Capital Gains tax makes such a difference – not!

The Labour party beleives that a capital gains tax will make housing more affordable, despite this not being the case anywhere in the world.

Their claim is that every other country has a capital gains tax…and that is about the depth of their argument.

Our closest neighbour, Australia, has a comprehensive capital gains tax…how is it working with housing affordability there?

Parts of the Sydney property market are going ”ballistic” as buyers take advantage of lower interest rates to gain a foothold.

There were 693 auctions scheduled across the city on Saturday and with 459 of the results reported to the Fairfax-owned Australian Property Monitors, the clearance rate was 83.2 per cent.

Social media was full of tales of parents spending $1 million-plus to secure their children inner-city houses. A two-bedroom terrace in Rainford Street, Surry Hills, sold to a 23-year-old university student for $1,094,000 – $119,000 above the reserve.

On the upper north shore, Pymble Richardson & Wrench agent Don MacLennan said the lower end of his market had gone ”ballistic”.  

Not well then it would appear.

Mr MacLennan sold a three-bedroom house on 843 square metres at 3 Yarrara Road, Pymble for $1,285,000 by private treaty last week.

”Three years ago, it sold for $905,000; it had a lick of paint and was immediately let,” he said.

”Most people said the house was too small but the buyer is living in a 100-square-metre flat in Hong Kong.”

On Saturday four bidders slugged it out for a five-bedroom house at 32 Pymble Avenue, Pymble, which sold under the hammer for $3,325,000.

”Our reserve was $2.9 million and the first bid was $2.9 million, which caused some consternation,” Mr MacLennan said. ”There was a very aggressive doctor, a merchant banker and a Chinese family – it was a very interesting mix.”

The upper end of the ”stodgy” north shore market is also starting to lift after a few years of flat activity, he said.

”It’s caused by business confidence, primarily. We are seeing more buyers in the upper end than we have seen in three years.”

  • Nick

    Common sense dictates that adding a cost to something will increase its price, which is why Labour’s shilling is so retarded.

    If it really wanted to get further, it should be pointing out how residential landlords are a $500m per year net drain on tax revenue.

    A CGT is important to plug this black hole. Currently residential landlords get tax deductions in the production of a tax-free capital gain. This is a harmful asymmetry in the taxing of property. You could say the same applies to any shares, business etc, but those investments don’t encourage or facilitate high gearing as much as property.

    Because of this, property investors often pay no tax, then get refunds against personal income. This can go on for years and years, then they put nothing back in the put on sale and get a nice big tax free gain.

    This is the reason a CGT is vital. Not some retarded notion that it will allow Socialist Cindy to afford her coveted Ponsonby villa.

    • Kapow

      You are not entirely correct. The removal of depreciation made a big difference to what can be deducted for tax purposes. If you look at your return on investment (gross rental income and a % of the purchase price of a rental property) and then discount the cost of money (i.e. your interest rate) – then the net return is very low. Especially for the large outlay to start with.
      The IRD are now going after those purchasers who are buying and flicking property as the gain is taxable income anyway.
      Adding tax to anything is never a good idea.

      • Nick

        Where am I not entirely correct?

        You actually prove my point in saying the net return on a rental is very low – which is why people don’t invest based on the rental returns. They invest based on capital gains. But they are able to deduct all of their expenses, meaning there is a mismatch with writeoffs on the one hand in the production of tax-free gains on the other.

        IRD have always gone after traders and developers whose gains are taxable. Nothing new there.

        • philbest

          Yeah, but where gains are expected due to structural distortions like inelastic housing supply, the existence of a tax will not stop people chasing the gains. Japan tried that; their CGT rates were as high as 75% and it didn’t make a scrap of difference to their famous property bubble.

    • peterwn

      An equally harmful asymmetry is house owner-occupiers not paying tax on the imputed rental value of their homes as used to be the case in UK. If there is a CGT on rentals, there should also be one for owner-occupier houses but that would be political suicide. A CGT on rentals will have the effect of driving rents up. In other words tenants pay the CGT

      These taxation ideas of trying to drive house values down or burst alleged ‘bubbles’ are no better than arranging deckchairs on the Titanic.
      What will drive house prices down is driving down the cost of new houses – land availability, eliminating ‘gold plating’ in subdivision requirements, cheaper materials and methods, simplify compliance, etc. Every $1000 knocked off the cost of a brand new house knocks $1000 of the cost of every other house out there.

