26 Feb 2013

Can New Zealand Housing be Re-priced to 'Affordable'?

Back in the 60s and 70s investment flats were priced for a yield of as much as 10 percent and standard affordable houses were about three times annual income.
The question arises as to whether housing can move toward that level again.
Currently some lesser desirable places enjoy investment yields that are much higher than in main cities. The comparable houses in smaller towns may be half the price of the city version.
I would contend that the value difference is not in the built value but in the land value. Often land is two to three times the value of the structure. Land value ultimately is flexible while buildings do have a constraint in their replacement cost and maintenance costs.


A solution?
Stage 1. Rather than actual rental income received a Government could place an Assessed Rental Value (ARV) on every property. An example may be to start with 5 percent of the CV. This is probably close to current levels in Auckland. Any property earning less than 5% would pay tax as if it had earned 5% less allowable expenses. Any yield at over 5% would pay tax as currently.
This would apply to all real estate not occupied by the owners or usable exclusively by them.

Stage 2. There would be an annual change of ARV to 6% then 7% , 8% and finally 9%
Even at 9% some small town investment yields would still have a tax that is no more than at present.

The effect of ARV -hypothetical outcome.
Firstly investors would know how much tax they would be paying over the development to the ultimate 9% ARV.
This would help owner occupiers because the price of property will adjust within 5 years to accommodate the new rules -see below

Examples now (All 50 week rented)
Property value $300,000 Current rent $350 pw Yield 5% based on rates insurance etc $50 pw
ARV 5% is in balance

Property value $750,000 Current rent $670 pw Yield 4% based on rates etc $70 pw
ARV 5% and tax would be payable on an additional $7500 not received

Year 5
Property value $300,000 Current rent $420 pw Yield 6% based on rates insurance etc $60 pw
ARV 9% is in balance Tax payable on an additional $9000 not received

Property value $750,000 Current rent $810 pw Yield 4.8% based on rates etc $90 pw
ARV 9% and tax would be payable on an additional $31500 not received.

These are radical changes and of course would not happen!

What would actually happen is that prices for investor property would fall and be taken up by owner-occupiers.


A real option
As above but increase ARV by 0.5% annually from 5% until 9% reached
Similar outcome but speculator cut off at the knees and the home ownership raised as many properties return to occupier ownership -even in Auckland