When you have politicians with nothing to lose, influencing tax laws targeting the most ambitious in our country, perhaps we've gone too far?
Some say it's not far enough. High income earners were hit last year, and property investors this year – The upper and middle class of New Zealand are carrying a much larger tax burden than ever before.
Some politicians think property investors are crying crocodile tears over higher taxes – property investors don't hate paying tax though, not for the most part. What they, and anyone with half a brain for business hate, is how inefficient Government is at orchestrating meaningful market intervention. They simply don't believe higher taxes can solve a housing crisis.
The narrative over the past six months has shifted subtly from a supply-side emphasis on solving the housing crisis, to an attack on the demand side, unfortunately creating some unhelpful divisiveness in the process.
Yes, property investors have become a little exuberant lately, I'll give you that, and yes, perhaps some righteous anger is justified, especially from those bidding against them in the auction rooms. We're not being told the whole story here though. Are we making an assumption that all of those who do not currently own property, want to, or are able to own property?
What share of the 33 per cent of households who do not own property, are actively looking to purchase? Would a crash in a housing market fix the problem? Who wants to go first catching a falling knife?
Are we not merely swapping the ownership of rental properties from private landlords to Government?
Why do we have private medical insurance, private schools, private hospitals, and all sorts of charities doing good all around us? May I suggest they are far more efficient at achieving good outcomes than "no skin in the game" puppetmasters making rules up on the fly?
If I want to support the poor, every day I'd choose to support a charity, not the Government. In business and in investing, no one wants to pay something unless there's a good result in the end – why do we expect so little in terms of business acumen from our politicians, especially ones who describe the practice of claiming expenses against revenue as a "loophole"?
Just like you cannot save yourself rich, we cannot tax ourselves or print ourselves wealthy as a nation. Wealth comes from hard work, risk, ambition, creativity and an environment which permits success – are we starting to lose this?
Changes in the bright-line test (capital gains tax), and the loss of interest deductibility are going to have some obvious impacts: Property investors may choose more to buy new builds - same bubble, just in a different pot, potentially with more acute side effects in adverse markets; Less will be spent in upgrading the private rental property stock due to less cash available to the owners; Often owners of more than one property are self-employed too – Less net income, less new employees; Contractors will get work cancelled, less income for everyday Kiwi's, and less overall tax collected by the IRD.
There's going to be some less obvious side effects also: Small-scale investors may sell up their two rentals along with their home, and plough it all into one massive property – luxury properties will become a niche asset class for disenfranchised property investors; First-home buyers may find it harder to move up the wealth spectrum, due to slower capital gains in their home; In the event of a housing crash, supply of housing to first home buyers could actually be in excess of demand (immigration last time I checked was pretty neutral).
More investors will borrow against the value of their home to speculate in shares and crypto-markets (after all, if you cannot claim interest as an expense, investors will chase gains elsewhere). 1987 anyone?
So, a small portion of our society wears the cost of this whole exercise, all designed to fix the housing crisis. Given we haven't seen any meaningful new house supply created by this current Government, if it's not a tall poppy tax, what is this really about?
As much as I hate these tax changes, and I really am rather displeased, I think there's another valid reason why this actually does need to happen. There's a rat's worth of money supply rolling through the snake of our economy right now.
Low interest rates (the medicine all central banks dish out at the moment, regardless of the disease) sets off asset inflation first, then consumer inflation later. Everyday people are simply wedged between bank-issued currency, the creator, and the IRD, the destroyer of currency.
Assuming the stock of property is a constant, you cannot increase one side of this without increasing the other. We're truly tempting demonic inflationary forces unless this is delicately balanced.
The Government told the Reserve Bank of New Zealand to give it their best shot last year with respect to property investors – they did. The RBNZ told the Government to give it their best shot this year – they did. It's all rather impressive really, now let's all settle down.
When balanced, the dance between creator and destroyer works fine, but we've been unbalanced of late indeed. Lock some kids in a room with a bunch of candy, what did you think would happen? Lower interest rates will persist for longer – this is ultimately going to lead to a level of inflation much higher than what we've seen for some time, unless some work-arounds are urgently implemented.
Yes, increasing the housing supply could have a been a bit smarter, but this is the Government we voted for, it's their modus operandi, so let's just get on with it shall we?
- Darcy Ungaro is an authorised financial adviser and host of the NZ Everyday Investor Podcast.