KEY POINTS:
Much finger-pointing has followed the Centre for Housing Research's finding that the property boom is putting home ownership out of reach of more and more Aucklanders. Speculators and developers have attracted their share of blame, as have those who, according to the Reserve Bank Governor, should be saving
their money rather than placing it in rental property. What this criticism ignores is that borrowing money and buying housing is a perfectly rational response to the tax system. Therein lies the nub of the problem.
Not for nothing do some property investors gloat about their tax deductions and tax-free gains. Those who leverage up and buy an investment property can deduct almost every expense. Property can even be negatively geared to create a loss, which can be deducted from other income when calculating income tax. There is also no capital gains tax when property investors sell. Compare that with the disincentives for saving. The income generated by after-tax money put into managed funds or other financial instruments is taxed. There is not even the vaguest semblance of a level playing field.
It is little wonder, therefore, that New Zealanders see only one road to wealth accumulation. That path also tallies with a widespread view that house ownership is the most stable of safeguards in times of turmoil. It far outranks the ownership of shares in popular esteem, a view reinforced by the 1987 stockmarket crash. Up to 70 per cent of households own no shares directly, even though since 1993 overall pre-tax returns from the sharemarket and real estate have been similar.
New Zealanders' investment decisions hinge also on the belief that property investment is virtually risk-free. It is not. Some people are discovering that now as the Reserve Bank increases the official cash rate more aggressively. Others may find themselves exposed to a price slump, even belatedly when they retire and seek to trade down what they believe is a bountiful nest-egg. Many baby-boomers will be doing the same thing at much the same time, creating a potential market glut.
The national mindset is a severe obstacle to more balanced investment. But more people would stop and think if all investments were placed on an equal tax footing. Much time has been spent analysing monetary policy options for shackling the household sector, and more is likely to devoted by Parliament's finance and expenditure select committee. But the alternatives harbour consequences that have led, in the main, to their rejection internationally. Equally, tinkering with the monetary policy framework will not tackle the essential inequity between investment alternatives.
Some have sensed as much. National Party leader John Key has spoken of the need to reduce taxation on investments other than housing, a process adopted by President George W. Bush and Australian Treasurer Peter Costello. There is no thought in New Zealand of imposing a capital gains tax on property investment, as is the case in Australia. Mr Key and his political opponents know this would be the probable catalyst of a property price collapse and electoral suicide.
But a similar result could be engineered if the distortions in the tax laws were ironed out. The New Zealand mindset would ensure house ownership remained a top priority, but property would no longer be regarded as the only canny means of accumulating wealth. More money would be saved and directed to the benefit of local business, and there would be less reliance on foreign capital. Most importantly, there would be less money driving up the price of housing and placing it beyond the means of even more people.
