of eonomic activity (and therefore inflation) by influencing levels of investment. The trouble is that the world seems awash with dosh at the moment and high interest rates seem to be attracting too much of it in our direction.This seems to be keeping exchange rates high, hurting exporters, and fuelling property prices.
I'm not sure what the answer is but I cannot help feeling that greater use of fiscal policy would be preferable to constantly increasing interest rates. As it's doubtful whether there is much scope for reducing Government expenditure, this would seem to suggest tax increases, preferably indirect taxes like motor fuel taxes, GST (perhaps domestic rental income could be made to attract GST) etc
hiawatha

[Halebop]

quote:Originally posted by Steve

Bit before my time, but didn't Muldoon control inflation with a price freeze in the late 70's? Of course, in the long term this didn't work as the excess of the 80's showed us...


Definately not "control" Steve. How can you hope to legislate against inflation? About as successful as legislating against prostitution and drugs I suspect.

While the freeze was on the name of the game was find assets (these were still allowed to inflate) that would rise in value. Of course, all that unproductive asset shuffling would ultimately prove inflationary as well. So this was just another form of inflation and even Muldoon worked out that by squeezing harder he was just letting it trickle through his fingers. It was policies like this that gave the fruit loops at social credit hope that 1+1 was indeed 48. When the handbrake came off, prices and wages rose quickly.

[Bilo]

Shrewd Crude re your point:
3..."Taxing is not the answer either.... we pay far too much tax as it is.... tax errodes away at growth as well...."

Taxation is a redistribution not necessarily just more for those who already pay. Perhaps you are one of the few b____s like me that pay and it is too much of a mental shift to think that you might get some back / pay less.

[duncan macgregor]

All they have done is make investors like me desert the country and invest elsewhere. When you have farms running at a loss because of a high dollar, and factories closing shop because they cant compete against slave labour, the writing is on the wall. The young people are booking up student loans then fleeing the country when they qualify. Nz needs a good kick up the backside before it goes under.
Get rid of the tax system, where people pay tax on their earnings. You should only pay tax on your spending. Income tax abolished, raise gst to cover it, plus a different rate for the items that only the rich might buy. Fifty pc gst on 6cyl cars 75pc on 8cyl cars and so forth. Hundred of thousands of office wallers would then be free to have real productive jobs instead of leaching out the swill bin. Ah life could be made so easy with a little bit of thought, but until that happens, i invest overseas and watch in mild amusement. macdunk

[hiawatha]

But MacDunk, as NZ resident you pay tax on Australian income
hiawatha

[Shrewd Crude]

Steve- Muldoon was one of the worst leaders NZ ever had...
his brain epxlosions made NZ suffer for a decade after he left office...
Yes in the early 1980's he tried to control inflation with a price freeze... it worked at first but becamwe worse over time
as did England on November 1972....
http://rbnz.govt.nz/keygraphs/fig1b.html
look at this graph of historical, The low point in 1984 was when he held the price freeze.... look what happened after it was lifted...
inflation was worse... thats what happens when you let a politician run the economy.... Since then the RBNZ has been calling all the shots, who have one main goal which is to contain inflation....
[8D]
.^sc

[Steve]

Sorry SC, it appears that I ommitted the word tried.[:I]

[Enumerate]

quote:Originally posted by Shrewd Crude
... thats what happens when you let a politician run the economy.... Since then the RBNZ has been calling all the shots, who have one main goal which is to contain inflation....


The problem is that monetary policy is still being run subordinate to those who control fiscal policy. Evidence of this is raising the inflation bands by Dr Cullen.

The "witchhunt" against property ownership is obscene. The most dominant effect contributing to our current inflation rate is not the appreciation in property prices.

If you were serious about controlling inflation - you would first tighten fiscal policy (this makes it difficult to buy elections). You would engage in serious programmes to mitigate external factors (get serious about domestic ethanol in transport fuel, get serious about building a domestic petrochemical industry starting with discovery programmes).

[Halebop]

quote:Originally posted by Enumerate

The "witchhunt" against property ownership is obscene. The most dominant effect contributing to our current inflation rate is not the appreciation in property prices.

There is no "witchhunt" against property ownership. How would removing the tax advantages of negative geared property or adding a mortgage levy affect owners of property? These measures impact those who borrow, not those who own because I can own property without the borrowings. 'Course few would be in this position because the cash flow from residential property is so poor there is little prospect of clearing debt in any sort of time frame that comes close to prudent investment metrics.

If you find yourself in this category, consider your motive. The pre tax cash flow does not stack up so you are a speculator rather than investor, no matter how "rational" you believe property to be. There is rarely any political mileage in supporting speculators no matter what services to liquidity they might provide.

The real issue is that we export billions each year to foreign creditors via mortgage borrowing. Those that are complicit (the borrowers) enjoy reduced tax bills despite making higher profits. Housing is becoming the domain of investors rather than owner occupiers because the tax system supports a higher price for investors. Property investors may think "So what?" or (more probably) "WIFM?" but they should be safely assued that any social and political backlash will cost them money and not the renters. The arguments that these investors provide some special social quality (accomodation?) via property investment is specious. The market would find the price that property is viable without the need for a tax subsidy. In any case, much property investment is tax driven, so those that pay higher rates of tax are being subsidised by the renters who mostly do not. A very strange form of redistribution.

How come those on the right find it so easy to accept user pays and bootstraps except where it comes to their residential property portfolio? Here they are happy to suckle on the State's swollen bosom. All very self reliant I'm sure.

[Enumerate]

The commercial reality, in New Zealand, is that residential property is acquired almost invariably with debt funding. The percentage of people gaining tax benefit, in the residential property market, by investing in a highly leveraged fashion is tiny compared with the debt supported by the non-investor market.

It is disingenuous to presume that the rise in residential property values has been precipitated by a small number of leveraged investors. The rise is a global phenomenon and is largely validated by the high rates of inflation in evidence around the world.

There is most definitely a "demonistation" of residential property by the Reserve Bank governor. He may be concerned with the levels of private debt and growing consumer spending - but the focus on controlling residential property price inflation is a mistake in causality - it is an "effect" and not a "cause". A poor grasp of causality is the economist's greatest weakness (the essential Muldoonist trap).

The climate in Wellington is pre-disposed to a Keynesian view of the world - a world view that the history Professor can identify with. In Bollard, we have someone supporting the "party line" and failing to identify the "causes" where there could be political fallout in such an identification.

Instead, we now "tilt at windmills" ...

[warthog]

The warthog notes that it is more useful to observe people's actions rather than what they say. This applies to everybody: The Government, Bollard, developers, and so on. So Bollard says he might move again to curb the housing market. Developers say they will move to LA, or Melbourne, or wherever. Let's see.

