The selling of New Zealand – feature article

THE $ELLING OF NZ
[Jun/Jul 2014 issue]

How the National Government is directly responsible for higher interest rates

Finance minister Bill English regularly lectures New Zealanders on their spending on real estate and says we need to tone it down to keep interest rates low. However, it’s not ordinary New Zealanders but overseas investors enticed by National that are stoking house price inflation and mortgage interest rates. IAN WISHART investigates

New Zealand’s booming housing market and resultant pressure on mortgage interest rates is the direct result of a government policy designed to entice foreign migrants, an Investigate inquiry has discovered.

In 2011, National changed the immigration rules to allow foreigners to gain New Zealand residency if they invested $1.5 million in the country for a minimum of four years. Significantly, the rule change allowed that investment to be made in residential property, for the first time ever.

The “Investor 2” category stipulates that the $1.5 million cannot be invested in your own house, which meant wealthy foreigners wanting to live in New Zealand simply had to pony up with enough cash to buy a residential property portfolio. The only stipulation is that “the residential property must be in the form of new developments,” says a briefing paper for prospective migrants on the Erskine & Owen website.

With $1.5 million you’d need to purchase at least two, possibly three properties in Auckland, or even more if you were investing down country. In short, that means every investor migrant is probably in the gun to purchase four properties (including their own home), significantly ramping up the pressure on the New Zealand property market.

“Prior to July 2011, property was not accepted by Immigration New Zealand as an acceptable investment for the purpose of migrating to New Zealand,” says the Erskine & Owen briefing.

Not only are the investor migrants required by law to purchase multiple properties per migrant, but New Zealand banks and financial institutions are falling over themselves to offer the mortgage lending facilities they need. ANZ bank, for instance, has a dedicated unit devoted to migrants, and is a partner on the New Zealand Association for Migration and Investment (NZAMI) website:

“ANZ offers migrant banking services through its dedicated International Banking Services team which includes a specialist Asian Banking team, staffed with Asian language speakers. These specialist teams understand the needs of new residents and can work with migrants in the language they are most comfortable with. Of particular advantage for new residents is that the bank can set up and manage new accounts until they arrive in New Zealand.”

One mortgage broker spoken to by Investigate says the official figures suggesting only two percent of residential properties are being sold to foreigners are wrong:

“It’s nowhere near that low. The reason the government’s official figures seem low is because they are only capturing foreigners who buy in their own names.”

Asked what he meant, the broker explained:

“A large number of foreign investors are structuring their residential property purchases  here through New Zealand shelf companies with a New Zealand resident director. To all intents and purposes the properties are being bought by ‘New Zealand’ entities, and they won’t show up on lists of foreign purchases.”

Economist Tony Alexander last year posted details on his website of what he told an inquiring Chinese journalist about the real levels of Asian involvement in the Auckland property market:

“My survey of real estate agents indicates about 20% of dwelling sales go to people located in China. There is no information on foreign purchasing of houses in NZ beyond that survey and much more work needs to be done before one can say definitively what the actual proportion is. More than a simple survey is needed for that. There is no information on the proportion of the housing stock currently owned by foreigners and certainly zero information on any of the characteristics of any of the foreign groups buying houses in New Zealand.

“With regard to Chinese buying of houses – I have yet to find a single person in New Zealand who agrees with the survey results. Everyone believes that the true level of Chinese house buying in Auckland in particular is much higher than my survey suggests. The issue is rarely mentioned with regard to any other part of New Zealand,” says Alexander.

While there are those in the media, like Newstalk ZB breakfast host Mike Hosking, who take the official “two percent” figure at face value, those who are really in the know don’t. Nor does New Zealand First leader Winston Peters. If, he argues, that only one house in 50 is being sold to foreigners, and that Asian migrants make up around 20% of the Auckland population, why are Asian real estate agents so prevalent?

“Take Barfoot and Thompson,” says Peters, “of the top 25 agents, 21 are Asian”. It only makes genuine demographic sense, he argues, if economist Tony Alexander is correct and around 20% of houses are being sold to “people located in China”, represented through New Zealand-based companies and trusts probably for their own reasons but with the effect of masking the true impact of property sales to foreigners in the government’s figures.

