Are Immigrants really responsible for the property price boom?
Are immigrants really responsible for the real estate boom?
This is the hot potato, endless commentary on whether house prices are headed for a boom or a crash, if the boom will continue or the bust is around the corner.
NZ economy or for that matter any economy is tied with real estate values, so real estate is not a standalone entity, it’s the new gold standard and a ripple in the real estate can create shock waves in the overall economy, as it did in 2008.
So are immigrants to blame? I don’t think so
There are several reasons for booming property prices and somewhere down the list there is a continued strength of rental demand, which may be linked to immigration. However to negate everything else is downright mischievous, a diversion used by the politicians and the media. To be honest, everyone who matters, has got a finger in the pie and it will not suit the entities who make the rules to expose themselves.
I think that the analysis i.e. Immigration = Blame for property boom among other things, is very lazy and lacks detail. I have prepared a list of factors which I think are responsible for the real estate frenzy.
Rules that the politicians make – Real estate investments in NZ were capital gains tax free, till not so long ago. You get to claim tax benefits for any real estate investments. If you are a mum or dad who does a 9-5 job in NZ, real estate is a preferred investment because the politicians make rules that favor real estate over other investments, simple! Then anyone can buy property in NZ and till last month they did not need to have a local bank account number or IRD number, perfect place to stash your ill-gotten or otherwise cash.
Speculation / Market Sentiment – I think that 25% of the real estate market is driven by 24 x 7 media frenzy about real estate prices whether they are up or down. If you purchased google or apple stock 10 years ago, your rates of return would be fantastical, however how much coverage does media ever give to those. Real estate perhaps get more attention than celebrity news in NZ. This does not make real estate the best investment but it’s certainly the most marketed investment. Who would not want to buy a house, have a tenant pay part of the mortgage and make a cool capital gain (tax free) while having to top up the mortgage with a little bit per week (which is tax deductible anyway). The problem is that soon everyone wants a second or a third house, which creates a demand, not of a rental kind but of an investment kind, which spirals up the prices. Unfortunately this has continued for too long, property is out of the reach of many and the only one who is laughing is the overseas banks.
Tax Laws – If you pay $ 100 per week to top up a mortgage of a rental investment, at the end of the year you can claim up to 38% (top tax bracket in some cases) back.
Domestic Demand – Most countries in the world are urbanizing, there are more and more people living in the cities and less and less in the rural areas. New Zealand is no exception.
Immigration – The last factor, an immigrant will tend to live and work in areas which are economic centers of gravity in any country, in New Zealand it’s undoubtedly Auckland. This does create a demand for housing and other services. However immigrants just don’t live in houses, they do businesses, they consume food and other goods and services, they watch movies, drive cars, fill critical skill gaps in the local labor market, start businesses et al. There is a positive impact on the total economic activity in the country and that creates further jobs, the cycle perpetuates. Yes there is a demand for housing, schooling, transport etc. and the associated economic activity which is seldom mentioned, but wasn’t that the idea in having immigrants over in the first place?
To conclude I would like to mention that perhaps the government needs to change the rules around capital gains tax and around residential property investment. After food, housing is the most important human need and to throw it open to crony capitalism is making a whole section of the population vulnerable, it’s irresponsible to say the least.