A New Tax System for New Zealand

For those who follow what's happening in NZ, the Tax Working Group (TWG) has submitted its recommendations to government. The TWG was set up to review the NZ tax system and provide advice for reform. Bernard Hickey's written a good break down of the report and what it means. For those of you who are interested but uninformed, there's plenty of previous articles from Bernard on the issues here.

As I've written before, there are structural problems with the NZ economy restricting growth and fueling inefficiency. Of these, arguably the most significant is the skewed investment preference of retail investors for residential real estate. This preference is driven by tax incentives and at a deeper level, ignorance.

If the government follows the TWG's advice, the tax incentive will change to a disincentive - with the intention of driving investment from non-productive to productive asset classes. But it won't fix the ignorance problem. Well, not immediately anyway. NZers' proclivity for buy-to-let residential real estate, junk debt (via finance companies), and over-priced domestic corporate bond investment is firmly ingrained. Market efficiency will deal with the ignorance and punish those slow to learn and adapt through poor returns for the risk assumed.

When the reality of the likely tax changes takes hold and domestic retail investors learn that diversification out of their favourite asset classes is helpful, that wall of equity will have to go somewhere. My guess is a good chunk of it will flow into the NZ Stock Exchange. The NZSE provides one of the consistently highest dividend yeilds in the developed world. Offering tax free With capital gains, the retail yield seekers that want their capital return cake too might find this too good to turn down. The NZSE has been under capitalised compared to its developed world peers since the '87 crash when retail investor aversion set in. My bet is things are about to change commencing with a structural break in the tax system - and the NZSE will be on the winning side of the bet.

The Trouble with New Zealand

The NZ Herald published an article today on the banking inquiry panel and the structural problems of the NZ economy. Worth a read for those interested in NZ. Some choice quotes:

New Zealand is "using the credit card to pay the mortgage" and if it continues we will lose our sovereignty to Australia, politicians were told today.

Commentators told opposition MPs holding an inquiry into bank pricing that New Zealand's obsession with property was the cause of most economic problems.

Bernard Hickey, managing director of interest.co.nz, told the inquiry the New Zealand economy was not an economy but a "housing market with a few other things tacked on".

I've written before on this blog how stupid New Zealanders are and their addiction with residential real estate as an asset class. For those that are interested and missed these, you can find them here, here, here and here - I won't bother reposting the facts. Those New Zealanders invested in residential property who lose their shirts and their pension pots will have no one to blame but themselves and their own ignorance. No doubt they will then vote the Labour party in with an election pledge to bail them out of their misery.

Kiwi Retailus Investo-Erectus: Part II

As a follow-up to my earlier Retailus post, (Infometrics economist) Matthew Nolan has just posted an excellent piece here.

Furthering the theme I laid down, Nolan also notes the confusion around risk/ reward trade-offs:

The lack of income growth stemming from this investment suggests that something is amiss – even if New Zealand has not really “over-borrowed” in the strictest sense, it appears we may have invested poorly. This misallocation of investment is the unfortunate result of a policy failure, bad luck, and further misinformation regarding the return/risk to investment.

Let's be clear - there's not only misinformation disseminated by under-educated and shady personal financial advisors/ retail brokers - the much bigger problem is retail investors' lack of understanding and knowledge of sound investing. This is compounded by the laziness in performing due diligence.

And then Nolan goes on to state (in far more polite terms than I did) how stupid NZ retail investors have been with their investment choices:

Ultimately, this implies that it is not even the fact we have accumulated debt that is of concern for New Zealand; it is what we have done with it. And in this sense it appears that New Zealand [retail investors] as a whole has made poor investment decisions. We have collectively whittled away a golden opportunity to improve the New Zealand economy by borrowing to invest in things that offered very little return.