      • philbest

        Land taxes are an even better idea than taxes on “imputed rentals”.

        And in both cases it would be necessary to ameliorate other taxes to compensate. A good idea if so. A bad one if not.

    • BR

      CGT is not a “tax”, it is a FINE. It is a fine on an activity which is legal. A government that introduces a capital gains “tax” is just too gutless to outlaw the activity which it does not like people doing, so they impose costs on it and call it a tax. It is anything but.

      The purpose of taxation is to fund the things that are essential and that everyone has a stake in. A capital gains “tax” does neither of these things.

      So what will the government do with the extra “tax” it collects? They will spend it on further expanding and enabling the bureaucracy to boss us around and steal more of our freedom, therefore they, and anyone who supports such a dishonest rort can stick their CGT in the place it hurts the most.

      Bill.

    • Stephen

      Never ever had a cash refund yet that is from losses. It doesn’t happen. Yes you get back overpaid tax as does every other individual in NZ.

      As for the 500Mil losses the Govt. incurs. Well they can fix that easily.
      They could allow us landlords to recover the Local body Rates from the residents of the town they live. Money that is spent on facilities for those residents. If the govt. allowed that (and it is specifically not allowed by Law under the RTa.) then landlords would have less of a loss once the govt. also disallowed the deduction. That’s your 500mil got rid off and the right people paying the bill which is actually a Govt. subsidy to the Local Govt. One it also collects GST on.

      The we could look at the cost of interest rates. why do we in NZ have such high rates? Govt. interference in everything that drives our exchange rate right through to waste of taxpayers money for everything. (including bailing out investors in many failed enterprises and gaurnateeing banks).That causes borrowing that causes a high exchange rate and high interest rates. Reduce that rates like this year and its a certainty that losses will be reduced. Work out how much less can be claimed at 5.5% versus the average of 8%. Well more that you 500 mil.

      But this year that drop is now being negated by higher insurance costs. And why is that. Because govt interfered in the insurance market for many years leaving those that paid insurance high and dry because there was no attempt by insurance companies to properly calculate and fund the risk.

      Fixing the so called loss or rather subsidy of local govt. by the govt. wouldn’t be that hard but none have the balls to fix stuff like this.The sooner tenants have to front for rates the better. They will start to take responsibility for not only contributing to the facilities they use but will also start to take an interest in the money local bodies waste and will therefore move to get rid of the spendthrifts and wasters that are involved in councils.

      Nothing like user pays to sort out the budget.

  • Toryboy

    There is a lot of nonsense, and an absence of logic, whenever people talk about housing affordability.

    Affordable houses means houses at a lower price than at the moment.

    All quite simple, really.

    Those who talk and talk about housing affordability should set an example by selling their own house for $190,000 to a “young married couple”.
    Needless to say the greedy selfish Labour MPs and Journalists who have been talking about affordable housing have no intention of it applying to them!

    • justin

      But unfortunately all the generations above did buy their houses for 3x income (on average). It’s just that these same generations have removed all the protections around property ownership.
      Reality check is that NZ could easily have super cheap housing costs for NZers and that would be tangibly beneficial to all of us as a nation. Instead we work more hours than any other nation and fall into one of three categories; land owners, perpetual renters or mortgage slaves to aussie banks.

      • Toryboy

        Buying a house for 3X income is no problem in many parts of NZ – it just Auckland which has expensive houses.

        • justin

          But kiwis do live in Auckland. Also not many places where 3x income is actually the case (you really have to go the sticks for that).

          • philbest

            You are correct, Justin. Median multiples are nowhere near as low as 3 in any NZ city for which analyses are done.

          • Toryboy

            Invercargill, Dunedin, Wanganui houses can be bought for 3 x income.

          • philbest

            There is a difference between “can be” and median multiples.
            In cities in the USA with a median multiple of 3, houses “can be” bought for 12 months income too. Seriously, check out some RE sites and apply a search filter at $50,000, you will be amazed at what comes up. The same stuff would be $120,000 in Invercargill and $500,000 in Dorkland.

