Archive for February, 2010

A very close call…….

Prime Minister John Key’s address in Parliament yesterday gave the country a good steer on likely changes in the next budget and thankfully offered some certainty to the speculation and alarm following on from the recently published Tax Working Group paper “A Tax System for New Zealand’s Future”  (VUW,  Jan 2010).

I think the property markets in particular missed some fairly large bullets in the form of a Capital Gains Tax and a Land Tax. The government’s tax take is down and tasked with moving the economy through recession, encouraging industry, employment and competitiveness particularly with Australia, we should be surprised Key is not looking to take on more of the TWG’s recommendations.  Their report  clearly stated they thought the current tax system was in need of change, was inefficient and  not competitive as top personal and corporate tax rates were high relative to other countries.

The share market has for a long time played a poor second to residential property investment as middle New Zealand probably has never regained confidence in the corporate sector since the fall-out of 1987. And so the chorus from commentators like Bernard Hickey of interest.co.nz who today claimed the changes suggested by the TWG were too watered down was not unexpected.  That said they have a number of valid points, not the least of which is the falling affordability of housing in NZ. The Demographia International Housing Affordability Survey: 2010 (www.demographia.com/dhi.pdf) classes 5 metropolitan markets in NZ as “severely unaffordable”. I am grateful not to be a first home buyer in 2010.

After reading the TWG’s strong recommendations I was convinced that a CGT for all investments was a certain as was a Land Tax. The report reasoned a land tax was an efficient tax and could easily be levied and administered. John Key did declare depreciation allowances are likely to be lost as the report concluded that removing distortions created by preferential treatment of rental property would promote efficiency. Presumably this means they intend to encourage investment elsewhere as loudly requested by the capital markets (where John Key was previously employed).

I think the imposition of a Land Tax would have been a disaster for the property markets. It may have been political suicide to target owner occupier family homes but I did expect them to impose a Land Tax on investment property. This would seriously hit anyone who is highly geared, be they land developer, farmer or forester… so that’s probably about half? Who knows but the fallout and resulting flurry of mortgagee activity would be significant and undermine the confidence totally of the property market and indeed the nation.

At least the horrendous looking Risk Free Return Method didn’t get a look in. So gone is the 20% deduction on new plant and equipment (not good for encouraging council compliance with those new codes) and depreciation on buildings where it can be shown the values rise over time and lets face it, that’s probably everywhere. At least depreciation is not a cash flow item.

The Property Investors Federation have already trumpeted that higher costs for landlords would be passed onto tenants. But I wonder… rentals like anything are the equilibrium of demand and supply.  If renters lose disposable income due to the increase in GST on all their consumables then they will look to rent a lesser property. Where renters gain disposable income because their marginal tax rates have fallen they could consider purchasing a home and find banks more willing to lend… softening the rental market again… We could go round and round arguing that one! So rental returns down and first home buyers up?

So we don’t have to like it but it will be interesting!

10 February 2010

February 10 2010 | Uncategorized | No Comments »

“Success consists of going from failure to failure without loss of enthusiasm.”

Quote from Winston Churchill

February 01 2010 | Uncategorized | No Comments »