(The following is an article written by Andrew King and published in the NZ Herald)
Property is a hot topic right now, with many people believing it to be a problem and expressing opinions on how to solve the problem.
Without balanced and researched information, people will remain uninformed and confused about important topics. So what are the main concerns that people have about housing and what are the facts? Some of them may surprise you.
Why are our house prices so high?
There are some fundamental reasons why our property prices are where they are and some temporary influences.
Fundamental reasons include the charges that many councils inflict on new home builders, especially development contributions. These add tens of thousands of dollars before any peg is placed in the ground. In Auckland it costs an outrageous $12,000 just to connect a new home to the water mains at the end of the section.
Another fundamental issue is red tape and the length of time it takes developers to get subdivisions approved and new homes built. Time is money and extra costs from delays are passed onto the eventual home buyer. Even the Special Housing Areas aimed at solving this problem take a frustratingly long time to get houses built.
Compared to many other countries, in New Zealand we like big houses on big sections and this just costs more. The high cost of building materials compared to other countries is another fundamental issue.
However the main catalyst causing Auckland property prices to rise since 2013 is net migration, which is at a record high of 53,000. During the last property cycle net migration was around 30,000 and property prices increased at a faster rate than today. This high level of net migration is partly due to foreigners moving to New Zealand, but most of the increase is actually fewer New Zealanders moving overseas and more expat Kiwis returning home.
If we want lower housing costs we should be looking at the fundamental issues and not temporary ones such as migration. Long term laws for short term situations are generally a bad idea.
Are Auckland property prices a bubble ready to burst?
The short answer is no. The Auckland property market is made up of people buying and selling properties. With many more people wanting to buy homes it is inevitable that they will compete with each other on price and prices will rise.
Price rises are not welcomed by buyers, but the current level of price increases is not excessive given the extraordinary high level of migration.
Massey University's home affordability index is currently at 25, but it was at 34 in 2007, showing that housing is surprisingly a lot more affordable now. We have low interest rates to thank for that.
The current situation will not continue forever though. At some point the market will start to stall and prices will level out, just as they have done in previous property cycles. But will it crash, fall a little or just level out?
If we build too many properties, as Ireland and America did, then we may see large falls in property prices. If the economy is affected by a severe event in a major part of the economy, causing migration to fall dramatically, then prices could fall. It is not impossible for this correction to be a crash, however there is nothing pointing to it at present.
Does rental property have a tax advantage
It is understandable that many people believe that property has a tax advantage. Many commentators continually repeat this, but they never say what the advantage is. That is because there is no advantage. Property is treated in exactly the same way as any other business or investment. This has been confirmed by tax experts and even the IRD.
Some believe that because rental property expenses are tax deductible then rental owners have a tax advantage over home owners. At first glance this seems reasonable, however a home owner is buying accommodation and the rental owner is buying an income stream. The home owner doesn't have an income stream to take expenses off, but a rental owner does.
Consider your car. You cannot claim the cost of running your car, but a car rental or taxi company can. It is the same with rental property.
Is there already a capital gains tax on property?
Kind of. If you trade in property (some people say speculate) then you pay tax on any capital profit you make. It doesn't matter if you only do it once and you have a regular job at the same time, if you bought and sold a property intended to make a profit, you owe tax on that profit.
Many people are unaware of this and some will put themselves at severe financial risk by trading property unaware that they owe tax on the profit.
Are first home buyers today worse off than 30 years ago?
Yes and no. First home buyers are disadvantaged by higher property prices and this is accentuated because we are in the middle of an upswing in the property cycle. However this is offset partly through higher incomes but mostly through lower interest rates.
Thirty years ago mortgage interest rates were around 20%, while they are around 6% today. Combined with rising incomes and property prices, affordability today is about the same as it was 30 years ago. It has always been, and probably always will be, hard to get into your first home.
The good news for today's young is an aging population and the inevitability of inheriting their parents and grandparents property gains.
Will higher finance costs for rental property reduce property prices?
Potentially, but more likely it will lead to higher rental prices.
A key requirement of the Reserve Bank is to control interest rates and so they are therefore concerned when property prices increase at a faster rate than general inflation. Because of this the Reserve Bank want to develop tools that they can use to target the finance costs of property buyers. They have already brought in LVR restrictions, which mostly affected first home buyers but also affected many rental property owners as well.
The Reserve Bank is now looking at increasing the amount of capital that commercial banks have to hold when lending on rental properties. This will increase the banks costs and potentially increase mortgage costs for rental property owners.
The aim is to reduce demand for rental property and therefore prices. However there is already a shortage of rental property and some parts of Auckland are experiencing overcrowding as a consequence of higher rental prices. Unfortunately there are few options for tenants as it is significantly cheaper to rent the average Auckland home than it is to own it, and you don't need to save a large deposit.
If rental owners sell, as the Reserve Bank wants, then there will be fewer rental properties available and more overcrowding.
An argument is sometimes put forward that if a rental property is sold then it's likely a first home buyer has bought it. This is a good thing for the individual first home buyer, but not the majority of tenants. This is because the number of people living in an average owner occupied dwelling is lower than the average rental property. So a rental being sold to a home owner just leads to more demand for rental property.
There are fundamental reasons and transient reasons why property prices are where they are. Uninformed figure pointing at who or what is to blame is unlikely to result in good decision making.
Without proper analysis of the situation it is unlikely that good policy decisions will be made and unintended consequences will be the result.
Rental property owners frequently appear to be the first choice for having a stick taken to them, but the justification doesn't add up and forgets that tenants will also be affected.
Mike Hosking added his approval of Andrew's article in this videocomments powered by Disqus