KEY POINTS:
Finance Minister Michael Cullen has floated the idea of a levy on mortgages to drive down inflation. Fixed rate mortgages mean that Reserve Bank interest rate rises take a few years to have an impact while a levy would be an additional interest rate charge on all borrowers. The idea was raised in a Treasury-Reserve Bank report and Dr Cullen said it had merit.
This forum debate is now closed. Here is a selection of your views.
Jairosi
I am a hardworking skilled immigrant. Me and my wife recently bought a house and grabbed a good fixed mortgage deal during the recent mortgage war that went on. Because of our income we just miss out on working for families but are still heavily taxed. We have two pre-school going kids who virtually wipe out my wifes income in kindy fees. Now Mr Cullen wants to dig deeper into our pocket. Get real sir, Australia is actively recruiting. No wonder why people are scooting to Aussie, you are actively scarring them off. I am wondering how many are like me out there who are thinking otherwise.
Steve
Its time we shut the door to foreigners buying residential property here. Just like Acupulco of the 1950's, they swoop in, buy the best, then (begrudgingly)pay a pittance to the locals to look after their playthings while they are back home running their businesses. Nelson is fast becoming Queenstown the second, while born-and-bred locals beg or borrow to take on massive mortgages they may never pay off. Other cities are experiencing the same fate, while our Government quietly curry favour for UN positions after we have sent them packing in 2008. Wake up Kiwis and fight to save Godzone before it goes the way of the Dodo!
Andrew
Great idea. It will cool the housing market. NZ dollar will drop. Probably the only solution in current situation. Currently we are earning money to overseas hedge funds and killing economy. Unfortunately we need to be shaken up.
Ian
Really this is worse than Oliver Twist. At least Oliver finished what he had before asking for more. If Cullen wanted us to save, he would put the surplus, every cent of it, into a named KiwiSaver account for each taxpayer. Surely this wouldnt drive inflation and help us save for retirement, which seems to be the main concern. He could also reduce the tax rates so he didn't collect too much. Instead he wants new taxes.
Read my lips "No new taxes!" (or levies fees or what ever else they want too call them.)
Owen McShane
Just think of it as the "Planners' Tax". They price we will have to pay for the mad theory called Smart Growth or Dense Thinking, which has strangled the land supply and driven section prices through the roof. Where there is light handed regulation houses are affordable.
Where Smart Growth is imposed housing rapidly becomes unaffordable. Today's planning graduates seem to have no understanding of economics or how markets actually work.
Tony Hollis
Michael Cullen has been vilified for saying the correct thing. The major problem in the NZ economy is the imbalance of money going into mortgages instead of the productive sector. This raises interest rates, which raises the dollar, which damages exporters and causes the gigantic trade deficit, which we have. Alan Bollard can't fix it. He has to simultaneously raise interest rates to cool the housing market and lower interest rates to lower the exchange rate. There clearly needs to be an extra tool in the tax armoury to fix it. What Michael Cullen has proposed would certainly help and obviously should be investigated. But the other parties have immediately rejected it because they feel the public won't accept any extra taxes. Which is sad, because an extra tax like this would be good for the people of NZ. It would scare off some speculation in houses, which would reduce house prices (or at least the rate of rise of house prices), lower interest rates and lower the dollar. The dollar actually dropped as a result of his comments, only to come back up again as he was attacked in the media. Therefore the only way to get positive changes like this through is to have support from other political parties. They have cynically refused it. This shows a real defect in the way democracy is working in this country. The people aren't educated enough to know what is good for them. And the politicians and media arent telling them in clear enough terms. As a result, the poor hero who actually does try to do the right thing gets shot down in flames. They say you get the government you deserve. Its a sad reflection on us indeed that we have the kind of government that we have.
