What drives the property market?

Here’s a question, I’m not sure of the answer to: Why have house prices increased so much in recent years?

Is it because credit had been easy to get? Has it been because of investor behaviour?

Then there is this question: Has the market been fuelled by the tax system?

There has been a lot of hot air over these types of questions recently. What is clear is that the Reserve Bank has increased interest rates over recent years with the main purpose of slowing the housing market down. RBNZ governor Alan Bollard has made it clear that was one of the objectives of these increases.

He has also acknowledged monetary policy is not the most efficient tool for managing the markets, and the bank and officials have looked at other ideas, such as ring-fencing losses from property (so people can’t offset them against other income), and a mortgage levy (which is supported by economists such as the BNZ’s Tony Alexander).

The good news, from the perspective of investors, is that the government doesn’t look like doing any of these things. Reports were done and they went as far as the Office of the Prime Minister, however, as the NZ Property Investor magazine reports this month, they aren’t going anywhere.

Why? Not surprisingly there is little political support for changes. The only real support out there is from the Green Party, and that is for some sort of capital gains tax.

Not exactly a policy one would talk about, especially this close to an election.

While people still debate whether property investment has a tax advantage or not, I come down on the view that, yes, there are some advantages. The main one though is that it is one investment where people are prepared to leverage their capital. This is fine when the investment increases in value and many people have made lots of money this way.

What’s probably more pertinent now, is that previously other investments such as managed funds were at a significant disadvantage to assets like residential property. With changes to tax laws and the introduction of the portfolio investment entity (PIE) tax regime and things like KiwiSaver, the differences are less than they were before.

It’s hard to see the rules around property investment changing too much and while there may be some advantages, there are other aspects to the game which make it a hard business (eg: managing tenants).

The other thing to remember is that property investors aren’t just buying an asset, they are setting up a business and running a service providing accommodation to others. This, I think, makes it quite a different type of investment.