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Can House Prices Be Controlled?

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It’s clear that house prices and rents are rising. The media run stories of astounding prices being achieved for what are sometimes old houses in less than mediocre condition. By Olly Newland

It’s clear that house prices and rents are rising. The media run stories of astounding prices being achieved for what are sometimes old houses in less than mediocre condition.

Various talking heads have been asked “what should be done?” but have had no real solution other than saying more land should be made available. I’m sorry to tell you this, but they are all dreaming.

Let me tell you that more land may be the long term solution, but it will take many years for any benefits to be felt. What are needed are more dramatic moves that will get results without distorting the market.

For starters, a suggested capital gains tax, as some are clamouring for, will have the totally wrong effect. It would drive prices up even further. If such a tax were to be introduced it would result in a mass withdrawal of property off the market.

Think about it. If you have a property that you are considering selling, would you rush it onto the market if you were going to be slugged with tax? Of course not. After all, if you don’t sell you don’t pay tax. It’s a no-brainer.

Worse still, those pushing a capital gains tax want to exempt private homes. Well, that’s even sillier, because private home sales make up the vast majority of the market. Under that system we will end up with mums and dads flogging off their houses for tax-free gain… leaving house prices to continue to rise.

Look overseas if you want proof positive. Some of the countries that have capital gains taxes have suffered the worst property crashes. Such a tax does nothing to stop price rises.

Twelve months ago I predicted the coming current rise in property prices and told everyone the reasons why. That some sort of ‘mini bubble’ was forming has become obvious.

The reasons for the current situation are:

  1. The extortionate costs of council charges when building or subdividing
  2. Escalating costs of raw materials
  3. The loss of tens of thousands of houses because of the leaky homes scandal
  4. The loss of thousands of houses from the Christchurch earthquake disaster
  5. Slow but steady immigration and increase in population
  6. The removal of tax breaks (small as they were) in the 2011 budget was a colossal blunder and I said so at the time. It wasn’t so much the money, it was the message. The authorities openly stated that they wanted to discourage investment in property. Well, they succeeded didn’t they? It discouraged many buyers from going into the market to provide rental accommodation.
  7. We have GST on every new house or renovation. Think about it: A newly built $500,000 house carries a GST content of $75,000! So why build? Next door could be a second hand house for sale, GST-free and often loaded with extras
  8. The ongoing effect of historically low interest rates cannot be overstated. So long as these low rates exist they have the effect of providing a hefty wage rise to the mortgage home owners as well as allowing borrowers to borrow even more. These low rates are likely to fall even further which will add more fuel to the fire. The worry that interest rates will rise sharply has so far proven to be an empty threat.

Well, some might say it’s easy to criticise, but what can be done?

Here are a few ideas:

  1. First home buyers should be given a GST rebate on new built houses of up to (say) $500,000. First time buyers only and not repeatable. That would be a good start for those who are trying to get on the property ladder. Australia has something similar and stamp duty is rebated for first home buyers. It’s the same general idea and it works
  2. Reinstate the building depreciation deduction allowances — thereby send out the message that being a property owner is no longer a sin
  3. Shake up the costs involved through council and water charges. They are scandalously too expensive and make up a disproportionate part of building costs
  4. Give first home buyers a grant towards any low cost home. This would only apply to newly built homes and that, along with the GST rebate would give a big boost to builders to provide low cost homes. There’s the nub of the problem: Builders cannot make a profit on cheap houses. Radical thinking is required to solve that conundrum
  5. Give encouragement to investors to provide more affordable rental accommodation. For those who provide long term accommodation, remove some of the more onerous restrictions of the Residential Tenancy Act. The emphasis is on long term. If tenants could rent for years, free from the threat of eviction, able to call their house or flat a “home”, a lot of pressure would come off the rental market. In other countries you can lease a home for years if not decades. Think about it: If you could rent back your own home  (the one you live in) for, say, 30 years and use the money for business or similar would that not be attractive? Such a move would take a lot of pressure off people who currently think they need to buy or face eviction at relatively short notice.

With more than 45 years in the property game, Olly Newland provides a consulting and mentoring service for people committed to making serious progress with property investments. Whether it be buying, selling, holding or troubleshooting. If you’re interested in knowing more, visit Olly’s webpage

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