            And I am talking about boom city Houston, 5 million population, not busted arse cities or country towns.

        • philbest

          There is no reason, though, that houses can’t be 3x income anywhere there is farmland convertible to fringe suburbs. The price of farmland is low enough everywhere, that fringe housing can be a similar price everywhere, just as most consumer goods are a similar price everywhere.

          Any city with unaffordable housing has only the local policies about development, to blame.

          • johnbronkhorst

            Except the expectations of the purchasers.
            Town water, sewage, stormwater, drainage, water roading, waste disposal, public services, access to schools, shops etc.
            These extra services are expected and taken for granted in cities like Auckland. All come at cost of supply and planning. Not such a heavy expectation in the smaller towns.

          • philbest

            IF it was possible in the Dorkland region, to develop exurbs with those economical features, I guarantee the demand would be massive. The “expected and taken for granted” is the Councils standards, not the snobbery of the potential buyers.

          • rockape

            Wouldnt it be a great idea to make little villages in the country,each with a pub/Inn and a post office corner shop. Close but not too close to big towns and jobs, a bit like Europe did 800 years ago!

      • Patrick

        Many of those previous generations faced interest rates of 10% higher than those today, that also needs to be remembered when we talk of how tough the younger generation supposedly has it today

        • justin

          Remember the current generation face 12% payments student loans, and they also have 3% extra tax for super/kiwisaver.
          The interest rate is directly related to the bubble too.

          • Patrick

            If those student loans were used for the purposes of educating the recipient then they wouldn’t be such a burden, but in many cases they fund lifestyles, flash must have iPhones, XBoxes etc etc, even gap year piss ups overseas.
            The older generations however spent their time working their arses off either in the parents businesses or in local industry. Mainly because the parents undertook to fund them during their study. Many a young kid was out doing physical labour & it did them no harm at all. These days it is far to easy to run up close to $100k in debt before you even start earning a living. Those student loans are a massive millstone around the necks of these young people & become a huge obstacle when they walk through the doors of the bank looking for a mortgage.
            BTW is it still the case that if you earn under x amount you are under no obligation to repay the loan – unless you disappear overseas?

          • Pissedoffyouth

            I know of plenty of people who are permanent students, the allowances pay more then the dole and there’s no limit to the courses you can do. So much wasted money

          • Pissedoffyouth

            You can opt out of kiwisaver and if you don’t get a loan in the first place you don’t have to pay anything back….

        • AnonWgtn

          And up to 20% in the 1980s.
          Introduce a Green pollicised LabourWinstonMana Government and you will see the dollar drop 30% – terrific, but the contrary to that is that whilst exporters do well ALL imports will cost probably 25% more including fuel oil then the trucking of food and goods.
          Cheap televisions etc will go up considerably to the point where the dealers will go bust quickly as people will not buy – and cars, as they are all imported.
          Mortgages will got to probably 12% overnight as money leaves rapidly overseas, and we still have to borrow from overseas, and the politically priced borrowing will be very high, as overseas confidence drops rapidly – all within 3 months.
          Yipee – a country gets the Government it deserves.

        • philbest

          The simple maths, though, is that a small mortgage and high interest rate is far easier to cope with than a large mortgage and low interest rate.

          Not just in the lifetime amount paid back, either. High interest rates were due to high inflation, which meant incomes were rising rapidly in nominal terms. My parents borrowed roughly 3x their annual income to buy a house at a high interest rate, and a few years later the sum they had borrowed was well under 1 years wages. AND the interest rates fell a few years later, leaving them on easy street.

          None of this is gonna happen to young folk today taking out a huge mortgage at a low interest rate. They might still be on a treadmill of existence in 20 years time.

          • Patrick

            Granted but I suggest the way in which borrowing is treated nowadays has a big impact, previous generations had the attitude that paying off the loan was the most important thing to do, take it over the shortest period pay the maximum & any extra you can. These days we do the reverse, take the loan over the maximum period, pay the minimum & load everything you need/desire onto the mortgage. We even have interest rate only mortgages where the gamble is taken on future capital gains. BTW how will those folks get on when CGT comes in?
            I do not know why kids do not spend years at school learning about the effects of compound interest, how much the $1000 telly will cost when it is loaded onto a mortgage, these are amongst the biggest challenges a kid will face but the education system teaches them feck all about it.