Grant
Tax! Tax! Tax! Dr Cullen has a very limited vocabulary. He wants to call it a "levy". It is still a tax. The underlying premise of this governments economic policies is that the populace are morons and do not know how to handle their own finances. It therefore behoves the government to confiscate all privately held monies via levies, user pays fees etc (all taxes) and then decide how best to spend money we have earned on our behalf. There is potential for inflation to get out of control. New Zealanders have a low propensity to save. Labours simple solution to both - crate another tax. We know best! We will save you, you poor morons. Well we arent morons. Instead of punishing the hard working, Dr Cullen needs to think outside his narrow framework and develop some policies that are incentives. Incentives just in case it was missed the first time. Some of the populace are not morons and can do a better job of managing finances that the government. Leave the money in the hands of those with the whit to earn it, who dont have to take it from others by means of taxation, and you will be surprised how the economy will flourish. The strong hand of intervention is what is stifling New Zealands ability to grow.
Mitch Dieudonne
Reintroduce a capital gain on selling residential property within 2 years. Have a annual property tax for those who own additional houses/properties; Levy overseas owners of residential property not residing New Zealand. The revenue gained should go towards subsidising first home owners. All political parties should agree on policy to help more New Zealanders own their own houses.
Paul
The RBNZ must do something. Its tolerance of the reckless expansion of the money supply will end very badly. Homeowners and savers will all be hurt badly. The proposed levy is not the answer. The answer is to reduce the money-multiplier by significantly increasing reserve requirements on banks.
Claire Lawrie
This tax is a no brainer. Surely a better solution could be found!
M Amin
Labour has always encouraged people to do nothing and penalised hardworking people. Is Labour intending to drive all talent out of New Zealand? Buying house is already a dream for lot of people in New Zealand and this levy make it more difficult. One more reason for well educated hardworking people to consider moving out of this country as quickly as possible. This reminds me a story that I heard sometime back. There were 7 friends who used to go for dinner daily. Looking at economic condition of each they decided that 2 will dine for free, other 3 will bear 25 per cent of the cost and remaining 2 will bear 75 per cent of the cost. After some time cost of dinner declined by 10 per cent, all seven got together to decide how cost benefit should be distributed. The 2 who were dining for free felt if they dont get anything out of this there were not treated fairly. After long discussion it was decided that 10 per cent cost reduction will be distributed evenly across the board. Next day at dinner time 2 person who were paying 75 per cent of the cost didnt turn up. Labour is doing similar thing, I am afraid this is what can happen to our country.
Matt
Well all I can say is welcome to Helengrad. All the government wants to do is tax,tax,tax. Cullen should pack up his desk and leave and take Helen with him. At least John Key has an idea of how hard working people want to be treated. We are not to be dictated to. It really is time for Labor to go but just make sure they pay their election over spending bill before they do.
Jean
Stupid, stupid, stupid. If Cullen wants to increase savings and reduce housing investments - easy - make all bank and building society interest earned totally tax free.
Ian Bruce
Banks now lend borrowers a very high percentage of the cost of the property that they are seeking to buy. Why not simply slow things down by requiring a greater level of equity by the borrower, say at least a minimum of 25 per cent of value the property that they are seeking to finance? This may also help to address the savings issue. Too simple?
Peter
Something has to be done make speculation in the property market less attractive. Currently the wealth of this country is being fleeced by not just overseas speculators and business owners, but also by many of our so called business leaders. I am sick to death of seeing the majority of investment advice from nearly all sources in New Zealand focused on property speculation rather than developing sustainable business. The really successful economies in the world got to be successful through investment in business ideas, not rental properties!! I am all for a levy on mortgages and a capital gains tax , but it needs to go hand in hand with suitable incentives assistance for first home buyers. Many countries have this mix with the mortgage levy in the form of stamp duty, so what the government is suggesting is actually in line with practices that are known to work overseas (notably in Australia). If this brings down the cost of houses, then thats great. If it provides an incentive for investors to focus their attention on businesses rather than property speculation, even better.
Malcolm
It is about time Cullen and Treasury got in touch with reality and see what they are doing to ordinary New Zealanders, we pay enough in tax now and whether is called a levy or not its just another dumb tax. I am not an accountant but even I can see that continuing to raise interest rates only makes NZ more attractive to overseas investors. We have a shortage of skilled workers in this country and dumb ideas like this only make it more attractive to look at Australia.
Kevin Wroth
Is this man for real? Why does he not rather attempt to sort out the banks who are granting mortgages far too easily and am sure this does have an impact on the house prices? Why must they always treat the symptom and not the cause? Come on guys, get real! Am sure there are far more sensible ways to attempt to monitor the rampant increases, use those creative thinking skills.
