Is my broker the asshole? His advice seemed utterly outrageous, but at the same time completely rational, writes Jesse Mulligan.
I had journalist Matt Nippert on my RNZ show this week. He’d done some calculations based on house price inflation and Lotto first-division inflation and worked out that by the year 2039, if you correctly pick all six numbers in the Saturday night draw, the money you win will not be enough for a deposit on a home in Auckland.
I was planning to give a first-hand account of this craziness by reporting on the Barfoot and Thompson Wednesday auctions this week, but John Campbell was already there, reporting on the same thing. Yes, Auckland’s housing market is so under-supplied that there aren’t even enough houses to go round the journalists wanting to report on them.
Luckily I had another interest in the auction – my wife and I were bidding on one of the houses. Thanks to some luck, timing and family help we already have a home, but she keeps having children and we’ve been forced to upgrade. For five years I’ve been following Mary Holm’s advice and pouring all my money into my mortgage – paying off debt is the best investment, she says, because each dollar saves you the value of the interest rate, risk free, with no tax. So I made an appointment with a mortgage broker to find out whether I’d paid off enough yet to buy somewhere bigger.
That was an unusual meeting. The broker had a very different perspective on my money, which was that I’d made the wrong move by paying off my mortgage, and that what I should have been doing is using the annual gains in the value of my house to leverage and buy more houses. Auckland property values go up 10 per cent a year, “like clockwork”, he said, so each year I wasn’t buying houses I was being a stupid fool.
Capital gains aside, did I know that all I needed to do was cover interest payments on my extra houses, and that the government would give a third of the money I spent on these payments back to me? There is a shortage of rentals in Auckland, too, so I could charge some unlucky family astronomical rent and get extra income that way. What was I waiting for?
I’d been trying to work out whom to focus my anger on around this Auckland property crisis, and I felt like I had found my guy. It was partly his cockiness, but also the implied sneering at my diligent efforts to do the right thing with mortgage. Worst of all, it was the knowledge that he was telling this stuff to all of his clients, and that there were hundreds of brokers around the city doing the same. Ever wonder what’s driving property prices up? It’s not first home buyers – it’s these fucking guys.
Was there any risk to his investment plan? As long as people keep moving to Auckland and not enough new houses are built, then the economics will force house prices up. Interest rates could increase, but there’s no sign of that worldwide – in fact, in some countries rates have gone down below zero and into negatives. In Germany, for example, you theoretically have to pay the banks to hold onto your money.
The biggest risk, he told me, is legislative change. That’s right, the only thing that can stop homeowners like me from gobbling up new, affordable homes and renting them at crippling prices to the young couples who were bidding against me is if the government does something to change the incentives.
That’s when I realised that this guy, while possibly still an asshole, is not the asshole I was looking for. I encourage you, dear reader, to save the majority of your purple, bilious rage for the government who, faced with the defining economic challenge of our lifetimes, is attacking it with all the vigorous urgency of a teenager tidying his room.
Immigration is high, and they’re all coming to Auckland – that’s not an accident, it’s part of the plan. Yet the existing law is designed to benefit property investors not home buyers. The best way for you to buy a house under the current legislation is for you to already have one.
And the government doesn’t seem to care. Economists are lining up to suggest mechanisms we could use to discourage property investment – a capital gains tax or land tax seem the most promising. And none of these ideas is perfect and you’d need to target them very carefully but we desperately need some legal change that can make its way into the conversation between me and my broker, so that at some point he has to say to me: “of course you can’t keep doing this forever” or, “you’ll need to pay tax on these profits, obviously” or “the IRD is not going to let you claim interest payments on a million dollar house that was worth half of that five years ago”.
Where is the leadership? Where is the willingness to make a substantial law change that will upset some voters but will immeasurably benefit the majority (and the economy)? Talk about equity and capital gains – this government is as popular as any has ever been, they’ve invested in eight years of populist decision making but are still unwilling to use any of that capital to make one hard decision. How popular do they need to be?
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(Labour don’t get off for free here, having dropped their own capital gains tax policy when Andrew Little took over. Still, they’re in opposition and can’t be expected to do much right now except loudly make the same sort of points I’m making here.)
The Prime Minister’s hints this week of a tax on foreign investors won’t solve these problems, and while offshore buyers no doubt create some of the demand, it’s the luring of locals like me into the investment game, and the highly-leveraged bidding wars this creates, that are pricing first home buyers out of the market.
We didn’t win the auction on Wednesday – the house we wanted ended up selling for one million dollars above its CV – but we have our eye on another. The big question is if we do manage to buy a new place, what will we do with the old one? Ridiculously, it will cost around the same monthly amount to own them both, deprive somebody else of their first home, and cream it on capital gains and tax rebates until we get bored of making money and sell.
I’d love for a young family to buy our old home and be as happy as we were when we moved in. But until the government changes the rules there’s zero incentive for me to do sell it and, even if I did, it’d probably just be bought by an investor.
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