New research on property investment

Nov 20, 2017 | News

The Herald interviewed Dr Michael Rehm, a senior lecturer in property at the University of Auckland Business School, who says preliminary PhD research by one of his students is revealing how property speculation has fuelled high prices and the Auckland housing crisis.

The research points the finger clearly at Kiwi investors (government figures show foreign property investors are involved in only three per cent of house sales here) and a strong motive of tax-free capital gains.

The student, Yang Yang, has used data available to the government and Inland Revenue to track thousands of house sales over the last 18 months and, using a newly-developed speculation index, has identified potential speculative house purchases.

Yang has benchmarked cash flow returns from the investments against a risk-free alternative (a six-month term deposit) and other risk-appropriate investments offering higher returns.

“What he’s found is that, if you put capital gains aside, 97 per cent of speculators are not earning as much in cash returns as the risk-free alternative,” says Rehm. “So only three per cent are earning more than a term deposit.

“If you compare their returns with the risk-appropriate option, 100 per cent do not make as much in returns.”

Rehm says this data runs counter to the picture painted by landlord lobby groups who often maintain landlords are in it for long-term cash flow, not short-term capital gains.

The Yang research also looked at two groups of investors – those who bought with a mortgage and cash buyers.

“Even when you look at cash buyers, 72 per cent are not even achieving the risk-free returns, so only 28 per cent equal or exceed the return from a six-month term deposit. If that doesn’t reveal what the real motive is for property speculators, I don’t know what does.”

The research begs the question of what to do to stifle speculator-and bank-fuelled investing in property. Rehm says: “I wasn’t too surprised at the findings – I have always suspected the housing crisis was supported by domestic residential property investors and owner-occupiers – but I was disturbed by the degree of speculation.”

Research covering the years 2003-2008 showed owner-occupiers held onto their homes for a median of five years while investors held on for a median of four.

The “bright line” test introduced in 2015 is designed to make someone who buys and sells a property within two years pay tax on the profit; Rehm says it is too early to assess its effect.

“What I suspect is it will just alter behaviour. The bright line test says you must pay tax if you buy and sell within two years; but if it is slightly over two years, you can beat the test and avoid paying a cent.”

It might catch and discourage “flippers” – those who bought and sold a property for profit just an hour after the ink was signed on their deal.

There was also, especially in the election campaign, much discussion about a capital gains tax, he says: “Yet we already have legislation covering this – the Income Tax Act of 2007. The problem is that the act requires the IRD to somehow gauge your intentions…did you intend to buy this property to make a profit or not?

“They have admitted themselves there is no documentation or other hard evidence which can identify someone’s intentions – so they don’t call anyone on it; nothing is done. That’s the tragedy of it.”

Rehm says Yang’s research will make “pretty horrible reading” for many when complete – but it offers a chance for government to deploy the anti-speculation measures of the Income Tax Act.

“We have information that is already available to the government or government departments,” he says. “We hope to be able to share this with the government in the future.”

The recent moves keeping LVR lending restrictions in place were a step in the right direction and he thought there could also be measures taken to stop speculators funding property investment through the banks.

“We could say to speculators: ‘Use your own money. Don’t go to your friend at the bank and leverage the equity in an inflated property.’ That’s what happens with some of these people – they don’t actually use any of their own cash.”

The other measure which could be taken was to lower debt-to-income ratios which were far too high in New Zealand, with most mortgages sitting somewhere between 9-12 times borrower income.

“Rationing credit would solve the problem, I am pretty sure of that,” he says. “But the politicians are terrified of it because they worry that it could bring the whole thing down; the banks don’t like it either.”

Recent articles

Annual Report

2021/22 CHA Annual Report

2021/22 CHA Annual Report

Strategic Plan

CHA’s 2022-2023 Strategic Workplan

CHA’s 2022-2023 Strategic Workplan

Featured Network

Residential Tenancies Act Community of Practice

Residential Tenancies Act Community of Practice

Our Place

Our Place Report 2017

Our Place Report 2017

Case Studies

Media Releases

News

Newsletters

Community Housing Aotearoa newsletter – November 28, 2022

Welcome to our latest newsletter. We cover the latest staff news, we seek feedback on our Conference topics, outline what submissions are currently being prepared, plus highlight a number of community and partner events. Community Housing Aotearoa newsletter November...

Community Housing Aotearoa newsletter – November 14, 2022

Welcome to our latest newsletter. We cover the latest staff news, Auckland's CHP network latest event, we seek feedback on our Conference topics, outline what submissions are currently being prepared, plus highlight a number of community and partner events. Community...

Community Housing Aotearoa Newsletter – October 31, 2022

Welcome to our latest newsletter. We cover the release of our Annual Report and our AGM, we seek feedback on our Conference topics, outline what submissions are currently being prepared, summarise the VUW Interns' work to produce CHRA Registration and Methamphetamine...

Submissions

CHA’s Submission on the Charities Amendment Bill

CHA submitted to the Social Services and Community Committee on the Charities Amendment Bill. We supported a robust and fully inclusive review be done through an independent body to address underlying issues that our sector faces and ensure lasting charities. The...

Legislation

Reports

CHA 2022 Annual Report and Audited Accounts

What a year for our Community Housing Aotearoa Ngā Wharerau o Aotearoa team. Our Annual Report highlights our service delivery, including: - 16 submissions to central and local government. - 30 trainings and events delivered on topics ranging from public health...

CHA’s Methamphetamine Harm-Reduction Handbook

CHA has developed a Methamphetamine Harm-Reduction Handbook - with consultation from the NZ Drug Foundation - with advice for providers, tenants, and policy-makers. This resource can be read below: Methamphetamine Harm-Reduction Handbook

Research

Community Housing Aotearoa

Contact Us

Contact Info

Level 11, Ranchhod Tower,
39 The Terrace /
102-112 Lambton Quay
PO Box 11543
Wellington 6142

+04 385 8722

support@communityhousing.org.nz

Follow On