Another Dave
Get rid of LAQCs for a start. Set deductions of interest at less than 100 per cent of the actual interest paid out. Allow only mortgages secured against the individual property and no allowance against non earning assets like land. Make IRD chase every property sale within two years of purchase. A levy will only hurt the wrong targets.
Lee
Its like a sick Tui Advert isnt it? "New Zealand rewards hard-working Kiwis and encourages them to do well" - Yeah Right! This represents another disincentive for young people to settle down together and raise healthy well-educated kids. Many will probably opt to go over the Tasman. Tax investment properties and offer more incentives for first time buyers. Stop blaming one of the few successful enterprizes available in NZ for inflation. Invest money into the manufacturing base (thats working class jobs, right?) Raise the minimum wage to discourage people from being caught in the welfare poverty trap. Stop pretending you are a Labour Party.
Rob
What a stupid idea, Mr Cullen is obvious incompetent in his job. We have to save more, to get inflation down by adding a levy on mortgages costs only go up subsequently we have less in our pocket to buy food and other essentials. what is the effect? More use of credit cards and less savings. Our houses are unfordable for most of us not because our houses are too expensive but because our salaries and wages are too low, we still earn on average 30 per cent less then Australians. To make housing affordable Mr. Cullen should think of making interest on mortgages tax-deductable instead of taxing them extra.
Chris
Cullen is demonstrating the first signs of insanity caused by being too long out of touch with the middle class tax payers keeping this country running. Is it tax cuts or even more tax increases? The arrogance of this government is incredulous and is almost matched by the apathy of the public who keep accepting increased taxes, many of which are cloaked as levies or other charges. Unfortunately more honest hard working New Zealanders will be moving to Australia, leaving NZ as a true welfare state where the government plays too large a part in determining what is done with the money we've earned. If we're to ever receive a tax cut, surely the simplest and fairest one is a reduction in the amount of GST. Anyone disagreeing could only argue GST is an unfair system, -this doesnt really wash after so many years of its existence. We are told we don't save enough. What about removing the tax on interest earned from money saved?
Wilson
To cool the housing market it would be better for Dr Cullen to treat the root of the cause. He has to negate the benefits obtained by people in investment properties. Its diabolical when you see people buying property, renting them out and themselves staying in rented properties, people buying second properties with no deposits and then obtaining tax benefits. This has led to the unhealthy trend of people investing in properties ,depriving first time buyers out of the market in terms of price and availability of homes. By putting a levy on mortgages he will be imposing a further strain on first time home buyers.
Charles Duigan
The past of experience of Mr Muldoon who attempted to manipulate market forces should be lesson enough. The economy must run on its own, this has been our policy now for many years, artificial movements do not work, the market will find its own level according to all the normal parameters. As normal it will overshoot but find a sound level very quickly. Leave well alone.
Kiwicritic
The solution to all the nonsense going on in this country, is simple, really simple. Lets all fly to Australia. If all the hard working, educated, tax paying kiwis fly to Australia, then where will this government find the money to give out as dole to all its lazy-ass vote bank? That will be the day I keenly await. Now, where is my travel agents phone number..
Tessa
Number one way to turn a left wing young professional homeowner voter to right wing, I know, why not add a tax to fixed interest mortgages. Lets make it harder for people to get into (and keep!) their own homes while also encouraging kiwis to save for a home and retirement with the new kiwi saver scheme. Hypercritical, I think so. How tempting it is as a skilled New Zealand born citizen to move to another country to make ends meet. Without the interest free student loan bribe (and Don Brash as competition) to carry them through the next election its hard to see how a Labour Government can survive.
Niel
It is so clear this is a tax, not a levy. Putting money into a savings account or investment account attracts around 4 per cent to 7 per cent interest on which one pays around 40 per cent tax, but putting your savings into your revolving credit mortgage effectively attracts around 9 per cent interest on which you do not pay tax. This "mortgage levy" is a way of recovering that lost tax on interest. One would still be better off putting savings into a revolving credit mortgage than a savings account, but the margin is getting smaller. I also do not understand why the delay in change of interest rates due to fixed mortgages is a problem, banks set their fixed term interest rates based on forecasts of what the average lending rate would be for the coming years. It is a business proposition, no need for government to get involved! Rather control the economy by changing the GST rate (or rather "GS Levy"?).
