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Thread: article on NZ housing bubble - more stringent lending?

  1. #1
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    Question article on NZ housing bubble - more stringent lending?

    Interesting article from The Age on how new rules in New Zealand will tighten up lending by making loans with low deposit to high valuation much more difficult to get:

    Facing a housing bubble? New Zealand may have the answer

    New Zealand's [regulations] are taking the form of what bankers are calling a "10/80 rule," whereby only 10 percent of new mortgages underwritten can have to loan-to-valuation ratios of more than 80 percent.
    New Zealand is pushing the envelope by making penalties harsh: Banks will lose their licenses if they skirt lending rules that go into effect on October 1. That already has the industry policing itself. The New Zealand Herald reported last week that banks have "started tightening up their lending criteria" for fear of even approaching the upper limit of lending ceilings.
    I'm no financial expert, but I would think this would decrease demand and slowly (hopefully) deflate prices as it becomes more of a buyers market. Those with good finances could still get into the market. Less fortunate people might have to wait out the deflation, but might be well positioned (save more for a down payment?) when the prices are more in reach.

    Would this really deflate prices, or just hold them flat?

    Thoughts?

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    So far it has created a feeding frenzy at the bottom end of the market and here in Cambridge first home owner 3x1 homes have risen from low- mid 300s to high 300s and >400 and are often sold before even hitting the internet. Remains to be seen whether this will correct itself.

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    Quote Originally Posted by Kanga View Post
    ... and here in Cambridge ...
    Have I missed something here? Have you moved back to NZ Kanga?

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    Increasing lending requirements won't do much to stop escalating housing prices in NZ. The real losers will be those on the low income end. The winners will be the fully funded investment portfolio managers and very rich overseas migrants. Being that NZ is a very small country compared to the US and Australia, such 'moral suasion' by the central bank will do little in controlling the house prices. Simply, more rich investors can do top bid at the housing auctions, they don't need a bank (and if they did need funding, they use their foreign banks overseas.

    BTW, this 10/80 rule is nothing new and many developed countries have implemented it after 2008/09 economic housing crisis. To really tackle the housing problem in NZ, there needs to be a combination of controls in place (capital gains tax, foreign investor requirements, increase housing supply, lower building costs, etc.).

    The real issue is, will NZ politicians walk away from their vested interest in owning properties? They would be fools to pass laws that disadvantages them in making $ from their investments.

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    Quote Originally Posted by Super_BQ
    To really tackle the housing problem in NZ, there needs to be a combination of controls in place (capital gains tax, foreign investor requirements, increase housing supply, lower building costs, etc.).

    The real issue is, will NZ politicians walk away from their vested interest in owning properties? They would be fools to pass laws that disadvantages them in making $ from their investments.
    All great points. Many countries are suffering from rich overseas investors buying up properties (which often sit empty most of the year). Happens even within the US, in places like Hawaii or mountain towns (e.g. Breckenridge, Colorado). The local workers can't afford housing because of the multi-million dollar McMansions driving up prices. In Breckenridge they finally wised up and set aside some developments for local residents only.

    Increasing supply in some markets has kept prices down (e.g. Texas), which is good, although the quality is often lacking and infrastructure is an after thought. A little long term planning can improve supply, while making good fiscal and environmental sense. The better developers usually buy up a large tract of land and have a plan for the entire development. That's not to say that some of them didn't go bankrupt in the past few years. Cities also need to be involved in the planning. Even in ultra-conservative Colorado Springs, they finally realised a few years back that no planning was killing incentives for businesses to go there. Poor infrastructure means new residents go elsewhere and new businesses follow them; low taxes isn't the panacea that some conservatives think it is.

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    Lending restrictions have no bearing on foreign investors especially since in the NZ market, foreign investors are not subjected to the lending rules which governs banks here and are not even qualified for loans in NZ. Their respective countries where they come from have some pretty attractive interest rates for investment in properties.

    For eg. since I am in Singapore, the interest rates for foreign property investments start from 2.25% although there is a restriction on properties that must be a minimum of $500K and more and I need about 30% deposit. No problem...since properties in Auckland are generally above that level and no problem since it is a property in which I intend to either get rental or just remain empty in light of capital appreciation. A property that I do not intend to live in. All the issue is a 30% deposit which I need to cough it up somehow.

