NZ house prices relative to rents are the most overvalued among developed countries, says the OECD. Photo / File
Of all the ways of measuring income inequality and poverty the most instructive, surely, are those which take account of housing costs.
And here the latest richly informative report on household incomes from the Ministry of Social Development makes sobering reading.
Over the five years — 2009 to 2013 inclusive — the proportion of households spending more than 30 per cent of their income on the roof over their heads has held steady at 27 per cent.
But among the lowest fifth or quintile of households ranked by income it has climbed from 33 per cent in 2009 to 42 per cent last year. In the late 1980s it was just 16 per cent.
Just over one in four of bottom-quintile households reported spending more than half their income on accommodation last year, up from one in five between 2004 and 2009 and higher than at any time since the statistical series began in 1988.
Those numbers are from Statistics New Zealand's household economic surveys.
Administrative data from accommodation supplement payments tell a similar story.
Of the households that rented and received the accommodation supplement last year, 94 per cent paid more than 30 per cent of their income in rent, three out of four paid more than 40 per cent and nearly half paid more than 50 per cent.
"The increasing housing stress for lower-income households reflects significant rises in gross housing costs for many of these households and household incomes that are rising more slowly than housing costs," the MSD household incomes report says.
"In addition, the policy settings for the accommodation supplement have remained unchanged since 2005 which means that an increasing proportion of accommodation supplement recipients are receiving the maximum payment (33 per cent in 2007 and 50 per cent in 2013)."
But even with that taxpayer subsidy, which costs about $1.2 billion a year for around 300,000 recipients, rental yields are low.
Or to put it another way, as the OECD does, New Zealand house prices relative to rents are the most overvalued among developed countries.
New Zealand Institute of Economic Research principal economist Shamubeel Eaqub, in a paper just published in Housing Finance International, the journal of the International Union for Housing Finance, says investors tend to employ a buy-and-hold strategy, consistent with retirement or long-term investment motives. But they are accumulating more and more of the housing stock, making them a large part of the market, accounting for 43 per cent of housing market transactions, Eaqub says.
It is the flip side of a decline in owner-occupier rates to the lowest they have been since 1951.
Though rental yields vary by region and investors' required rates of return can also vary, Eaqub estimates that at the current national average gross rental yield of 4 per cent, and assuming a required rate of return of 11 per cent, investors buying houses today are expecting capital gains of 8 per cent per annum indefinitely. That looks optimistic. The average rate of real house price rises over the past 20 years has been 4.1 per cent per annum, on top of an average 2.3 per cent in ordinary consumer price inflation.
Over the past 10 years real house price growth has slowed to 3.4 per cent. Over the past 30 years real house prices have risen an average 3 per cent per annum.
Given the Reserve Bank's inflation target, historical precedent suggests a reasonable expectation of capital gains, in nominal terms, is 4 to 6.5 per cent a year, Eaqub says.
"Embedded capital gains expectations in current house prices are unsustainable," he concludes.
And that is without any change in the tax treatment of those gains. New Zealand is unusual among OECD countries in not generally taxing capital gains.
Labour income is taxed but earnings derived from simply holding the right asset over the right period is supposed to be sacrosanct. Well, why? Especially if the rise in the investor's equity is amplified by high levels of gearing — higher than are usually available to businesses.
Tax law already provides for taxing capital gains from sales of houses bought with the intent of capital gain.
"But this test is difficult to apply as it requires judicial interpretation of how intent is defined," Eaqub says. Few people buy an asset with the intent of selling it at a loss, after all.
Eaqub suggests that if an investment property is bought at a negative rental yield after accounting for reasonable gearing, mortgage costs, rates, insurance, repairs and so on, then the intent is pretty obviously to make a capital gain. He is clearly right to conclude that clarifying the existing tax position, whether through jurisprudence or through regulation, would be likely to reduce the actual and perceived tax benefit of property investment.
Critics of Labour's plans to introduce a capital gains tax, like tax accountant Mike Shaw of OliverShaw, point to a number of potential practical difficulties and anomalies.
The exemption for the family home would give rise to boundary issues, he says, for example if people rent out their home for a period while they go overseas.
Taxing gains from the introduction of the tax would create both a bottleneck of valuation and the risk of over-valuations which would reduce the subsequent tax yield.
"In Australia they simply decided to tax assets acquired after introduction, to avoid inflated valuations of existing assets," Shaw says.
He points out that the proposed rate of 15 per cent for a capital gains tax is a lot less concessionary to someone earning less than $48,000 (whose marginal rate is 17.5 per cent) than someone earning more than $150,000 (36 per cent under Labour's tax policy). Non-residents are hard to tax.
And a capital gains tax would amplify the fiscal effects of a downturn, when taxpayers start making capital losses.
Landlords often run the argument that a capital gains would only drive up rents.
In Auckland right now, however, with a strong surge in net migration following a period of under-building landlords appear to have the upper hand in terms of the balance of supply and demand.