Analysis of the Capital Gains Tax

In the days since the Government Tax Working Group announced its recommendations, there has been a lot of discourse on them. Some of the discourse has been highly constructive, but there has also been a lot of ideological, emotionally driven commentary which has ignored the subject matter.

In light of that I have tried to write an analysis that is politically neutral.

It is important to note that New Zealanders buy property as an investment because it is one of the few ways of developing ones own wealth, without a significant tax measure applied. When I say an investment I am not talking about the family home, something everyone would like one of to be their own. Nor am I talking about the holiday home that might be a crib on land with a total value of $100,000. Rather I am mentioning properties that are going to be used in the rental market and have active tenants paying rent/board.

The idea of owning a rental property permits the owner to have control of the house and be paying off any mortgage that they might have without actually having to use their own funds.

The more properties of this nature that they own, the great the return per week from tenants. When the landlord exits the market and sells all of their properties, they are able to take all of the appreciation without having to pay taxation on it. Not surprising then that people with a bit of money to spare have flocked to the New Zealand market, invested in properties. However this has had a down side as in turn it has driven up property prices, which have forced a number of potential buyers from the market. In order to pay for those properties or gain appreciation on them, the matching rents have risen as well, which has put the squeeze on those with limited income means.

Contrast this with putting their savings into something like the share market or a long term deposit in a bank account, where it can be taxed. The share market obviously has a degree of volatility reflecting the trading environment of the day. How well the shares do depends on how will the company performs publicly – oil companies for example experience fluctuations in oil prices depending on the ability to supply the market, geopolitical conditions in the Middle East.

In terms of the long term deposit, the holding bank announce . However interest rates have stayed very low since the Global Financial Crisis, making it difficult to accrue significant interest. Some banks have interest rates so low that they are what I call acidic in that one actually starts paying the bank to have ones money invested in them, and the net outcome is a loss. The taxation of these methods of developing ones wealth poses a question:

If they get taxed, then why should the method of wealth development that is owning secondary properties  for the purpose of money gain not subject to tax?



Tenure review to get a deserved ending

On Thursday, Minister for Environment Eugenie Sage made an announcement that New Zealanders had been hoping for. After 20 odd tortured, ill thought out, highly controversial years of the land tenure review process, Ms Sage finally announced its impending demise.

When it started in the 1990’s Land Information New Zealand (L.I.N.Z.) was in a bit of a bind. It wanted – and in many respects needed – to get a host of high country properties worth millions of dollars a piece off its books, no longer being able to be the ideal landlord. So, the Government looked at a process that could discharge responsibility for the land, give the lease holders (farmers)more responsibility, which they were asking for, all the while maintaining access for the public.

The idea sounded great – the Government no longer has responsibility for land it could not really manage; the farmers who are the leaseholders would be given greater control over the land in return for making it accessible to the public as far as farming operations permitted.

But the execution of it was appalling. It quickly became obvious that the Overseas Investment Office did not really know what it was meant to be doing, if anything, in terms of regulating the sales that happened. Little screening was done of potential buyers, what they intended to do with it and how suitable as non New Zealanders they were to be in possession of some of New Zealand’s finest farm real estate.

Farmers became frustrated because the sale of properties to buyers became mired in politics. There were several high profile cases with a variety of controversies attached. They include the sale and resale of land in the Mackenzie Basin which became the subject of intensive dairying (and equally intense controversy about the spoiling of high country charateristics with false greenery in a naturally arid area). Another was the sale of the large Lillybank station near Mt Cook, which was bought of Tommy Suharto, the son of Indonesian dictator Suharto. Mr Suharto’s business partner bought a station that Mr Suharto had spent $7.5 million in 1992 purchasing.

Access campaigners also became concerned. Much of the high country farmland had access routes to key camping areas, fishing spots and tramping routes. Many of those who succeeded in deals to purchase such farms often give no hint as to whether they would permit the access to these spots to continue, or recognize the Queens chain. Some were also concerned that those spots would become degraded by non compliant land use.

Many of these concerns were well founded. Some of the buyers indicated little interest in the well being of the communities nearby or for the conservation values held by New Zealanders. As this stoked resentment it was inevitable that controversy should arise.

In the end, with so many frustrated by the way the tenure review was being carried out, the review found itself with few allies. Except for the very few people who had managed to conduct sales of property and whose finances had done very well out of them, there was little support. 30 leases are still in progress, but one has to ask whether it is appropriate for them to continue given tenure review is now at an end.


Changes coming for foreign purchases of N.Z. properties

Today the Government announced that farm properties will be subject to new restrictions from 15 December. The decision to tighten rules follows concerns about a directive from 2010 which the Minister for Land Information Eugenie Sage considers to be very weak and undermines the Overseas Investment Act.

For New Zealand buyers wanting to invest in New Zealand properties, this is good news. It helps to give them a bigger foot in a doorway crowded by the feet of many wanting a slice of New Zealand real estate. Concerns had been raised that New Zealanders were being locked out of their own country – ironic since it was former Prime Minister John Key who said that New Zealanders risk becoming renters in their own country.

It will invariably invite criticism by National whose party spiel about foreign investment was that it was important for overseas investors to not feel unwelcome in New Zealand. True to an extent, but the National Government of Mr Key, like the Labour Government of Prime Minister Helen Clark to some extent ignored the fact that New Zealanders ability to invest in our own country’s real estate. This helped to give rise to the New Zealand First narrative of New Zealand being sold to the highest bidder by the two major parties.