[Bilo]

Cullen’s Record:
• Cullen raised income taxes against international trends;
• Accentuating property as the best performing investment in a capital gain free NZ;
• Prevaricated about incentives to exporters and was happy that they couldn’t agree on anything, so they got nothing – in fact less than nothing;
• And Cullen fiddled while the NZ productive sector burnt.
• Set up a super fund to invest Kiwi money offshore.
• Prevaricated over the Resource Management ACT and then joined Kyoto just to kill another productive Kiwi industry;
• And the Labour party’s political persuasions left the RBNZ’s sole inflation lever ineffective, and Cullen is happy with the RBNZ performance. Cullen, happy in the knowledge that RBNZ are trying to punch non-tax-paying-asset-speculator’s lights out with both hands broken and tied behind their backs. Egged on by the Australian banks whose profit record shows that how hard done they are by the margins they receive for 100% property loans.
• So Kiwis continue to send their capital overseas or invest in NZ property, borrow through Australian banks from Japanese housewives and Dutch dentists against their assets in NZ - at a net cost to Kiwis and NZ taxes.
• Forces the RBNZ to intervene in the money market forcing Kiwis to pay excessive interest amounts in a world flush with surplus cash to the delight of the Australian banks;
• Still prevaricating about lowering income tax to previous levels let alone levels that encourage productive activity.


“Killem all Cullen” fiddles while NZ wastes – now to dump the RBNZ as ineffective and turn the lights out on NZ before handing over a near hopeless economy to the other political party.

[Halebop]

quote:Originally posted by Enumerate

The commercial reality, in New Zealand, is that residential property is acquired almost invariably with debt funding. The percentage of people gaining tax benefit, in the residential property market, by investing in a highly leveraged fashion is tiny compared with the debt supported by the non-investor market.

Suggest you provide some numbers to support the tiny argument. The "commercial reality" is that the tax system strongly suggests borrowings to be useful. My commercial reality is that I don't borrow. This provides freedom of action because I have no commitments (like cash flow) to consider when making investments and have cash to spare when buying opportunities arise. The irony is of course, my bank at times contacts me with solicitations to borrow. ...those who can best afford it require it least.

About 2/3rds of the population are owner occupiers, irrespective of their debt status. This means 1/3rd of investment property is held by investors, again irrespective of their debt status. Even if there was only one property investor in the entire country (Keiran Trass suggested there were 250,000 though I'm not clear how this might be known unless IRD publish some numbers and we can identify links between individuals and corporate structures), 33% of properties by number would be captured in the tax net. Hardly a tiny proportion.

What we do know in terms of numbers is that property investors would rationally maximise the amount of borrowings that could be considered tax deductible, because the tax system rewards them for this. So irrespective if my borrowings represent 100% of my portfolio value or 1%, I'd want to capture the largest possible shares of the cost of those borrowings in my list of deductions.

A look to borrowings and borrowing costs versus GDP shows that the property boom has also conincided with a mortgage lending boom. It would be a brave call to discount any link financing has on markets.


quote:Originally posted by Enumerate

It is disingenuous to presume that the rise in residential property values has been precipitated by a small number of leveraged investors. The rise is a global phenomenon and is largely validated by the high rates of inflation in evidence around the world.

Agreed. I don't care if investors are leveraged or not. All property investors contribute to the rise in property values. Just as all net property sellers would contribute to a drop. This is a pretty basic fundamental to markets. It's not a coincidence that Rose prices rise at Valentines. Forget disingenous though. It's improbable to surmise that removing the rev from borrowings would not in turn remove a major lever on property inflation. But that isn't even the argument. The issue is the amount of money we export paying for those bills and the inflationary impact that dilution creates. Property and property prices are only a symptom. The core is debt, debt servicing and wealth exporting.


quote:Originally posted by Enumerate

There is most definitely a "demonistation" of residential property by the Reserve Bank governor. He may be concerned with the levels of private debt and growing consumer spending - but the focus on controlling residential property price inflation is a mistake in causality - it is an "effect" and not a "cause". A poor grasp of causality is the economist's greatest weakness (the essential Muldoonist trap).

That's f

[Shrewd Crude]

halebop....
yet again, another top post....
you are a mack daddy....
[8D]
.^sc

[Flying Goat]

quote:Originally posted by Bilo

Cullen’s Record:
• Cullen raised income taxes against international trends;
• Accentuating property as the best performing investment in a capital gain free NZ;
• Prevaricated about incentives to exporters and was happy that they couldn’t agree on anything, so they got nothing – in fact less than nothing;
• And Cullen fiddled while the NZ productive sector burnt.
• Set up a super fund to invest Kiwi money offshore.
• Prevaricated over the Resource Management ACT and then joined Kyoto just to kill another productive Kiwi industry;
• And the Labour party’s political persuasions left the RBNZ’s sole inflation lever ineffective, and Cullen is happy with the RBNZ performance. Cullen, happy in the knowledge that RBNZ are trying to punch non-tax-paying-asset-speculator’s lights out with both hands broken and tied behind their backs. Egged on by the Australian banks whose profit record shows that how hard done they are by the margins they receive for 100% property loans.
• So Kiwis continue to send their capital overseas or invest in NZ property, borrow through Australian banks from Japanese housewives and Dutch dentists against their assets in NZ - at a net cost to Kiwis and NZ taxes.
• Forces the RBNZ to intervene in the money market forcing Kiwis to pay excessive interest amounts in a world flush with surplus cash to the delight of the Australian banks;
• Still prevaricating about lowering income tax to previous levels let alone levels that encourage productive activity.


“Killem all Cullen” fiddles while NZ wastes – now to dump the RBNZ as ineffective and turn the lights out on NZ before handing over a near hopeless economy to the other political party.



Belgian Dentist's actually, other than that minor oversight that was a superb post and I agree 100% with your sentiment.

FG

[FTG]

Lets get back to the basics folks.

As already raised, rising house prices & interest rates are not the cause of the problem. They are one of the many effects.
In true tradition many "experts" latch on to the "easiest & sexist" target - hence the increased recent focus on regulating & taxing further the property market. Real ambulance at the bottom of the hill stuff!

Investing in rental properties is a business. A landlord is in the business of providing a service for customers - Accomodation.
Like any other business, money is often borrowed. This money is & should continue to be tax deductible as a business expense. Just like any other business. To Halebob's point, at the moment, in most cases, borrowing large %'s for rental properties does not stack up in cashflow terms. Hence any prudent business owner (landlord) would ensure they don't tip the balance and have too many borrowings. Remember, Cashflow is ultimately the lifeblood of any business!

