By Frank Newman on 19th September 2013
It’s a sad state of affairs when politics crowd out common sense. There are a couple of matters of interest that have reawakened my affections for politicians.
The first is the policy announcement by the Labour Party regarding non-residents and housing. The policy would stop foreign residents, except Australians, from buying an existing home, but not prevent them from building a new one.
There was little detail behind the policy and no “evidence” that the problem they wish to solve is a problem at all. The announcement had a candy floss coating, “we want to make sure that first home buyers are Kiwis and they have the best chance”, but nowhere has it been stated how much house prices have risen as a result of foreign buyers, where the house price rises have occurred, and what nationality these foreigners are. What we do know is that most foreign investment into local housing is by Australians or ex-pat kiwis!
Not only is there no evidence to support the policy, it actually won’t work. As property commentator Olly Newland pointed out, “any overseas buyer would very quickly find somebody else to buy a house for them here in their name and hold it in trust for them. There are a thousand ways to get around it if they want to come here”.
The second matter of interest is the discussion taking place about the new earthquake strengthening requirements. There is something not-quite-right about it. Don’t get me wrong – I have no problem with building standards being set to higher standards where safety is a genuine concern.
My issue is the all care and no responsibility approach taken by regulators. Here’s the basic situation. An investor builds a commercial building and it is signed off by their local council as being Building Code Compliant. Ten or twenty years later government says, “Sorry those standards are no longer acceptable. In the interest s of public safety here’s the new higher standard. Do it or else”. In most cases the cost of meeting the new standard is very significant. A building owner has three choices.
- Upgrade the building to the new code. The IRD considers that cost to be a capital improvement so the expense is not tax deductible. The only way the landlord could recover the cost is to increase the rent. The tenant however will not want to pay the premium because from their point of view nothing has changed and they see no reason why they should pay any more than market rent. As a result the landlord will wear the cost.
- Demolish the building and replace. The problem is they will have to carry the added cost of demolition and the risks that the development may not attract tenants at the higher rent to justify the additional investment. The landlord may also be subject to greater restrictions like building coverage that apply to new buildings.
- Walk away from the building. It then becomes a local council’s problem.
The unfairness of the situation is that the changes have been introduced to increase public safety, yet the public bear no cost.
The least that could happen is central government could allow the cost of upgrading to the new standards as a tax deduction. In most cases that means the investor recovers 28% of the cost. Bearing 72% is still disproportionate in my view but at least it recognises that buildings owners who did meet previous standards are not to blame if those standards later prove to be inadequate.