    As a non-resident Kiwi, I am allowed to get this loan (if I wanted to) and I would have not only circumvented the strict lending criteria in NZ but also get a NZ property for a steal starting from 2.25% rate whereas the average 6 month rate is about 6% in NZ. The only risk is the fluctuation of currencies between the SING$ and NZ$ - if the NZ rises, then I would be forking out for more this property (although this can be easily offset because when it is sold, you get more in return).

    Am I a foreign investor? No I am not since I am a Kiwi resident. I just happen to be abroad at the moment. When you look at the restrictions that Labour NZ, intends to put in, none of them apply to me. CGT doesn't apply if the residence is empty (if I list it as a primary residence), if it is for rental, I will wait until the rental tenancy is over, list it as a primary residence and sell it. Once again I managed to circumvent the CGT, while still all the while paying off a lower mortgage, being a non-foreign investor (so those restrictions don't apply to me) and pretty much still be nowhere penalised for all the measures, LVR restrictions, CGT rules etc etc that the RB or Labour intends to implement.

    There is no need to lay the blame on foreign investors. There are about 1 million Kiwis living abroad outside of NZ and you certainly cannot tell me not many of them have properties in NZ as investments with no intention of returning to the country.

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    In Breckenridge they finally wised up and set aside some developments for local residents only.
    On my recent trip in BC, Canada - local city and provincial gov't have built these huge apartment complexes (that resemble like hotels) only for low income families. This is great as it creates more downward pressure on the landlords wanting to rent their properties out when the gov't can provide better.

    Am I a foreign investor? No I am not since I am a Kiwi resident. I just happen to be abroad at the moment. When you look at the restrictions that Labour NZ, intends to put in, none of them apply to me. CGT doesn't apply if the residence is empty (if I list it as a primary residence), if it is for rental, I will wait until the rental tenancy is over, list it as a primary residence and sell it. Once again I managed to circumvent the CGT, while still all the while paying off a lower mortgage, being a non-foreign investor... (
    I'm curious where you live (Singapore?), how the banks there will freely lend you $ on an asset that does not exist in Singapore (a house in Auckland). In NZ, a mortgage on any house requires the house to have insurance and be liquid under NZ law (liquid as the bank can foreclose on a house under NZ laws). I can only think this would be difficult for an overseas bank to attain title property of such a house.

    You need to define what 'primary residence' means. In my previous post, it's been shown clearly in Canada how they deal with foreign owners of real estate. There is no category of primary residence for an overseas person or entity so i'm quite sure NZ IRD will implement similar rules for their CGT. Anotherwords, it will be very hard to convince a tax auditor that you've lived overseas for more 183 days while at the same time, say the house that was previously rented in NZ, was changed status to be your primary residence. They would view your NZ house more like a vacation home, while the house/apartment you live in most of the year (in Singapore?) would be your primary residence. Think clearly about CGT because almost all developed nations have some form of CGT (and if CGT doesn't work, then there would be fewer countries having it).

    Kiwis living overseas yet owning a house in NZ is not an issue. It would be expected for them to pay tax on the gain when they go sell it (IF CGT comes into play). Even so, it could be disadvantageous as the country they live in will require them to report their NZ assets so CGT can be assessed. ie. in Canada, residents there are required to disclose ALL overseas assets that are excess of $100,000 and provide details of the asset. The kiwi person living in Canada will ultimately have to pay CGT to the CRA (Cdn tax dept) on their NZ house after it's sold. While a NZ person living in NZ, if they owned a house in Canada they would still have to pay CGT to the Cdn tax dept. regardless if IRD taxes or not. To avoid double taxing, both countries allow a "foreign tax credit" section on the tax return.
    Last edited by Super_BQ; 28th September 2013 at 12:34 AM.

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    CGT tax exists but there are enough loopholes and pitfalls for such countries to address the issue of trying to catch people who have navigated around CGT. In many cases, tax departments requires you to report to them meaning declare your assets, intentions for them to be able to tax you. After all if one chose not to declare their assets, hide their assets all over the place, then the likelihood of the tax department finding out is unlikely unless they invested the resources to check up on you and furthermore it is their proviso to prove that you are hiding assets from payment if you choose to challenge their assumptions.