Depreciation: What is it? simply a recognition that all assets have a finite life and hence is an allocation for future expenditure & replacement of those assets.
Like any other business, depreciation is and should continue to be a deductible expense for rental properties. Maybe not today, maybe not tomorrow, but one day the landlord will have to make significant capital expenditure decisions to keep his main business asset up to the standard his customers demand. If he doesn't, be assured, like any other business owner who doesn't make timely reinvestment decisions, his cashflows will be negatively impacted.

It doesn't take too much intelligence for one to realise that if we were to make the rules different (e.g. eliminate depreciation & interest deductbility) for the rental property business owners what's going to happen. It would be far better for those owners to invest in other types of business.
Despite it being "sexy" to attack property investors and blame them for all and sundry Cullen etc has just enough intelligence to know that if they "change the rules" too much they will clearly tip the balance. Not only would they crush the patient but also the ambulance would be demolished!

[Enumerate]

There is an excellent description of the relationship between fiscal and monetary policy as interpreted by the Reserve Bank Act:

http://www.rbnz.govt.nz/monpol/review/0097145.pdf


quote:
Fiscal policy influences demand pressure via both direct spending by the government and changes to private disposable income through the taxation and benefit system. In these ways, fiscal policy affects demand and inflation pressure, in much the same way as changes in trading-partner demand for our exports, or confidence-based changes in private investment, for example. While demand – and thus inflation – pressures may originate from a range of different sources, the task of monetary policy is to respond so as to maintain an overall level of demand consistent with keeping inflation in one to two years’
time within the target range. For example, if the government increases its net spending, all other things being equal, monetary policy needs to be tighter for a time, so as to slow growth of private demand and “make room” for the additional government spending.


We have the situation where the Gov't has decided to increase its net spending. Monetary policy must tighten, as a consequence. This has lead to a speculative boom in the currency which makes "virtuous" behavior - thrift, low debt - an irrational course of action.

Borrow as much as you can, in NZ. Send it to Australia to "work". High inflation or a currency collapse will reward you.

Efforts to subdue the property market is Muldoonist idiocy of the first water. It is a price freeze - by another name. This will end, as it did in the 80's, with a currency crisis.

Advance Australia fair ...

[Flying Goat]

quote:Originally posted by FTG

Lets get back to the basics folks.

As already raised, rising house prices & interest rates are not the cause of the problem. They are one of the many effects.
In true tradition many "experts" latch on to the "easiest & sexist" target - hence the increased recent focus on regulating & taxing further the property market. Real ambulance at the bottom of the hill stuff!

Investing in rental properties is a business. A landlord is in the business of providing a service for customers - Accomodation.
Like any other business, money is often borrowed. This money is & should continue to be tax deductible as a business expense. Just like any other business. To Halebob's point, at the moment, in most cases, borrowing large %'s for rental properties does not stack up in cashflow terms. Hence any prudent business owner (landlord) would ensure they don't tip the balance and have too many borrowings. Remember, Cashflow is ultimately the lifeblood of any business!

Depreciation: What is it? simply a recognition that all assets have a finite life and hence is an allocation for future expenditure & replacement of those assets.
Like any other business, depreciation is and should continue to be a deductible expense for rental properties. Maybe not today, maybe not tomorrow, but one day the landlord will have to make significant capital expenditure decisions to keep his main business asset up to the standard his customers demand. If he doesn't, be assured, like any other business owner who doesn't make timely reinvestment decisions, his cashflows will be negatively impacted.

It doesn't take too much intelligence for one to realise that if we were to make the rules different (e.g. eliminate depreciation & interest deductbility) for the rental property business owners what's going to happen. It would be far better for those owners to invest in other types of business.
Despite it being "sexy" to attack property investors and blame them for all and sundry Cullen etc has just enough intelligence to know that if they "change the rules" too much they will clearly tip the balance. Not only would they crush the patient but also the ambulance would be demolished!



Now the translation: "I am a property investor, so F you all"

[Enumerate]

Consider the following quote from the above referenced link:


quote:
New Zealand has chosen not to go down the path of determining monetary and fiscal policy jointly – which would require a different set of institutional arrangements from those established by the Fiscal Responsibility Act and the Reserve Bank Act. Under the existing arrangements, a decentralised approach to co-ordination is provided for. The Government, as fiscal authority, and the Reserve Bank, as monetary authority, co-ordinate policy by each taking account of the policies of the other, but within their respective longterm frameworks. This decentralised approach to co-ordination is acilitated by each being very transparent about their respective policies. A more centralised approach would imply on occasion subordinating the long-term objective of one or the other in the interests of
short-term stabilisation.


In a situation in which Cullen is an arrogant ?@#$ and Bollard is a spineless &$%@ - the NZ system could enter a potentially deadly spiral. The monetary response is insufficient to deal with the fiscal irresponsibly. Inflation creeps up - the monetary response becomes even more frantic.

Unlike Australia, where record commodity prices are holding up the economy, NZ does not have many positive external factors to console the Reserve Bank Governor.

I suppose Don Brash is looking for a job. If the Reserve Bank Governor had a spine - he would be telling the Gov't to control fiscal policy.

We cannot have a "soft landing" and a loose fiscal policy. Keynes was wrong Dr C - your history books and dedication to political expediency are leading you astray.

[hiawatha]

quote:Investing in rental properties is a business. A landlord is in the business of providing a service for customers - Accomodation.
Like any other business, money is often borrowed. This money is & should continue to be tax deductible as a business expense. Just like any other business. To Halebob's point, at the moment, in most cases, borrowing large %'s for rental properties does not stack up in cashflow terms. Hence any prudent business owner (landlord) would ensure they don't tip the balance and have too many borrowings. Remember, Cashflow is ultimately the lifeblood of any business!


Suppose I own a property unencumbered by a mortgage. If I were to sell that property and plonk the money in the bank I could earn interest on it. Therefore if, instead of selling, I continue to own that property I incur what might be called a "notional" cost in terms of the interest lost. Therefore it seems only fair that I should be able to treat as tax deductible, that "notional" cost from any rental I might receive if I were to let that property.
If I'm not allowed to do this then I think it's unfair that persons who borrow to purchase a rental property should be allowed to deduct for tax purposes the interest THEY incur thereby.
hiawatha

[FTG]

Dear oh dear Hiawatha,

You haven't applied much thought to your point have you!
If you were in the envious position of being unencumbered by a mortgage then your "business" would have significantly less expenses (interest charges are normally the highest cost for most landlords) and hence the bottom line would be significantly higher. So NOTHING would be lost! In fact, invest in the right property and your % return may even be higher than what you would get at a bank.

[hiawatha]

quote: Dear oh dear Hiawatha,

You haven't applied much thought to your point have you!
If you were in the envious position of being unencumbered by a mortgage then your "business" would have significantly less expenses (interest charges are normally the highest cost for most landlords) and hence the bottom line would be significantly higher. So NOTHING would be lost! In fact, invest in the right property and your % return may even be higher than what you would get at a bank.