Jim Kilgour
Dr Cullen wants to stop and think who his voters are mainly low and and middle class people who shop around to get the lowest rate possible. It seems he does not want to be in power after the next election.
Trevor Courtier
Tax on mortgages sounds like the "Fart tax", and about as useful.
Garry Baker
It makes it harder for young people to own their own homes. Cullens idea is so parallel to Lewis Carrolls Mad Hatter Tea Party, and I am not sure which character to liken him with.
Peter Kivell
Why doesnt he just enforce a minimum 10 per cent deposit on mortgages this would get people saving and give people an equity buffer should the market go belly up. He has done a great job of talking our dollar down, with this levy idea, was that his intention?
Gavin
Another tax? Its amazing what the average New Zealander will put up with. At what point do we give up or simply stop caring, perhaps it's already happening and that's why so many of our statistics are heading in the wrong direction.
Mea
No no no Dr Cullen. The ordinary working person in this country needs a break. Its these people who are supporting those on long term benefits, while at the same time keeping the corporate capitalists in the grand manner they have become accustomed to, through these workers receiving low wages and downgraded employment entitlements and conditions! Now this government is talking about taxing fixed rate mortgages, which will affect the ordinary working people of this country. NZ has already have developed a new socio- economic group, the working poor! Imagine what damage Dr Cullens new mortgage levy scheme will do to these people! It will be devastating to say the least!
Ferdie
We have worked hard to buy property and we are being penalised for it. This government collects too much tax. We also have pt work on top of our full time jobs to get ahead and be able to afford what we want but the tax on the second job is horrendous. When will this Govt stop taking too much tax and stop penalising hard working people and get those on the benefit to the workforce?
Dan
Cullens idea of a levy is great if he wants to collapse the economy, stop personal savings and destroy retail sales. I am sure glad he went to university for all that wonderful knowledge. He lost his common sense along the way. Basic concept Cullen, when the taxpayers have more money they spend it, they save it and they spend it. The government collects more tax. More tax collected means a stronger economy and much happier voter.
Ron Glover
Wasnt the good Doctor a Graduate in History (and Statistics)? He should look up the consequences of Arnold Nordmeyers 'Black Budget' of about 1958.
Dayne Kells
Change the rules to have a levy on mortgages? If the Labour government wants to continue on the path of becoming a third world government, please go ahead. One of the great advantages of most first world governments is their stability, if that is removed, the first thing that will do is drastically cut investment in New Zealand. Maybe that is what is needed in a small measure in the short term, but any loss of confidence by international and Internal investors will not be forgotten for a very long time. Another measure that was similar to this but was rejected by NZ public was the election funding debacle that Helen Clark thought she would solve by changing the law. Hopefully the NZ public will again see the danger in the path this would lead us. See Jamaica, Russia, Bolivia and Venezuela for examples of where this will lead.
Jacko
I know several exporters and while this might seem a good idea at first glance, its only really treating a particular symptom - recent ineffectual deployment of the OCR - it will not treat the major causes. With appropriate policy, actions and leadership there would be, and is, no need for this kind of knee-jerk response to a situation that is getting out of control. Because our economy has been, erroneously, left to major on primary commodities, when we talk of exporters in NZ it mainly concerns high-volume, but low-margin primary product and so exchange rate desperately affects profitability. Also, because other business taxation policy is anything but supportive of exporters who produce more elaborate goods, high exchange rate hurts them just as much, and both types of exporter are also equally affected by exchange rate volatility. (Imagine if every time you went to fill up you had no idea of what you would pay for fuel? Got the picture!?) The mistakes and issues that need correcting are:
1. reduce the priority given to domestic market stability considerations in the current OCR deployment policy, meaning RBNZ would be able to apply OCR increases of significance earlier in the cycle. The pain might be short and sharp at times, but not as bad as the chronic debilitation we are suffering now. In other words give RBNZ some teeth and more independence from government's policy and philosophical platforms. Its all been too much sheep in wolfs clothing for too long.