    As for tax residency status, the status immediately changes once you return to NZ (no matter how short that stint is) so in effect, you can claim primary residence rule if your tax status has changed while still not quite living in NZ yet. Nevertheless the IRD would take a view that they rather have you as a tax resident than not, as it is up to you to prove you are a non-tax resident (rather than the other way around) when you are not living in NZ.

    The primary residence rule that comes with CGT is a big headache for the IRD department once implemented because they are aware of the many legal and plausible variations that primary residence can be defined. A house left empty most of the time (because it is not rented out) can be defined as a primary residence if the person who comes to return to NZ stays there during his return. Would it not be termed as his primary residence in NZ? Such a case for an arguement can be made. I would think that the tax department rather than get into a serious fight with each and every issue of primary residence and its legal definition would in effect avoid all first homes in NZ as a primary residence and start looking to funnel resources to tax secondary residences. There are enough people going around in NZ that would try to avoid and hide secondary assets.

    Furthermore if you look very carefully homes with income (a subhouse attached to the main house) where the owner is staying in that same address as the tenanted person would also be able to prove his case of 'primary residence' despite the fact he pays tax on income earned from the property but does not pay the CGT because the property is a primary residence would be able to circumnavigate the CGT.

    There are enough cases to prove that CGT has enough issues when it comes to implementing and enforcing it and making sure people are aware of what is taxed and what is not. Countries have implemented it and it has in many ways reaped good revenue for the government in question but have mixed results on its success on controlling the effects it has on prices of property. In the end, it is the simple market demand and supply which determines how and where prices are at in NZ more so than CGT can ever fix.

    Banks ultimately are companies and yes they do lend funds for foreign property investments and yes their rates can be very attractive and terms easy to abide. Markets like the UK, US, Australia are primers for them though lately they have been open to investments in emerging markets as well. Westpac, Lloyds does a lot of business in this area.

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    batgirl1001, without going into a long debate, I will say a lot of your claims are incorrect and in some cases, over simplistic. Computers have made tax dept's job easier in doing background checks. As an ex-IRD auditor told me, there is no area or bounds where IRD can't investigate. My wife was called enquiring on a credit card issued in China and they wanted to know which bank account it was from (they were looking for the interest and income deposits). They even knew the history of purchases on the card used in many different countries over the past several years. How was all this private information found? (by a click of a button by a computer).

    Primary resident or not, one of the goals of CGT is to discourage ownership of multiple properties. It's not the sole answer as I said before:

    To really tackle the housing problem in NZ, there needs to be a combination of controls in place (capital gains tax, foreign investor requirements, increase housing supply, lower building costs, etc.).

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    Let me explain to you how simplistic and perhaps naive your assumptions are.As wonderful as computers are, they don't put 2 and 2 together and add to 4. A transaction of an item or transfer doesn't contain personal information between the parties involved and no IRD may not have the resources to research and investigate everything as they have limited resources.

    Let me point out my own example how sometimes they are overwhelmed with work, they really don't have the time. I declared rental income and paid tax for it. The following year they still never sent it their tax form and I had to chase them. In the end, long story shortened, it was me chasing after the IRD so that I can pay tax as if I am so eager to part with my money. So no I do not believe they have the means and resources. So no I do believe they will be able to handle the issues that will crop from CGT once it has been implemented. They may have no bounds where they can go but they would have difficulty allocating resources to check on everyone and everything and knowing what to look for.

    To highlight another experience, my property in Singapore which was put up for rental as well, had my property tax, rental income tax deducted from my bank account even before I could say HUH??!!! It was so nice for the IRAS to send me a letter informing me they had made the deduction.

    Let me point out that personal information, credit information and spending history are commonly shared among banks more for profiling the customer and marketing rather than nosing around to see if the person has bounced a check in their pass history. So your data is available up to a certain point and though some people have found it intrusive and rather tiresome, their is a limit to how much checks the tax department can do especially if you are not a person of significance as the bigger the fish, the bigger the target on your back. So ordinary people have gotten away with many things by under-reporting on tax expecially those who are in self businesses.

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