I was just being logical.
One of the first principles of taxation is that the only expenses which are deductible are those that represent the actual cost of doing business.
Interest is not a cost of doing business since a person can carry on a business perfectly well without incurring any interest.
I guess the point I'm making is that if Bollard were to suggest that tax law be changed to make interest on property investments non deductible, in the interests of "getting tough on property investment", then there is no reason why we should consider this either irrational or unfair.
hiawatha

[Base Trader]

NZ is now made up of families with two incomes, commiting significant proportion of their cash flows into rents/mortages. Are we any better off for this as a whole? Not really.

Does the average NZer have a better position as a result of a higher property value as compared to his Father who committed a far small proportion of income from a single wage into paying for the family house? The houses have a few more gadgets, the neighbours are closer but they are essentially the same.

If the majority of assets held were financial assets these could be liquidated or dividend streams can provide for an improved standard of living. But a house if you liquidate if means you trade down or trade rents for an asset - and essentially weaken your standard of living. The property investor aside - the average NZer is no better off and most likely worse off for the property boom.

Property investment needs to be controlled to improve the lot of all NZers. The rebalance should start with CGT to reduce the effect of gains in an investors decision. In the case yield becomes a more important component of the investment decision then valuations will be made relative to rents. Rents are typically driven by CPI, wages, supply-demand etc - things that relate to the overall economy and not the micro economy of a tax advantaged investment.

For mine I would increase CGT to 50%-60% of gain and decrease yield marginal tax rate to 25%-30%. Or better again set up Real estate Investment trusts at 22% tax rate. This will encourage building of housing but only if their remains a rental market. Importantly, it will effectively eliminate negative gearing.

[I.T.Ancient]

We don't need another tax. Any additional income for the government will be spent sooner or later in an inflationary and wasteful manner.

It was no accident that FTG devoted plenty of words to depreciation. As a business owner, I can expense some spending immediately - and thus deduct against tax - while other spending has to be capitalised and I have to drip feed the expense (depreciation) over time broadly in line with the resale value of the asset which I purchased. This ties in perfectly with the way I value my business - the assets are worth what the market will pay for them. Property investors claim depreciation expenses against assets which are appreciating in value. Those tax deductions are substantial. Notionally, property investors have a tax liability to repay all those deductions if and when they sell the property. There are all sorts of ways they can avoid that (the most common methods involve trusts and of course just not selling). In effect, other taxpayers provide them financial assistance to buy property! This is achieved by their having their properties on their books at entirely fictitious values.

Changing the daft depreciation rules would put more money into governmant coffers too, but unlike a CGT, it wouldn't provide them with yet another tax which they could arbitrarily increase when they want to pay more of their mates $100k to sit in offices in Wellington promoting government policy on discussion forums.

[hiawatha]

quote:Changing the daft depreciation rules would put more money into governmant coffers too, but unlike a CGT, it wouldn't provide them with yet another tax which they could arbitrarily increase when they want to pay more of their mates $100k to sit in offices in Wellington promoting government policy on discussion forums.

Depreciation is a legitimate cost nevertheless. The depreciation clawback that comes into effect when a property is sold at a capital profit is, in reality, a CGT in disguise.
hiawatha

[neopole]

i have read some awesome comments in the last 2 pages, and some purely profit orinentated comments too, and its interesting to see where NZers stand on this topic.
one thing i'd like to add here is this........
what happens to our future generation?
how do the 20 somthings (our future) become home owners?
"median" kiwis....... thats most of us......
not the " average" kiwi as stated by the govt......
earn around $15 hour.
so,
hubby and wifey, or defacto couple in this day and age.... have $30 hour combined to buy a median priced house in the $300,000 range in provicial towns and cities........ where the work is.
add the housing supliment to the combined income,
and 100% morgage over 50 years,
and then........ if they are very lucky, they might get a house in crimesviles.

in the meantime...... the 35plus age group are "investing" in residential property,while collecting depeciation and tax refunds on income, and spit the dummy because they might have to pay tax on their guarenteed profits............
too bad about the future of the next generation.

in the old days........
people used to set seige on other lands and rape and pilage.......
then
people used to rape the land for mineral and oil profits.
then
they raped their fellow man through poor wages and working conditions.

now,
they rape the future of the next generation...
and the sad thing is.........
the government supports this.

end of the day.........
4 million people in a country the size of the UK,
and some of the most expensive realestate compared to income will only lead to one conclusion.............

POP!!!

[Halebop]

quote:Originally posted by hiawatha

Depreciation is a legitimate cost nevertheless. The depreciation clawback that comes into effect when a property is sold at a capital profit is, in reality, a CGT in disguise.

Depreciation is an expense, capitalised over the economic life of an asset. Clawing back the depreciation claimed at time of sale (where the sale price exceeds the depreciated value) is a recognition that the expense was not incurred by the owner. This has absolutely nothing to do with being a capital gains tax in disguise.

What the depreciation allowance does acheive though is economic cash flow when economic fundamentals don't otherwise exist (i.e rent does not cover outgoings). Property self help books and property forums are full of advice that boils down to the depreciation allowance being a key feature in residential investing affordability and cash flows. I don't find this a meritorious reason for its existance. In the longer run it serves to make housing less affordable (and rational) to those who want nothing more than to live in their own home (I'm not talking investing here) and serves as an both an anchor on productivity and lever on inflation as we export interest payments to pay for new kitchen fittings.

[hiawatha]

quote:Depreciation is an expense, capitalised over the economic life of an asset. Clawing back the depreciation claimed at time of sale (where the sale price exceeds the depreciated value) is a recognition that the expense was not incurred by the owner. This has absolutely nothing to do with being a capital gains tax in disguise.

No capital gain, no clawback. Therefore tax on depreciation is a capital gains tax in disguise.
hiawatha

[thereslifeafter87]

quote:Originally posted by Enumerate


quote:Originally posted by thereslifeafter87
The idea isn't to increase government spending, it's to create a more neutral tax system, removing distortions that currently exist. Any CGT should be offset by a reduction in income tax rates - or an increase in the bands.


We have already seen the introduction of a limited CGT - and have yet to see hide or hair of any reduction in taxation.



You're wrong.

The government has given flow through tax treatment to mutual funds, allowing those one lower incomes to be taxed at their marginal rates rather than at the fund rate.

Also, traders who make more than five percent a year overseas will save a helluva lot of cash, as their gains are capped at five percent under the fair dividend rate.

[thereslifeafter87]

quote:Originally posted by hiawatha


quote:Depreciation is an expense, capitalised over the economic life of an asset. Clawing back the depreciation claimed at time of sale (where the sale price exceeds the depreciated value) is a recognition that the expense was not incurred by the owner. This has absolutely nothing to do with being a capital gains tax in disguise.