One group of people particularly likely to feel the pinch are the Chinese. I have mentioned below why Chinese investors find New Zealand so attractive. But it needs to be noted that the Chinese Government has a global agenda in much the same respect as America – power, prestige, but also the means to enable that power to continue to grow.

For the ordinary Chinese citizen though, the reasons are likely to be more mundane. The reasons for Chinese investing here are many and not all necessarily for reasons that Americans or Europeans would:

  1. Chinese purchasing property in New Zealand has to do with many of them seeking a place to invest wealth that they do not want subject to Chinese Government scrutiny.
  2. Ensuring they have a bolt hole in the event that for whatever reason China becomes untenable as a country to live in.
  3. New Zealand may be seen as a less regulated market
  4. New Zealand properties and New Zealand come with a perception – largely true – that New Zealand is clean and green

With a huge population now pushing 1.5 billion people and megalopolises like Guangzhou with 35 million people, urban life in China is one of huge numbers of people, smog, traffic jams and central government planning simply not able to keep up with planning needs. One can sort of sympathize with them for wanting to move to cleaner less polluted countries.

However that does not change the fact that New Zealand needs to look after its own people and real estate. One concern that has arisen in the last several years is that whereas other countries have criteria on who can buy property based on citizenship status, we do not and that New Zealand needs to toughen up. Another one was that if a person from another country buys New Zealand property, would they then live on it, or be absentee landlords of some sort, when a New Zealand buyer would at least live there.

So, I welcome the new measures being put in place.

The $1.5 billion loss on Christchurch red zone land

When the earthquakes stopped ravaging eastern Christchurch, thousands of properties lay broken and abandoned. The owners had fled either because the quakes were too much to handle or their properties had suffered such severe damage as to be no longer inhabitable.

The Government came to the rescue, offering to buy them up at their 2007 rating value. Many people accepted and one by one the remaining occupants, upon reaching deals with their insurance companies, packed up and either left town or bought property elsewhere. By the end of 2016, only a few properties were still occupied.

Now, it has come out that since the Government snapped up what was N.Z.$1.5 billion worth of red zone land in eastern Christchurch, the value of that land has plummeted to a mere $21 million. If one works that out, 7,000 properties were worth an average value of $214,285. Now they are worth about $3,000 a piece. In addition to the money sunk into purchasing the red zone properties which take up all of Bexley, parts of Dallington, Avonside, Avondale, Aranui, $130 million was sunk into maintaining them.

To translate, the $3,000 I spent on courses for my Graduate Diploma would have been able to buy one of those properties.

So, what happened?

Effectively much of this is land that is not fit to be built on in terms of residential development. The properties either suffer lateral spreading that means during the shaking different layers of strata moved at different speed, and came to rest in different places from where they started. This has the effect of making the land unstable to build on.

Due to the high intensity of the ground shaking, in some places up to Modified Mercalli X, the dwellings would have also been subject to liquefaction, which would have caused subsidence. This would have damaged both the dwelling and the infrastructure such as the sewerage and water mains, and underground electricity cables.

Political parties as part of their campaign efforts in Christchurch are trying to figure out ways of capitalizing on the empty land and are proposing extra spending to fund projects that might make use of the land. No long term plan has yet been worked out. Locals are divided on what it might be used for. Some support letting it become light farming or horticultural land as this will not involve heavy dwellings such as houses. Others believe that it should become a sports mecca with rowing facilities and so forth.

Being a natural hazards graduate I tend to take a cautionary view of the land. It has suffered damage and there is nothing to suggest further earthquakes in the future will not cause similar problems. Seeing as the land is in what was the so called “Green Belt” around Christchurch, an appropriate use would perhaps be to let it become farmland. Large swathes of it are too low lying and too prone to flooding to be insured by insurance companies, which makes it difficult for anyone wishing to rebuild in the area.


New Zealand housing crisis due to deliberate ignorance

We perceive ourselves as intelligent and in many respects we are, but there is a degree of ignorance and – perhaps – arrogance that goes with being a human being as well.

In some respects New Zealanders are quite aware of how lucky this country is to be free of major conflict, still have a relatively pristine environment and good performance in most social indicators. And yet, we are quite far behind – knowingly so in some respects – when it comes how we house ourselves, manage housing for the vulnerable, sick and disadvantaged and hindering our socio-economic performance as a result.

There is something about the housing crisis so fundamental that we cannot help notice, yet seem to be quite content in ignoring:

Anyone can buy a property in New Zealand. You do not have to be a permanent resident or citizen to do so, as is the case in many countries. 

In the United States a non American can buy property, but there are strings attached. These are normally involve houses being registered with a residents association or similar and ownership of a property registered such an organization is understood to be an acknowledgement that the owner is expected to comply with their rules.

In China one cannot own land, but rather gain rights to use that land. A person can purchase a house in a designated area after a year or more of studying or working in China.

In Israel the land owned by the Government, Jewish National Fund or the Israeli Land Authority can generally only be purchased by Israeli citizens or Jews. This comprises about 93% of all Israeli land. The 7% that is not owned by one of these bodies is privately owned and in great demand as there are few restrictions.

I have said before and will say again that New Zealand should require people to become permanent residents at least before they can purchase property in this country. In past articles I have shown how New Zealand can take steps to improve the housing crisis here and rather than write it all out again, here it is again.