Up She Rises
What shall we do with the drunken sailor?
What she we do with the drunken sailor?
What shall we do with he drunken sailor early in the morning?
Hooray-up she rises, Hooray-up she rises
Hooray-up she rises early in the morning. etc etc
(18th century sea shanty)
This catchy song stuck in my mind when Mr Bollard Governor of the Reserve Bank once again raised interest rates another quarter percent. This gives me the impression that all who work in the RB must be smoking or imbibing some strong stuff if they believe that interest rate hikes will achieve much if anything to dampen the housing market.
What a waste of time and effort. Does he really think that the property market gives a rat's bum whether or not he raises interest rates?Property owners and investors alike have been having a non-stop wild party for years now and the band keeps playing on.
What can a small rate increase possibly do to stop the music?
Nothing!
Work it out for yourself. Take the average Joe Bloggs investor with a $400,000 investment property and a $300,000 mortgage.
Another quarter percent on the interest adds a piffling (tax deductible) $750 p.a. to Joe's outgoings...
At the same time the property's value increases by 10% which adds $40,000 to Joe's Statement of Position.
That's what I call good deal. Let's have some more please!
For a mere $750 outlay Joe earns $40,000 capital gain per year (well, until the slump, anyway. Then it's a different story -- so don't count on it.) A few lattes and a wine or two less, maybe switch to 91 octane petrol for the Ferrari and Joe's got it covered.
The same thing happened back in the 1980s.
Interest rates were running at 18%-22% for first mortgages but we didn't care bit.
Property prices were rising by 100% per annum.
It was a good deal even if we had to refinance every six months to pay the interest.
The difference came when somebody switched off the lights and the band went home.
Then it was a whole new ball game.
What I've come to see is that interest rate rises, although seductive to the Reserve Bank, are NOT the answer. They hurt all the wrong people, and in the end, achieve nothing.
We have:
(a) First home buyers being shut out of the market more firmly than ever. You only have to read the papers to told about that.
(b) Exporters are laying off staff and exporting jobs to Asia because our dollar remains stronger than it should (e.g. Fisher and Paykel)
(c) Rents are rising faster and faster as first home buyers capitulate and choose renting for life as an option creating a Catch 22 situation.
Of course there are those that say that the homeless have nobody but themselves to blame for living high and not saving.
But how can they save? A third of their wages is confiscated by income tax, another third is taken by GST and other government and local government charges, then they have to pay the rent, and buy the groceries -- so what's left?
Diddly-squat, that's what.
If the government really wants to temper property prices rises then the best method is to create other forms of investment that are equally attractive, e.g. tax-free savings accounts, a better business regime for manufacturers (just see how they encourage business in Ireland and Thailand for instance) or cutting the huge costs of subdividing and navigating through the Resource Management Act. A friend of mine who is developing a mid-range residential property which should sell for around $800,000 spent over $100,000(!) in fees and costs to get a resource consent, paying endless council fees, water fees, etc. if that's not inflationary, I don't know what is.
PRIZES
The top prizes for the most loopy suggestions to cool the market (or just grizzle about it) are as follows:
In tenth place: Andrew King of APIA who was foolhardy enough to tell the truth that aspiring home owners should cut back expenses and save. Right on the button Andrew, but not very PC with a Socialist-Green-Maori-NZ First mishmash government in place where the lowest common denominator rules.
In ninth place: Mary Holm for consistency in giving the dumbest advice to home owners for the longest period of time. Anyone believing her should have lost their shirt by now.
In eighth place: Chris Carter Minister for Homelessness who suggests that developers should build cheap houses among the expensive houses. Very clever. No one will buy the expensive homes if they think that riff-raff are going to live next door with loud music, wild dogs, and drunken parties all night long.
In seventh place: The Minister of Finance Michael Cullen whose suggestion of a 10 cents per litre fuel tax, if implemented, would push up prices for all inner city suburbs, hit the poor the most, and make living in the cheaper outer areas even more unaffordable. (He qualifies for several more prizes but this will have to do.)
In sixth place: BNZ Chief economist Tony Alexander who believes that "prices are exactly where they should be." Tony! Wake up and smell the coffee.
In fifth place: A 'class prize' to opinion writers and media columnists for displaying total ignorance in climbing on the well-worn bandwagon of blaming "speculators" for pushing up property prices when in reality it's the Mums and Dads selling their own homes for tax-free profits who are the worst speculators of the lot. Special mention to the NZ Herald's Brain Rudman and Tapu Misa. These walking cliches want a capital gains tax applied to "speculators" despite the fact that it doesn't work -- as seen overseas: countries who have capital gains tax still have had rampant property price rises. Their theory is such a tax would slow down speculators from turning properties over quickly for profits despite the fact that they are subject to income tax already, and despite the fact that holding back properties pushes up prices not lowers them.
In fourth place: The Boffins at Treasury who dreamt up the idea of a "mortgage levy" where mortgages carried a penalty levy while other interest charges did not. The idea was sunk without a trace at the first salvo and with no survivors.
In Third Place and Bronze Medal Winner: Chris & Gaby Munro who rent in middle-class Sunnynook and who railed through the news media that although in their late 30's they can't afford a house despite earning $95,000 per annum and spawning two cherubic kids. see NZ Herald
In Second Place and Silver Medal Winner : the Government idea of 'Shared Equity'. A recipe guaranteed to ramp up prices higher still, with no real explanation of what will happen when a home owner with the government as a partner wants to sell. How do you work out who gets what if the home owner has improved the property with his own sweat (not to mention purchases) in the meantime?
In first place and Gold Medal Winner for the Loopiest Idea of Them All goes to: Comrade Adele Pullen of Manurewa who wrote in the Herald on 30th May:
"Would it help first home buyers if there was a law that required that all houses bought had to be owner-occupied for the first 10 years of ownership with stiff fines for anyone illegally renting them?"
It's good to know that Communism is alive and well and living in South Auckland.
It seems to me that some of the "homeless" have a noxious notion that they are entitled to a home, free of charge, with no effort required and the reason they can't get one is because the "speculators" have bought the lot. You can just see them linking arms and marching through the streets with Sue (don't smack my kid) Bradford to the fore, singing the famous ballad:
"It's the same the 'ole world over
It's the poor wot gets the blame
While the rich 'as all the pleasure
Now ain't that a bleedin' shame"
Etc
COLIN KUMAR
Barfoot & Thompson Commercial
m. 64 27 684 1114 | p. 649 358 0989
c.kumar@barfoot.co.nz
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