No capital gain, no clawback. Therefore tax on depreciation is a capital gains tax in disguise.
hiawatha


No it's not. That is because you are not being taxed on your gains, it is simply a timing reversal of deductions you have previously received.

[hiawatha]

quote:No it's not. That is because you are not being taxed on your gains, it is simply a timing reversal of deductions you have previously received.

I agree one is not being taxed on gains. I didn't say it was an overt CGT. I said it is a CGT in disguise. Perhaps I should have said a tax in lieu of CGT , which amounts to the same thing.
hiawatha

[Steve]

quote:Originally posted by hiawatha


quote:No it's not. That is because you are not being taxed on your gains, it is simply a timing reversal of deductions you have previously received.

I agree one is not being taxed on gains. I didn't say it was an overt CGT. I said it is a CGT in disguise. Perhaps I should have said a tax in lieu of CGT , which amounts to the same thing.
hiawatha

It is NOT a tax. It is just a squaring up of a timing difference![^]

[KJ]

Effectively an interest free loan which is supposed to be repaid ie it is brought bach as revenue when the property is sold.
Nothing to do with capital gain.

[FTG]

[quote]Originally posted by I.T.Ancient

We don't need another tax. Any additional income for the government will be spent sooner or later in an inflationary and wasteful manner.

Totally agreee I.T.A. Also as already mentioned rising house prices are an effect, not a cause. Introducing CGT will do nothing productive in the long term. With the whole planet awash with liquidity, ALL asset classes have been rising - Equities, Property, Commodities etc. This has been happening in all developed countries, regardless of the tax regime in place. Property prices have been rising just as vigoursly in countries that already have CGT on property. Introducing CGT will NOT fix the problem(s). In fact some of the regions with CGT have had HIGHER property value increases than NZ.


Property investors claim depreciation expenses against assets which are appreciating in value. Those tax deductions are substantial.

Not entirely correct- It is primarily the land under a property which goes up in value. Land cannot be depreciated. Remember also at some stage significant capital expenditure will be required to keep a property up to the standard the "customer" demands. Examples include reflooring, repiling, re roofing, bathroom & kitchen refitouts etc etc. The depreciation of the building is an allocation for this future expenditure.


Folks,"Easy Credit" is a significant driver of the issues faced (worldwide). The harsh reality is that many individuals, companies & governments are borrowing beyond their means. Things look all nice & rosing when Interest rates are on the low side and the system is awash with money trying to find a home. But as we all know, the party can't continue forever. Eventually the artificial highs will fade and the hangover will set in. Property owners are just [u]part</u> of the party. They are no more the main cause of the party than the next door neighbour who was invited in for a few drinks.

[Steve]

quote:Originally posted by FTG

Folks,"Easy Credit" is a significant driver of the issues faced (worldwide). The harsh reality is that many individuals, companies & governments are borrowing beyond their means. Things look all nice & rosing when Interest rates are on the low side and the system is awash with money trying to find a home. But as we all know, the party can't continue forever. Eventually the artificial highs will fade and the hangover will set in. Property owners are just [u]part</u> of the party. They are no more the main cause of the party than the next door neighbour who was invited in for a few drinks.

FTG, if only there were a few more like yourself involved in politics

[Halebop]

quote:Originally posted by FTG

...Property owners are just [u]part</u> of the party. They are no more the main cause of the party than the next door neighbour who was invited in for a few drinks.


Not sure this is the best analogy FTG. A party after all, is made up of the aggregate of neighbours invited in for a few drinks. In any case, if that neighbour drinks too much, he still has to put up with the hangover the next morning, even if he didn't supply the booze. As a non party goer, I have an uncomfortable feeling that we will meet on the road at night while he's driving home. And I didn't go to the party!

[hiawatha]

quote: It is NOT a tax. It is just a squaring up of a timing difference!

OK. It's not a tax. It is just a device which brings about an increase in the amount of tax that a vendor has to pay at the time of sale. Which amounts to the same thing.
hiawatha

[Halebop]

quote:Originally posted by hiawatha

OK. It's not a tax. It is just a device which brings about an increase in the amount of tax that a vendor has to pay at the time of sale. Which amounts to the same thing.
hiawatha


Nope. It's a device which recognises that an expense claimed was not actually incurred. As it has been suggested, it amounts to an interest free loan in the interim period. This is a benefit to the property investor and not something that should be derided at point of sale.

[Steve]

Let's not forget that a taxpayer can elect at the start not to depreciate an asset!

No expense claimed, pay more tax in the short term - No depreciation recovery income, pay less tax in the future.

Applying the concept of time-value of money, it is a no-brainer to claim depreciation now and deal with any recovery at the time of sale...

[Lizard]

quote:Originally posted by thereslifeafter87
Also, traders who make more than five percent a year overseas will save a helluva lot of cash, as their gains are capped at five percent under the fair dividend rate.


That doesn't seem correct TLA87. As I understand it, traders will continue to hold their shares on revenue account with realised capital gain treated as income. The FDR regime is only applied to investors.

[hiawatha]

quote:Nope. It's a device which recognises that an expense claimed was not actually incurred. As it has been suggested, it amounts to an interest free loan in the interim period. This is a benefit to the property investor and not something that should be derided at point of sale.

Are you saying, halebop, that if I own a house then, barring accidents, it will last forever. It would be nice to think that, no doubt, but I don't think it's true. Therefore there must be depreciation.
hiawatha

[Halebop]

quote:Originally posted by hiawatha

Are you saying, halebop, that if I own a house then, barring accidents, it will last forever. It would be nice to think that, no doubt, but I don't think it's true. Therefore there must be depreciation.
hiawatha

No.

I (and several other posters, the IRD, past and present Governments and Case Law) am saying that if you sell that same investment dwelling for more than it's depreciated value yet claimed depreciation when it hasn't actually been cash expensed then there has been no loss incurred. No loss, therefore no legitimate expense deduction, therefore no tax refund, therefore it is effectively clawed back at sale time. All more than fair (you have still benefitted from the cash flow and time value benefit the depreciation tax credits provided at other taxpayers expense).

Not really sure how many other ways people can offer the same answer you find so unpalatable Hiawatha?

[COLIN]

quote:Originally posted by hiawatha


quote:Nope. It's a device which recognises that an expense claimed was not actually incurred. As it has been suggested, it amounts to an interest free loan in the interim period. This is a benefit to the property investor and not something that should be derided at point of sale.