          • philbest

            Yeah, there are perception problems, but young people feel like mugs now when they work their guts out, live frugally and save $100,000 over 4 years, and house prices went up $200,000 over the same period. Their mates who just bought a house 4 years ago without bothering to save at all, are $100,000 ahead.

          • Stephen

            And don’t forget that many of htese”young “would be house buyers are going to inherit a shit load of assetts when their parents peg out. The last 10 years have seen estates worth many millions being spread out among them with a lot more to come.If they started saving and working like many of us have then they can afford a house. doesn’t have to be the one they live in.

          • philbest

            Trouble with that theory is that there is not a lot of evidence that things are working that way in real life. One of Joe Flood and Emma Baker’s papers in Australia looked at it.
            The old people whose houses have been inflating in value have often drawn down on that value for consumption, and increasingly, people are counting on house value increase as a costless substitute for other forms of saving. It seems that very little difference has been made to “inheritance” in the overall.
            And significant minorities of an increasing proportion will reach retirement as lifelong renters.
            It is not a question of beating up on the “losers” who “didn’t work hard enough”: the system as it is will price out the same proportion of people regardless. Many of the losers will not necessarily be “to blame” for their own plight.

      • island time

        What protections were removed?

        • philbest

          I am not sure what Justin means, but what has actually changed everything is that housing “supply” is strangled by the Councils. The Councils used to regard growth as good and affordable new fringe housing as “a fair go for the younger generation”. Now it is all regarded as a shameful planet-raping episode in the history of evil humanity.

  • rockape

    To Stabilize house prices reduce the cost of building and increase land availability. It realy is that simple.

    • justin

      Plus…

      Foreigners not living here denied becoming landlords to kiwis (never met anyone who could logically argue why this should happen).
      Immigrants only able to build new.
      IRD actually enforce the laws on property speculators.
      Big Government to be decentralized (why have all the public servants living in the most expensive property areas?).
      Many core NZ businesses into the provinces (why is Fonterra based in Auckland really?).

      • rockape

        I agree with most of that. Spreading Government is a good one as would be incentives for big business,banks insurance etc to be given incentives to move to the regions. Immigrants to build new, disagree,overseas builders yes but an immigrant should have the same rights as anyone else. If you run a business,eg rental property you can claim tax relief ,fine, as long as you are taxed on increase value in assets,that doesnt need CGT.

      • philbest

        If the land availability thing was sorted out, it wouldn’t matter if overseas landlords were in the market. Over-investment in houses on the part of landlords would keep rents super low. The landlords would cop a loss, and there would be nothing wrong from a social justice perspective, with landlord’s losses subsidising the cost of living of poorer people.

        It would be an excellent idea to charge overseas landlords some kind of fee at a modest rate rather than ban them outright.

    • AnonWgtn

      You try and get a builder to drop his prices – Yea – what a laugh.
      Who is going to pay for his houses, cars and boats ?

      • rockape

        Builders wont drop their prices Labour in that industry is pretty poorly paid anyway. I said Building costs. Land,compliance local authority levies. those can come down. After all, what did they do for leakey homes other than generate income for councils.

        • captainnotsosensible

          Spot on. It’s compliance costs that have pushed prices up. And with the more experienced council bldg inspectors all in chch, the less exp ones up here are more cautious…which means more compliance work and proof for a tick.

          Most builders I know earn $40-60 an hour which isn’t a lot for 15 + yrs experience and the responsibility of signing off on a house where the homeowner might claim against at a later date.

      • peterwn

        In which case, look to narrow the scope of the traditional builder’s involvement in a house.

      • philbest

        Builders are actually getting severely squeezed between land costs and what house buyers can ultimately afford, period. This is why corners end up getting cut on quality.

        • Stephen

          Wait and see what happens when our dollar tanks in about a years time. Inflation in building will go berserk just like in the seventies. If you can’t buy a house now then you won’t then because not only will the price shoot up but the Reserve bank Governor will get hoisted by his own contract and have to put interest rates up to combat the inflation. So 12% rates will return.

          But then increasing interest rates never killed inflation before just screwed the crap out of Kiwi’s.for the banks benefit fund.