2. enforce and close loop-holes in current tax regulations so that capital gain is taxed at the appropriate marginal rate on investment property. No need for a capital gains tax even, but if it's all too hard, simply do CGT on investment property. No need for a mortgage rate levy, it just hurts those who can least afford the pain; non-investor home owners.
3. lets not forget all those 42" televisions etc etc that we spend our fiscal imprudence on - so introduce an inflation linked variable rate of GST on goods (mainly imported) that end up stoking inflation and skew the trade balance so they become less attractive - for a time that is. I would rather have my kids able to afford their own home than have a TV in every room of mine - let them go watch their own in their own home!
4. encourage people to save, with sliding tax incentives, and allow them to choose how the savings are invested, when you see 5 below they may even want to invest in stuff other than property unless of course they are institutional listed property investments for which Dr Cullen just changed tax regulation so investment in property trusts is yet more profitable. Clearly whats good for geese is not so good for ganders!
5. like many other good and essential social welfare institutions that we should be proud of in New Zealand, Working for Families was a great idea (notwithstanding the small fiscal stimulus) but business doesn't need so much of the same in form of the plethora of ill conceived, poorly run government business support departments and programmes - large and wasteful fiscal stimulus! Sure, some off-shore support is good and help with scientific research, but use tax incentives to stimulate growth focused behaviour in businesses, that is development of staff, product, plant and enterprise investment - just like they do in many other countries! A base rate cute would be nice, but that can wait until the economy re-balances away from purely relying on the primary sector, the whole nation is going better and we've got more ownership back on-shore (so we who live here benefit from the tax cuts, not foreign owners) and then we can bring business and personal tax down together.
6. this is not simple stuff, but if this, or something like it cant be made to work, keep changing governments till something does.
John Giffney
In response to Brian Farrows article called Cullen has a Point. Cullen has made a point; the time has come to recognise that the Reserve Banks only lever to control inflation is ineffectual. At the same time Cullen is rolling in our money, delighting in the Reserve Bank's concern that the government will promise to give some of it back to us and so return him to office. The fact is that a 0.25 movement in interest payments is now (with interest rates at 8pc) only a 3 per cent change in interest cost. There are few activities where a movement of this magnitude is a significant consideration. When interest rates were at 4pc it had twice the effect. As identified in Australia, it is the anticipation of an interest rate increase that hurts more than the interest rate increase itself. Australian rates are lower than ours and change less. NZ has really run out of space to increase rates, in fact must reduce them significantly to improve their leverage.
Banks are encouraged by international agreements with respect to asset ratios, to insist that their lending is secured against property. In many cases small business capital is secured by mortgage against residential house and land. The interest payments may still be tax deductible to the business if the transactions are completed the right way and this at marginal tax rates serves to further limit the effect of interest rate increases. Property investors are not only favoured in that they are investing in the Banks favourite asset class but that the NZ taxation system allows depreciation on housing investments to be deducted from earnings in addition to interest, and there is no capital gains tax. There are few employees and the Investors income tax is delayed until properties are sold. NZ has chosen to be different in not applying a capital gains tax, but failed to put anything in place to differentiate against investment in non-productive assets, particularly in residential land and housing. In fact changes in the banking sector and government taxation have preferentially facilitated investment in residential land and housing. This is not just for first home buyers as in many other countries.
Those New Zealanders involved in NZ export industries and manufacturing find being on the receiving end of friendly fire or collateral damage from successive NZ government actions is normal. Companies used to grow shielded under NZ Government skirts or be killed by NZ Government actions. Intervention used to be through duties and the fixed (until devalued or re-valued) exchange rate. Now it is the carry trade that is manipulating the floating exchange rate taking advantage of the highest first world interest rates and sapping New Zealanders productive efforts. Income tax is paid by employees as it is earned even if the enterprise isnt profitable. The NZ Government and its agencies act to discourage profit making by productive enterprises. None of the proposed solutions to the Reserve Bank's ineffectual cash rate changes has looked close to passing scrutiny from economists, bankers or politicians. NZ has vacillated over the problems posed in Brian Farrow's article: ineffectiveness of reserve bank interest rates manipulations; collateral damage of high interest rates on the exchange rates and hence the productive sectors; and domestic inflation,
for too long without a single worthwhile suggestion.
