No intergenerational war

Tony Alexander, Chief Economist at the BNZ, has written a very interesting piece about the housing market in New Zealand. In particular, he explodes the myth, expounded by people like Bernard Hickey, that baby boomers are robbing the next generation of wealth and happiness. It is garbage, of course, but as Alexander points out, it is nothing more than click bait. Now I am even more disappointed in journalists like Bernard Hickey, who don’t seem to care if they tell the truth or not. As our excellent writer, Lushington Brady said in his recent article professional journalism is in its death throes, if not already dead.

Here, Alexander explains why there is no such intergenerational war going on. He starts with talking about stories he read years ago in Readers Digest. quote:

It was about someone who would go out walking and to make the walk more enjoyable would sometimes set a goal of reaching a lamppost before some casual ambler in front. If the walker could see that they were not going to make this goal they would shift it to the next lamppost or one after that.

There are a number of things you can take from this story and the lesson I took is that the dopamine hit of feeling or achieving some success or meeting a goal is good, and shifting the goalposts to achieve it is no big deal if you are the self-motivated person who set the goal in the first place. You’ve got time. Chill out, reframe your contest, your timeframe, and keep walking. Just keep walking. And that is why introduction of a capital gains tax will not produce the big selling and pullback of fresh investors from the housing market that some people are expecting. end quote.

Investors that I talk to who want to stay in the rental market do not seem particularly phased by a capital gains tax. They have a long-term view of the situation. They are not in the game for a quick buck. They are looking for a retirement income. So selling is not on their agenda, and, if it is, they will either do it soon or re-evaluate, just as Alexander says. quote.

By and large older folk and younger ones who have become investors have time on their side before they “need” to sell – maybe 15 years more than in the past. The vast majority have not bought property simply to make a pile of cash in only two or three years – though the media would have us believe that this is the timeframe most of these people have adopted. Government
Ministers continually use the misleading word “speculators” without any evidence they are able to present regarding the motivations of investors. end quote.

To me, this just demonstrates the ignorance of most politicians. Speculators pay tax on the profits they make on property. Otherwise, they are tax evaders. quote.

Some people may well have a timeframe in mind. They know that achieving capital gain is a long-term process and you (me, anyone) cannot predict short to medium-term property price changes. Most of them know what well known commercial property investor Bob Jones has repeatedly noted over the years. You buy and you hold. end quote.

And most investors do exactly that. What has driven so many out of the market recently has been landlord bashing policies that make it tough for mum and dad investors to survive. quote.

If a capital gains tax comes in, this is what is going to happen. Investors will shift their target to a lamppost further down the street. They will give themselves a few more years to achieve a wealth goal, the magnitude of which
they really have always just been guessing about anyway. They will look to boost running yield by raising rents, perhaps by improving the quality of their property and targeting better tenants. end quote.

This is already happening now, at least by smart or long-term property investors. Many of the smaller investors have exited the market. quote.

In fact for the lowest quality tenants out there I have a message. Your future is bleak. You’re going to be hit by three things. One I have just mentioned. Landlords will target better quality people and actively discriminate between those who can prove their propriety and those who cannot. Second, rents will rise more than would otherwise be the case which is the key argument
[…] in one of the advisory papers associated with the Tax Taskforce from which they conclude that a CGT will probably in fact raise average house prices rather than cause them to fall. The mechanism for this to happen will be young people escaping rising rents by buying.

Third, as some landlords sell and fewer repurchase for rental purposes, young people will finally be able to move out of their folks’ homes and achieve the ownership dream which I believe most of us aspire to. As they move out of their parent’s house having stayed at home for years longer than anticipated or desired, they occupy the house which previously had tenants. The tenants will not be welcomed into the bedrooms now made vacant by the 25-35 year olds finally leaving home. They will have nowhere to go. end quote.

No. Because owner-occupied housing usually has a lower number of occupants. This will do nothing to help people needing rental houses. What it will mean is that the former occupants of one house will now occupy two or three houses. quote.

This will place additional pressure on the government and local authorities to boost the availability of social housing and as a society we should be prepared to pay for such accommodation to be provided for these displaced members of our society. Note – as more building resources are devoted to constructing “affordable” housing fewer higher priced, larger dwellings will be built and a bigger price gap will open up between these housing types. Jumping from the necessary first home to the desired
second or third home is about to become much more difficult.

All I see are politicians lying about the true nature of most property investors, poor prospects for occupants of the lowest portions of our socioeconomic spectrum, and dashed dreams to continue for young buyers still thinking that a big
house price correction is headed their way. end quote.

Smart stuff from Tony Alexander. Nice to see someone not bashing baby boomers for working hard and building up assets.


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