God defend the open home

The real estate flag represents New Zealand more than the fern does. Photo / Martin Sykes

If New Zealanders had been honest about finding a flag that reflected the national character it would have been an open-home flag.

We are obsessed with getting, protecting and growing our tax-free capital gains from land. Our economy worships at the feet of bankers and agents.

We feel in our bones that tax and banking systems are set up to make it easy and relatively risk free to get ahead by leveraging up and waiting for the inevitable rise in house prices.

It appears nothing can dissolve the magic. Labour has abandoned a capital gains tax, which means it is unlikely for another generation. The Government won't discuss the role of its migration policy in pumping up house prices in Auckland.

The Nimbys (Not in My Back Yard) in the leafy suburbs of Auckland will fight tooth and nail to thwart attempts to quickly build lots of affordable houses.

And now the magic and joy is spreading into the provinces.

This week, while the nation was working itself into a frenzy about which fronds and curls spoke the most about us, the real us was being revealed in statistics from the bowels of our real estate market.

Quotable Value reported that Auckland house values were up 20.4 per cent in the year to August, but it was the surge in values in Hamilton (up 10.3 per cent), Tauranga (up 8.6 per cent) and the Hauraki region (up 16 per cent) that caught attention. There will open home flags aplenty flapping in the provinces this spring.

Even the Reserve Bank seems powerless to dampen the speculative lust sweeping north and south from Planet Auckland. Its rate cut expected on Thursday will also embolden borrowers.

The scale of the obsession with borrowing to buy and hold land was also clear in Reserve Bank lending figures released this week. Mortgage lending grew $1.087 billion in the 31 days of July to $219.813b, the fastest monthly growth rate since December 2007.

Mortgage debt is growing faster than incomes, helping drive the household debt to disposable income ratio to a record high 162.2 per cent, among the worst in the OECD.

Landlords grew their borrowing by twice as much as owner occupiers and three times as much as first-home buyers in July.

Banks are comfortable lending this money to landowners because there has never been a big bust in house prices in our major cities and because globally set rules about capital allow them to lend more against land and housing than against businesses.

This was also clear in the Reserve Bank figures showing businesses borrowed just $12m more in July, and banks lent an extra $538m to loss-making dairy farmers racking up extra debt against their land.

Just let that sink in. New Zealand's businesses are relatively profitable with pre-tax profits last year of 9.7 per cent of income, yet they are choosing not to borrow to invest in growth.

Meanwhile, rental property investors, who in Auckland are receiving gross yields of less than 3 per cent and net yields that are far less, are gearing up massively to buy homes off other landlords and owner-occupiers.

They're betting on yet more leveraged tax-free capital gains and banks are happy to help.

It's the same for dairy farmers, lucky to get a cash yield from their cows of 5 per cent over the long run and making big losses for two years.

Why would anyone borrow, and be lent, so much for such low cash returns? The deductibility of interest for tax purposes and the tax-free nature of capital gains make all the difference.

The easy capital rules for mortgage lending by banks is the cherry on top.

The perverse result is that more than $1.5b was lent to loss-making businesses in July and just $12m was lent to businesses earning more than double the cost of new borrowing.

Only a land tax and/or a capital gains tax would force us to act in a rational, non-delusional way. Yet both would be seen as heretical and unpatriotic under the truly Kiwi flag of the open home.