It is surely about time that the Finance Minister remembered that he lives in a capitalist democracy and that using a carrot rather than a stick is the successful way to bring about desired behaviours. Perhaps it is because he always thinks its the other guys fault. Perhaps it is because he must always wield a big stick to beat New Zealanders in behind his drum. Perhaps it is because he really does believe that if he takes more of our money it will be spent better. Perhaps it is because the Finance Minister isnt the Revenue Minister. Whatever it is, the Government seems incapable of ensuring through strategic use of the major instrument in the Governments arsenal differential taxation - that investment in productive enterprise can be generally much more financially rewarding than investment in residential housing and land. Rather than trying to change the world banking system, or reduce the powers of the Reserve Bank, or intervene in markets, or eliminate fixed interest rate loans, the Minister of Finance should consider offering significant carrots to the productive sector that would assist it to produce returns in excess of those experienced in housing. This would reduce relative investment returns from housing, encourage increased investment in the productive sector while removing non-banking sector money from residential housing. It would increase the size of the productive sector and reduce any need for higher taxes. A Governments major lever is their taxation system. Cullen has a point and a taxation instrument with a sharp point. He should use it to reward investment in productive activity. P.S. What chance is there of a tax rebate on interest charges for a taxed entity with less than X percentage of total assets in residential housing and residential land?
Dave Moran
If I understand things correctly, the proposed new mortgage tax is designed to stop people from spending up large beyond their means and incurring unmanageable debts. The suggestion is that the governments normal financial engineering tools dont work quickly enough because most people have fixed rate mortgages.
Dr Cullen may have never encountered any personal financial challenges, but most of us have to have the fixed rate mortgages, because we plainly cannot afford to go on the floating rate. We dont choose to use this type of mortgage to allow spending on luxuries, it is the only way we can afford to live in the Auckland region. If an additional tax on mortgages (or any other tax at all for that matter) is put in place, Auckland will start to loose the people who keep the place running. I am a teacher, and my wife is a nurse who works 3 days a week. Her "spare" time is used looking after our two children. We live in a very modest 3 bedroom house close to the school that I work at. We have two old, but economical cars, no pets and dont smoke or have any other expensive vices. We worked hard before having kids, and paid off our old house in Hamilton a few years ago. When we moved to Pukekohe in 2005, it was necessary to get a $140K mortgage to buy a smaller house, on a smaller section. We are very careful budgeters, only buy food that is essential and clothes as needed for work and school. I spend roughly $15 a week getting odds and ends for the classroom.
With both of our pays combined we are currently going backwards about $50 a week. We love our new town and community, love our jobs and feel like we are making a genuinely useful contribution to society. However, if it gets any more expensive to live here we will be forced to go somewhere else where the numbers add up. A teachers pay isn't all that bad these days, and neither is a nurses. If we are struggling, how about the thousands of others working in jobs with pay less salubrious? Is Auckland going to be one of those places that has to bus poor people in every day to do the menial tasks, then shoo them out when they start to use floor space?
The Labour government seemed offended when it was suggested that an "underclass" is developing in New Zealand. To me, it seems, the quickest way to get an underclass is to slap more tax on those who are just hanging in there. My concern with this ludicrous new tax is not that the government is seriously considering it, but that they have shocked us with it, so that we will readily accept a lesser version, thinking that we got off lightly (an additional tax that they were truly aiming for in the first place). We cannot afford any new taxes at all, and its not our fault that it got like it is now.
S Mohanakrishnan
Looks like Cullen is attempting to do what Bollard tried and failed, that is talking up a scare and hoping this will have the desired effect of cooling the housing market. He should know better. If this is a threat, does Labour have the political will or majority or support to deliver on the threat? They dont. He is going to cut a sorry figure as did Trevor Mallard in the waterfront stadium fiasco. The stock market here lacks depth. The movement in prices are limited to a few cents. There are lack of good investment opportunities and what good pickings are there, they are tending to be bought up by Aussies. Unless the countrys stock market really delivers by giving a good return like the emerging markets of India, Brazil, Russia (which seems unlikely in the near future), there seems to be no good alternative investment prospects.
The government should encou
