Friday, February 09, 2007

!!!!!!!!!!!!!!!!!!

I think our finance minister is sleep deprived and hallucinating. His latest brilliant idea is a levy on fixed rate mortgages. The backgournd to this is that the main inflation control weapon in New Zealand is interest rates. When inflation gets too high, the Reserve Bank raises the official cash rate, which supposedly dampens demand and inflation is kept in control.

Unfortunately our high interest rates attract overseas investors, which mean that the exchange rate is high, and exporters suffer. Supposedly the economy is strong but the balance of payments is terrible, because people are rushing to buy cheap imports, and exporters are earning next to nothing.

Supposedly the imposition of an additional levy on fixed rate mortgages will dampen demand for housing, while not offering any additional incentive to overseas investors.

Here's what I don't get: the idea is that a raise in the official cash rate takes to long to flow through, so doesn't decrease demand for mortgages immediately. This seems strange to me, as surely it will decrease demand for new mortgages. It's only the existing ones that aren't affected until they are due for renewal, and surely the government doesn't want to throw people out of their houses? (Oh, I have just figured it out - if their mortgage costs go up, they won't have money for other things like, say, food and clothes, so that reduced spending in these areas will keep inflation down).

Secondly, house ownership rates in New Zealand are at an all time low, and it is predicted that huge numbers of people will never be able to afford their own home. And yet demand increases. That's because of the baby boomers looking to property as an investment. So maybe to dampen demand they could find some measure to increase taxes on property investors, and leave young people struggling to buy their first homes alone? Or maybe even help them along?

As the banks say in this article, this idea will never float, because about 1.2 million people in the country have mortgages, and that's a lot of votes (in a country of 4 million).

And I'm very glad to say that despite interest rates of nearly 8 percent, and house prices that are very high in relation to wages, compared to many other countries, my eldest daughter has successfully managed to buy her first home and will be moving out in a month. (I'll miss her. But I'm happy for her). It's not big, it needs a few repairs, but it is attractive and conveniently sited close to a very regular bus route.

9 comments:

rashbre said...

8% seems high, although in the UK a few years ago it was up around 13%. Nowadays its around 5% with shopping around.

Also in the UK, when builders create new housing they have to include a proportion of 'affordable' housing in their plans. Even in very spiffy areas there is a requirement for some equity share housing to be included (in other words, people own a part of the 'apartment' and get part of the equity when they sell).

I guess the thing to do is just to figure out how to get onto the property ladder and to 'tough it out' for the first few years.

Norma said...

Oh gosh. Keep him away from our government planners. They've never seen a tax they couldn't love. We have something called an AMT which was put in place in the 70s I think to "punish" people who made gobs of money but weren't paying taxes due to loop holes. Because of inflation, now millions of people instead of thousands qualify for this. But people are asleep when it comes to taxes and the economy is good, and ours (USA) is the best in about 30 years.

rampant bicycle said...

I've never had the best head for financial matters, so this sort of thing tends to give me headaches in a big way.

I do feel though that young folk starting out could really use more breaks from the government when it comes to housing. Prices are getting out of control in my area, too. :(

Here from Michele's today.

Catherine said...

I didn't think the US economy was so good, or why would it your dollar be so weak against ours? We were crossing our fingers for the US economy to get better!
In the eighties interest rates were around 17% here, but they are saying housing is actually less affordable now than it was then.

Becky68 said...

No, the USA economy is not so good from where I sit either (nor my mother, uncles & friends all over the states) I guess it's ok for baby boomers & other older people who already made their money & got out while the getting was good. For those of us who are younger than retirement age (I'm 38) or just starting out things are very sluggish & everyone I know is struggling to make ends meet!
Thanks for stopping by my blog earlier!

Carmi said...

Governments always manage to find a way to screw the little guy. This fiscal policy reminds me of the idiocy that goes on in Canada. Tax, tax, and then tax some more.

Sigh.

Congrats to your daughter on a monumental achievement!

Tia said...

Congratulations to your daughter! It is very exciting to get into your first home! (Even though we now couldn't get rid of ours when we wanted to...)

I would agree with the people who say the economy here (US) is anything but great right now. But that could open a whole political can of worms I won't stick my head into...

kenju said...

Congrats to your daughter - a milestone reached!

Michele sent me, Catherine. That tax thing doesn't make much sense to me - but then - little that politicians to does make sense.

Shephard said...

I am always surprised to hear about the housing market in other countries. Here in Los Angeles, it's just ridiculously insane, and I feel for any college kids starting out, hoping to find a home. So nice to hear that your daughter found a place!

Michele says hello!

~S :)