Are you saying, halebop, that if I own a house then, barring accidents, it will last forever. It would be nice to think that, no doubt, but I don't think it's true. Therefore there must be depreciation.
hiawatha


Hiawatha of course is correct. Land is the only element of a property that doesn't depreciate. But there can be no one correct scientifically-based formula that accurately spreads the decline in the value of a building over its useful life. If its affected by the "leaky building syndrome" then its true rate of depreciation might be a lot faster than standard IRD rates. Conversely, if its an aqueduct built by the Romans it might still be in use 2,000 years later! What muddies the waters for current generations is:
(a) Debasement of the currency, i.e. decline in the purchasing power of the dollar, or "inflation", and,
(b) Cost-push pressures on the supply of housing stock.

The depreciation "claw-back" provisions for investment properties sold within 10 years is a form of CGT. After all, why should it apply to a property held for 9.9 years but not for 10.1 years? It is all very arbitrary.

[Halebop]

The 10 year limit is a tax "break" and not something to moan about. It is a simplistic and mechanical model that accepts 10+ years is a reasonable period of time to deem that many of the costs of depreciation have actually been expensed or that the now plus decade old kitchen truly does detract from the capital value. To complain about this aspect is to invite much more complex and expensive to administer systems in it's place. The result is hardly likely to be less taxation if the 10 year limit was abolished altogther. I'm all for it if this is your suggestion? :D

Again, your perceived CGT claw back relates only to what was claimed in the first place - this has nothing to do with capital gain but actually correlates with expense loss, a literal double negative (there, another way of saying the same thing differently).

[Steve]

quote:Originally posted by COLIN

The depreciation "claw-back" provisions for investment properties sold within 10 years is a form of CGT. After all, why should it apply to a property held for 9.9 years but not for 10.1 years? It is all very arbitrary.

Not sure where you got this from Colin.

The depreciation clawback is not subject to the 10 year rule. The clawback is there for life, as long as the asset is sold for greater than its written down value. This is covered in sEE of the Income Tax Act.

The 10 year rule relates to what the IRD calls "Land Transactions" (purchase with intent to sell, subdivisions, developments etc) and is covered in sCB of the Income Tax Act.

[Halebop]

I know my father had some fun splitting the values of a rental property he chopped some land off in the early 90s. Not sure if the same rules applies now but it wasn't as straight forward as it might seem.

[hiawatha]

quote:I (and several other posters, the IRD, past and present Governments and Case Law) am saying that if you sell that same investment dwelling for more than it's depreciated value yet claimed depreciation when it hasn't actually been cash expensed then there has been no loss incurred. No loss, therefore no legitimate expense deduction, therefore no tax refund, therefore it is effectively clawed back at sale time. All more than fair (you have still benefitted from the cash flow and time value benefit the depreciation tax credits provided at other taxpayers expense).

Not really sure how many other ways people can offer the same answer you find so unpalatable Hiawatha?
Go to Top of Page

I'm not too concerned about what the law says. The law, as Dickens' Mr Bumble said, is sometimes an ass. The only way that depreciation can not be applicable to a asset is if the asset has an infinite lifespan. The difference between the selling price of an asset and the book value (BV = historical cost less depreciation) is actually a capital gain since it has to be assumed that if whatever is driving the capital gain had not occurred then that book value is what the house would have sold for. We don't know what the the house would have sold for in that event, since it didn't happen, but we have to make some assumptions.
I would say that the 40 year lifespan implied by the IRD's 2 1/2 percent allowance is probably too conservative. But if that's the figure they stipulate that's the figure you are best to go with. The IRD would do better to try to ascertain a more realistic figure than to impose this stupid and unprincipled clawback.
The point is that an assumption that a high selling price reflects 'depreciation not having "really" occurred' and that it is not due to a capital gain is simply an unprovable assumption.
hiawatha

[hiawatha]

A further point is that the purpose of depreciation is device accountants use to spread the cost of the asset over its working life and therefore applies even if the house remains in pristine condition. The fact that a house may or may not need a new kitchin after 10 years is irrelevant.
hiawatha

[Halebop]

quote:Originally posted by hiawatha

I'm not too concerned about what the law says.

:D ...um, the whole debate was about the law. But I guess if a disagreement about the law can exclude the law in its prognosis then whatever you like can be true. Well done! ;)

[hiawatha]

quote:then whatever you like can be true. Well done!

Only if the "whatever you like" is rational.
hiawatha

[Dubdee]

depreciation is in effect for those who claim it an interst free loan from the IRD repayable on sale. You can elect not to depreciate and therefore there is no clawback, but wow behold those who do not elect and fail to depreciate. They are deemed to have done so and clawback will apply to the total period from purchase until sale whether depreciation is claimed in any year or not. Not a pleasant outcome!

[hiawatha]

quote:depreciation is in effect for those who claim it an interst free loan from the IRD repayable on sale. You can elect not to depreciate and therefore there is no clawback, but wow behold those who do not elect and fail to depreciate. They are deemed to have done so and clawback will apply to the total period from purchase until sale whether depreciation is claimed in any year or not. Not a pleasant outcome!
Go to Top of Page

I think if you fail to depreciate, whether or not you elect, you risk missing out on the benefit if the housing market nosedives and your property finishes at a value lower than it cost you. Not very likely at present but I would not discount the possibility in the near to medium future.
hiawatha

[COLIN]

quote:Originally posted by Steve


quote:Originally posted by COLIN

The depreciation "claw-back" provisions for investment properties sold within 10 years is a form of CGT. After all, why should it apply to a property held for 9.9 years but not for 10.1 years? It is all very arbitrary.

Not sure where you got this from Colin.

The depreciation clawback is not subject to the 10 year rule. The clawback is there for life, as long as the asset is sold for greater than its written down value. This is covered in sEE of the Income Tax Act.

The 10 year rule relates to what the IRD calls "Land Transactions" (purchase with intent to sell, subdivisions, developments etc) and is covered in sCB of the Income Tax Act.


Steve: You appear to be well versed on the "ins" and "outs" of the Income Tax Act. However I was talking from my own experience with two different situations in respect of properties I have owned, at different times. The first was a house that we lived in for a short time and then rented out when we moved to another house. We claimed depreciation each year, against the rental income, in our tax returns, and when we sold the property some 4 years after buying it we were required to "disgorge" the amount of depreciation previously claimed. The second property was a lifestyle block which had another house on it, additional to our own dwelling, and we rented out that other house, claiming depreciation thereon. We sold the whole property some 12 years after purchasing it, but in this case were not required to "disgorge" the previously-claimed depreciation.
I hope you are not going to get the IRD cops onto me now, to reopen my tax returns!

[nell]

My opinion is that the IRD will get you one way or another. People with loss attributing companies to buy properties and depreciating assets that increase in value are just defferring tax and the IRD will win in the end. Can anyone pesuade me differently?

[Bilo]

quote:Originally posted by nell

My opinion is that the IRD will get you one way or another. People with loss attributing companies to buy properties and depreciating assets that increase in value are just defferring tax and the IRD will win in the end. Can anyone pesuade me differently?

