Real estate the real GFC villain

“We tend to have financial crisis when the bubble bursts in the real estate market,” Allen told finance specialists gathered for the Financial Management Association Asian conference hosted by Massey University. “Real estate markets are very different to stock markets. Stock markets are efficient and the prices adjust quickly. That is not true of real estate markets. Governments and central banks did wonderful job of saying the problem is these greedy people in Wall Street. My own view is that much of the blame lies in the public sector ignoring property bubbles.”

In this country, the Government appears to have heeded the good professor’s words of wisdom (and that of number of local financial “experts”) by delivering couple of decent body blows to residential property investors in last year’s Budget, which took effect this month.

Gone are Loss Attributing Qualifying Companies (fondly referred to as LAQCs) which allowed owners of often deliberately negatively geared residential dwellings to offset their property losses against other income at their marginal tax rates. And if they did happen to turn profit, that was taxed at the lower company tax rate. Replacing the understandably much loved LAQC is the much less attractive Look Through Company (LTC) option. This still allows losses to be offset but only against profits from that company in future years. An LTC is also taxed as if it were partnership at owners/shareholders’ marginal tax rate.

Also gone are depreciation allowances which significantly boosted the after-tax returns from property but deprived the Government of much needed tax revenue. This latter move has also impacted upon commercial and industrial property investment, essential to the efficient functioning of robust economy. However, the Government has partially responded to business concerns in this area by allowing fitout depreciation to remain on commercial (but not residential) property. (See next story.)

It remains to be seen whether these moves will dampen New Zealanders obsession with and enthusiasm for residential property investment and prevent future “bubbles”. Arguably, the most influential factor in the market is the law of supply and demand. Residential construction has taken prolonged hit as result of the downturn. Pent up demand from still growing population may well put pressure on prices, sooner rather than later. The Government does not appear to have strategy or solution for that particular conundrum.

 

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