  • Toryboy

    I am 100% against a capital gains tax but there is a great deal of ignorance as to what it actually is – most people having an image it applies only to sleazy Peter Rachman type property tycoons; few people realise or understand, it will apply to them as well.

    A Capital Gains Tax is a subtle way of sneaking around the abolition of death duties.

    Instead of focusing on housing, the National party should be telling people some of the other things a Capital Gains Tax would apply to –

    jewellery, paintings, your holiday home, the cricket bat (!) in your holiday home, furniture in your parents home when they die, your old ‘Slade’ LPs you bought in 1972, the Agatha Christie novels in your bookcase, the ring your Aunt left you when she died (there are 10000 other examples, but you get the general idea).

    I expect that when the average person finds out Cunliffe wants to tax their son’s cricket bat at their bach, the sentimental LPs they kept from their childhood and their parents home when they die – support for a CGT will dissolve very quickly; not to mention (as Bob Jones keeps pointing out) the sleazy property tycoons will never pay the tax anyway.

    Images of tax inspectors at funerals would be a very powerful weapon against the Labour party and a CGT and National should start pointing some of this stuff out to people.

    • rockape

      It wont be “The Grim Reaper Cometh”that will be the fear in your old age. It will be the tax collector cometh.!

      • Toryboy

        Yes, Mr Key should be pointing out a Labour/Greens CGT applies to EVERYTHING you sell for more than you paid for it – for example: ‘Slade’ LPs costing $3 in 1972, which you sell on trademe for $5 today

        • rockape

          The huge danger will be leading to retirement when you want to cash up your assets to move to the home for the bewildered and find the Government wants its cut. Hardly makes it worth planning for your future,maybe thats Labours cunning plan!

  • Day Day

    A CGT causes property prices to increase. As people will hold off putting property on the market, therefore choking off the supply.

  • Phar Lap

    Green Taleban,want a CGT ,inflation indexed.Increasing with the consumer price index.

  • justin

    The goal is to reduce house prices. Then just stop the subsidies of landlords. Working for Families and Accomodation Supplement (even Interest Free Loan encourage mortgage to be taken and paid first) are all responsible for blowing more air into the property bubble.

    • philbest

      It is the inelastic supply of land that is the problem. All the other demand side factors capitalise into house prices IF supply is inelastic, and not otherwise.

      For example, the tax deductibility of mortgage interest in the USA helped median multiples go as high as 11 in LA and SF; but in the dozens of elastic-housing-supply cities, the median multiples remained stuck down at 3.

      Low interest rates and easy credit also made no difference in those markets. Low interest rates, in the bubble run-up and now, just result in more and more discretionary income in those cities; quicker repayment of mortgages; increased household formation, and so on. This is why they are recovering or even booming now, even as the former bubble cities resume bubbling without actually picking up economically.

    • Toryboy

      Is the goal to reduce house prices? I mean – what about YOUR house? how much do you want it to fall in value?
      I very much doubt anyone truly believes in reducing house prices when it applies to them.

  • thehawkreturns

    CGT is about increasing tax take. Labour will not reduce income or sales taxes to compensate. The CGT is socialist wealth distribution directly to the unemployable Labour-voting masses. Why National didn’t alter the tax system and get rid of Working for Families which is a state subsidy for the few Labour voting workers I cannot understand. Dropping income tax and raising the lower thresholds should have the same effect but avoid the trap of “earning too much for WFF”. CGT is a con.

  • johnbronkhorst

    An excerpt from Alan Reynold’s report on CGT to the ASX>

    Corporate income that is not distributed
    is still taxed at the corporate level. And to the extent that retained earnings
    enhance the company’s assets per share, that normally raises share prices and
    thus produces another tax liability for individual shareholders. Australia still leaves

    retained earnings

    subject to “double taxation,” because investments
    financed from retained earnings result in taxable capital gains taxes for individual
    shareholders (as well as more taxable corporate profits in the
    future).When corporate and individual tax systems are not fully integrated, as
    Haig-Simons prescribes, the taxation of retained income is quite different for
    sole proprietorships or partnerships than it is for corporations. Suppose, for
    example, that Mr. Smith purchased a small apartment complex for$1 million, and then saved the after-tax rental
    income until he had accumulated another $1 million. Then suppose the $1 million
    was reinvested in doubling the building’s size. With twice the prospective
    rental income, the discounted present value of the property should double, to
    $2million. If Mr. Smith sells the enlarged
    apartment at that price, however, he will