Nell
A deferred expense is not an expense until it occurs. With property it can be delayed for 10 years and then it doesn't come to account at all.

[hiawatha]

quote:Nell
A deferred expense is not an expense until it occurs. With property it can be delayed for 10 years and then it doesn't come to account at all.


I don't follow that. Please explain.
hiawatha

[hiawatha]

quote: Finance minister Michael Cullen admitted in a speech in Wellington today that New Zealand needs tools other than the offocial cash rate (OCR) to combat inflation and rein in the housing market. Raising interest rates hammered exporters and harmed the economy, he said.

[Toddy]

A US led economic recession will make this thread redundant.

Watch the Kiwi drop the ball today. The NZ dollar is driven by the offshore market, not internally.
As for the housing market, its just another asset class and its day in the sun is just about over.

[Bilo]

quote:Originally posted by hiawatha


quote: Finance minister Michael Cullen admitted in a speech in Wellington today that New Zealand needs tools other than the offocial cash rate (OCR) to combat inflation and rein in the housing market. Raising interest rates hammered exporters and harmed the economy, he said.

Halleluiah! I guess we shouldn't stop bemoaning the worst Finance Minister since Piggy Muldoon and just recognise that he is a very slow learner.

This is the first step towards accepting that interest rates will reduce towards competitive market demand and supply levels, and tax rules and redistributions will be consistent with Kiwis getting ahead together.

[Shrewd Crude]

quote:Finance minister Michael Cullen admitted in a speech in Wellington today that New Zealand needs tools other than the offocial cash rate (OCR) to combat inflation and rein in the housing market. Raising interest rates hammered exporters and harmed the economy, he said.

this statement is wrong...."NZ needs tools other than OCR to combat inflation and rein in housing market"....
no.... NZ needs tools to rein in the housing market period.... Inflation aint bad at all in historical perspective...
Short term inflation here was never the issue it is medium term inflation which was the problem which should be doused by the recent OCR rise, and quite probably another OCR rise....
since 1992 inflation touched 4% twice....
and spent most time around the 2%mark....
this is more stable than ever before...

exports and imports have an inverse reletionship....
no matter what happens with Interest rates, there will always be nay sayers.... eg, If interest rates fall, exchange rates fall...
and then Imports become more expensive....
Oil prices go up....Retail prices go up....
machinery prices go up...
Its a tuff job when its a lose lose situation....

[8D]
.^sc

[cantab]

quote:Originally posted by Toddy
As for the housing market, its just another asset class and its day in the sun is just about over.


Agree, it's a horse that has run its two miles and it is a market so why not allow price to do its thing to match up supply with demand. NZ doesn't need other tools, anyway the same thing has happened with house prices all over the world.

There are some quite odd proposals and things happening in NZ at the moment.

[cantab]

[u]Bollard wont like this good idea:</u>

Warning on 'silly' loans
Ben Schneiders and Marc Moncrief
March 14, 2007


Home sweet home.
Photo: Louie Douvis

LENDERS are rushing to offer products to help ease Australia's housing affordability crisis, but economists warn the schemes could make the problem worse.

Adelaide Bank and St George Bank have unveiled so-called "shared equity" products that will allow home buyers to borrow a smaller amount up-front. State governments have also launched shared-equity schemes in recent months and the Federal Opposition is considering them.

The push comes as housing affordability in Victoria, when measured by comparing household income to new mortgage repayments, is at its worst level since late 1989. The situation is even more grim in other parts of Australia.

The Adelaide Bank-backed product, which will have a term of 25 years, has been dubbed an "equity finance mortgage".

The EFM — which is patented by Rismark — covers up to 20 per cent of the home's value and requires no repayments until the term expires or the house is sold.

The catch is that the bank takes a 40 per cent share in capital gains on that stake once the property is sold or refinanced, while its exposure on capital losses is capped at 20 per cent. While the bank is directly exposed to capital movements in the property, the home owners retain 100 per cent legal ownership of the home.

The product is pitched at the mass mortgage market. Adelaide Bank's Stephen Small said he expected 10 to 20 per cent of new mortgages would be EFM loans within two years.

Steve Keen, an associate professor at the University of Western Sydney's school of economics and finance, said that if its use became widespread, it would drive housing prices up even higher. He described it as a "very silly" product.

"If it's going to drive prices even higher, of course it's disastrous," he said. "It is another one of those products which is dependent upon the level of prices not falling over time. That has been a guaranteed line of success for 40 years, but it has reached such a level, now it is a wing and a prayer."

A commentator and former top-rated analyst with Macquarie Research, William Ammentorp, said the finance sector was becoming more innovative, which was making it harder for the Reserve Bank to shape the economy through monetary policy — "… you can change the interest rate all you want, but if everyone is on a two-year fixed (interest loan), it has absolutely no impact. You have this delayed impact coming through."

Meanwhile, St George Bank and developer Australand announced a product that would allow home buyers to split their mortgage between two titles.

It effectively creates an opportunity for owner-occupiers and investors in one property.

St George chief manager, specialised mortgage solutions, Bill McCabe, said the move into shared-equity products was a result of the Prime Minister's 2003 Home Ownership Taskforce.

He said products such as no-deposit loans and loans guaranteed by family had also come from the review and had been successful for the bank.

No-deposit loans have been criticised by some for exposing borrowers to more risk as interest rates climb.

http://www.theage.com.au/articles/2007/03/13/1173722467796.html?from=top5

[thereslifeafter87]

quote:Originally posted by Lizard


quote:Originally posted by thereslifeafter87
Also, traders who make more than five percent a year overseas will save a helluva lot of cash, as their gains are capped at five percent under the fair dividend rate.


That doesn't seem correct TLA87. As I understand it, traders will continue to hold their shares on revenue account with realised capital gain treated as income. The FDR regime is only applied to investors.


Nope. There's a specific section in the Act that deems no income to be received from a Foreign Investment Fund interest other than that calculated under the foreign investment fund rules. If a trader elects to use the fair dividend rate, then they pay tax on 5% of the opening value of their holdings.

Unfortunately there is also a provision that captures any gain in value in the shares as income where the shares are sold within a 12 months period (the quick sales provisions).

You can always elect to use the accounting profits method though... Much easier.

[Enumerate]

Let me understand:

a) fiscal and monetary policy, together, set the economic climate
b) markets react, in price terms, to changes in the economic climate.

We have seen:

a) the Reserve Bank governor indicates that monetary policy, alone, is insufficient to control inflation within the "band"

b) Dr Cullen does not accept any role in current fiscal policy contributing to the inflation rate

c) Effective "price control" measures are being sought to control, artificially, markets seen to be behaving "irrationally"

House prices go up; house prices go down. The economic factors driving this price trajectory are wider than simply inflation.

Effecting any sort of "price control" as a mechanism to control inflation is highly risky and completely irresponsible.

Failure of the the government to control fiscal policy is likely to be the prime reason inflation is growing and would explain why property prices rising is, in fact, a completely "rational" price reaction.

[patsy]

Although I support an aggressive monetary policy to control inflation, the article below from the Herald today shows another reason for the structural inflation in NZ. This structural inflation cannot be managed directly through OCR other than by the effect of OCR on eroding the purchasing power of out-of-whack salary increases not commensurate with growth in productivity.

But in NZ, it's not PC to talk about "productivity growth" because it brings up the ghost of reduced state sector, efficiencies, and tough "getting off the grass" policy and business practices.

-----------------------------------
Labour productivity growth lowest on record
12:20PM Friday March 16, 2007

Productivity growth has hit a low point, even as the Government continues to emphasise its importance in transforming the economy.

Figures released today by Statistics New Zealand (SNZ) show labour productivity growth of 0.4 per cent in the measured sector for the year to March 2006.

That was the lowest since the series began in 1988, and compares with an 18-year annual growth average of 2.5 per cent.

Capital productivity decreased 2.9 per cent, compared with an 18-year average of 0.1 per cent growth.

Multifactor productivity -- growth in output that cannot be attributed to either labour or capital -- fell 1.1 per cent, compared to average growth of 1.5 per cent.
-----------------------------------

[thereslifeafter87]

quote:Originally posted by Enumerate


b) Dr Cullen does not accept any role in current fiscal policy contributing to the inflation rate



Where do you get this from? Cullen accepts fiscal policy can be inflationary, hence why he isn't cutting taxes or spending the large surpluses.

[hiawatha]

quote:Where do you get this from? Cullen accepts fiscal policy can be inflationary, hence why he isn't cutting taxes or spending the large surpluses.

Both of these courses of action would be inflationary.
hiawatha

[I.T.Ancient]

Dr Cullen is spending the large surpluses - just not the whole lot.

Tax cuts are not inflationary in the same way as government spending. WFF handouts go directly to consumption and borrowing (banks see WFF handouts as a reliable income stream to service loans). Yet, WFF pay for vote spending is amongst the highest quality government spending because it is not entirely wasteful as very much government spending is. If I receive a tax cut, the funds will go directly to investment in productive assets. Instead the government steals a large slice of my income to waste or spend in grossly inflationary ways. The only thing Dr Cullen accepts is that politics is about buying votes no matter what the consequences. Talk of fiscal responsibility and prudent economic management is just a smoke-screen when the real game is stealing from the productive to buy the votes of the unproductive.

[belgarion]

Another way of controlling inflation is to adjust taxes ... politically impossible unless they go down.

However, taking money from people and locking it away for a rainy day is what Kiwisaver is all about. Once Kiwisaver is up and operational the mix will change.

Stand by ... ;)

[hiawatha]

quote:Tax cuts are not inflationary in the same way as government spending. WFF handouts go directly to consumption and borrowing (banks see WFF handouts as a reliable income stream to service loans). Yet, WFF pay for vote spending is amongst the highest quality government spending because it is not entirely wasteful as very much government spending is. If I receive a tax cut, the funds will go directly to investment in productive assets. Instead the government steals a large slice of my income to waste or spend in grossly inflationary ways. The only thing Dr Cullen accepts is that politics is about buying votes no matter what the consequences. Talk of fiscal responsibility and prudent economic management is just a smoke-screen when the real game is stealing from the productive to buy the votes of the unproductive.
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Cutting taxes is generally considered to be inflationary. You may well "save" any tax cuts you receive, but this means only that they will be used for investment spending rather than consumption spending. The point is that either form of spending is likely to be inflationary.
Incidently, if you pay tax, it doesn't matter, from the point of view of inflation, how wastefully the government spends that money. There won't be any inflation if that expenditure is covered by your taxation.
Mr Cullen's actions don't seem to be about buying votes. Think of that tax cut a couple of years ago that allegedly was sufficient only to purchase a packet of chewing gum.
hiawatha

[I.T.Ancient]

So if I spend money that I have earnt, that is inflationary, but if the government spends money it has taken from me that is not inflationary! Sounds as if you have found the cure for inflation hiawatha - the government takes everything that everyone earns, spends it as wastefully as it likes, hey presto zero inflation.

The chewing gum tax cut was all about buying votes - it was a niggardly fulfillment of promises made to United Future to aquire their political support. EVERYTHING Dr Cullen does is about buying votes.

[hiawatha]

quote:So if I spend money that I have earnt, that is inflationary, but if the government spends money it has taken from me that is not inflationary! Sounds as if you have found the cure for inflation hiawatha - the government takes everything that everyone earns, spends it as wastefully as it likes, hey presto zero inflation.

Spending money that you have earned is not inflationary. Where on earth did you get that idea from?
hiawatha

[stephens.pc]

All consumption spending is inflationary, regardless of where the money has come from.

[hiawatha]

quote: All consumption spending is inflationary, regardless of where the money has come from.

Rubbish!!
hiawatha

[Enumerate]

quote:Originally posted by thereslifeafter87


quote:Originally posted by Enumerate


b) Dr Cullen does not accept any role in current fiscal policy contributing to the inflation rate



Where do you get this from? Cullen accepts fiscal policy can be inflationary, hence why he isn't cutting taxes or spending the large surpluses.


Read the quote, again and then tell me why your comment is illogical.

Never mind .... I'll tell you why it is illogical. You present a policy option that Dr Cullen spurns, that is inflationary, as "evidence" his current policy is not inflationary. Sheesh ....

The fact that expanding the public sector is directly inflationary, as well. It is clear that there is something driving inflation. To demonise those that own property as a "cause" is dishonesty in the extreme.

I will be the first to admit that the current situation is unprecedented. Cullen has progressively reduced domestic borrowing by running at a surplus. He has also taken this surplus and invested it overseas in the Cullen fund. On the face of it - this should offset any inflationary effect of a loose fiscal policy associated with government spending.

However, all the apparent fiscal responsibility just encourages Belgian dentists and Japanese housewives to "punt" on our currency in terms of the high interest bonds, denominated in kiwi$$, that they buy like no tomorrow.

Hence, Dr Bollards monetary controls are worse than ineffective. Another round of the "stiff medicine" drives more hot money to buy kiwi$$ bonds.

The productive sector has both high taxes and lower overseas returns to deal with. This kills domestic investment and productivity growth.

We see all the symptoms of "stagflation".

Invest in Australia ... where productivity is higher and all the external factors are working in their favour.

If Dr Cullen refuses to lower the tax rate - he should control the expansion of the public sector.

Noone in private life would expect to have a lavish lifestyle AND accumulate savings at a great rate. Dr Cullen believes he can do this ... we will all pay the price, denominated in NZ$$.