    not be subjected to CGT because his $1 million
    reinvestment of earnings is added to the basis, so the sale at $2million yields no taxable capital gain. Now,
    contrast the landlord’s situation with that of a corporation. Suppose a
    thousand investors purchased shares in a new factory for $1 billion, and that
    company then saved its earnings until it accumulated another $1 billion. Later,
    that $1 billion was reinvested in doubling the factory’s capacity. The company
    now has twice as many assets per share, so the share price is likely to double
    too. Unlike landlord Smith, however, investors who sell their shares in the
    enlarged company

    will be subjected to CGT as if the
    reinvestment out of after-tax income had never occurred. Corporate
    reinvestments financed with after-tax income are not added to the
    basis of the individual’s capital gain. Yet individual stockholders own
    the corporation, just as the landlord owns his apartment or the shopkeeper owns
    his shop.
    Watch out your National Super and Kiwi saver account.

  • cows4me

    It wouldn’t matter if a CGT was the most insane and unproductive tax dreamt up because it’s got tax in the title it has to be a winner. A CGT is just another game in the draw for the favourite pastime of the socialist, class warfare. Of course the useful idiots will be chaffing at the bit, yes deal to the rich pricks, make the bastards suffer. NaĂŻve fools, they wold cut off their noses to spite their faces.

    • Patrick

      BR sums it up below, it isn’t a tax it is a fine, a penalty for being productive, industrious & prudent with your earnings.

      • cows4me

        But are not most taxes proposed by socialists fines Patrick. Work hard be successful, very naughty in the socialist world. It made indeed be a fine but even these idiots aren’t that stupid to call it so, tax has a much better ring to it and the useful idiots understand the word.

  • KinaRolf

    For those who think capital gains tax is a solution, take a look at Sweden, the world’s most draconian and highest taxes, and a property market that is worse than Australia and New Zealand. A SME can easily be charged 80% in tax and fees. If you put 25% capital gains tax, all sellers simply raise the price 25% to cover the tax. Labour is simply greedy as all socialist parties. They need money to buy votes with benefits. Regulate the rental market instead, make it unprofitable to buy and let tenants pay the mortgage.

    • BR

      What further regulations would you suggest? It’s already regulated up to strangulation level.

      I have two friends who are commercial landlords. One of them had a group of tenants living in one of his houses. The tenants started to get behind with their rent (They were out of work actors apparently. They did their best to ply their trade on this occasion). There was a beamer parked on the front of the section, so obviously they weren’t doing it too hard. He couldn’t kick them out until all sorts of bureaucratic hoops had been jumped through and lengthy procedures followed. They eventually got out of the house after they were about sixteen weeks in arrears, The thousands of dollars in back rent was never repaid.

      Bill.

      • KinaRolf

        You are talking about something different, to evict unsuitable tenants, what about those who wreck the place, steel and sell the interior and chattel, and then bugger off. I agree, improvements are needed, not more regulations. What we are talking about is to make it unprofitable to be a “commercial landlord” by simply buying up lots of family home properties and apartments and aiming to let the tenants pay the mortgage. Capital gains tax does not solve that problem. It makes it worse. Better are thoughts along the lines of restricting lending to more than one family home, extra steep fees on financing, classifying family homes and apartments to one owner only, including if they hide behind trusts or companies, creating competition, this will drive down the house prices and rental costs and we can return to the old New Zealand where everyone had a right to own their own home.

        • BR

          “restricting lending to more than one family home”

          So what you are proposing is that the government interfere in the market and impose further regulations? Is that right?

          “extra steep fees on financing”

          Where are the extra steep fees going to end up?

          Bill.

          • KinaRolf

            As you yourself pointed out in an earlier post, the government is already interfering, regulating, the market, including interest rates and lending conditions. It could be a place to balance the regulation bettor towards need, remove some regulation, and impose others that better care for the present abnormalities. Call my “fees” for “tax” then if you feel better, a good place to put the money could be to balance the huge social costs this “free market” is creating, but we need the debate.

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