A quick perusal of New Zealand homes on offer internationally is a quick reality check for anyone who doubts just how big the transference of real estate offshore actually is.

Auckland-based The Conveyancing Shop on its website states that overseas buyers don’t even have to set foot in NZ:

“My firm regularly acts for clients based overseas who buy and sell New Zealand property without needing to physically come to the country to complete the settlement. We manage this by emailing all the required documentation to the client who gets it signed and witnessed in front of a notary public in their country of residence and returned to us by courier…a non resident can purchase a regular house or section of land without any restriction.”

The law of supply and demand is what’s driving up prices and therefore interest rates. There are six billion people in the world who qualify as non-residents for New Zealand property purposes and who can buy New Zealand land and homes without restriction. Investors in crowded Asia and Europe could, and evidently have begun to, overwhelm the New Zealand property market in the same way that foreign currency speculators can easily manipulate the New Zealand dollar.

The other twist is that foreign investors are usually not paying tax here:

“According to the IRD, generally you would not be a tax resident solely on the basis of having rental properties in New Zealand,” advises Erskine & Owen to its clients.

Over at Bayleys Real Estate, they’re celebrating foreign investors, naturally enough:

“Leading New Zealand real estate agency Bayleys is undertaking a number of visits to Asia this month to capitalise on what managing director Mike Bayley describes as a groundswell of interest in New Zealand property out of South East Asia and China,” says the company in a recent news release.

“In an effort to dampen down an overheated property market in China, the government there has introduced borrowing and buying restrictions including a tax on the purchase of investment properties (other than the first home) in fast growing cities such as Shanghai and Chongqing…this has led to some investors looking for opportunities instead in New Zealand.”

With 1.5 billion people, selling New Zealand property to Chinese investors seems a sure fire way of importing superheated Chinese inflation as well to the local market.

Earlier this year, US cable channel CNBC reported large numbers of China’s wealthy are planning to emigrate and there’s a growing ‘industry’ in selling them residency:

“More than half of all Chinese multimillionaires have either left or plan to emigrate, according to surveys. Countries around the world are lining up to attract them, creating a growing business and economy around selling them residency.

“Australia said Tuesday that a new visa program aimed at the wealthy—the “significant investor” initiative—has received overwhelming response, with Chinese nationals accounting for over 90 percent of the 545 applications.”

New Zealand has been playing this game since 2011, and the impact on the mortgages and therefore household incomes of all New Zealanders is becoming obvious – a de-facto tax of thousands of dollars a year imposed on every kiwi family through higher interest rates, as a direct result of a deliberate government policy to attract migrants and foreign investors.

It possibly wouldn’t be as much, except that the government is allowing foreigners to finance their purchases through New Zealand banks as well, competing with locals for available money:

“We help arrange finance to buy property in New Zealand,” says the Global Property Guide website. “Our specialist mortgage adviser associates are experts with deep knowledge of New Zealand’s mortgage market…whether you are looking to buy in Wellington, or Auckland, or Christchurch or Palmerston North.”

On the same website is a message from an interested foreign investor:

“Great info. My company is interested in purchasing up to 100 rental properties in the Auckland region. These would be preferably in the lower end of the market.”

Little wonder the “tenants in our own country” phrase is being trotted out a little more frequently these days.

Accountancy firm Andersen, in a briefing to clients last year, noted “that the ease with which non-residents can buy property in New Zealand contributes to unnecessarily high house price inflation, causing harm to New Zealanders who cannot, as a result, afford to get  on the housing ladder.

“There is a related issue that also often features in the media. This is the case of so-called ‘astronaut’ families, where the wife and children live in New Zealand, enjoying the benefits of New Zealand’s education and health care system, while the husband works overseas. The breadwinner usually visits New Zealand for short periods of time. Anecdotally, the evidence is that most breadwinners in this situation do not pay tax in New Zealand. We believe that in many cases New Zealand income tax is actually payable.”

Again, not only are New Zealand citizens subsidising the government’s migration policy through interest rate rises and hefty house price inflation, but the migrants are often not paying tax here either, according to Andersens.

It’s not just Asians being offered the New Zealand dream. Across the ditch a company called New Zealand Mortgages and run by an ex-pat kiwi is pitching kiwi properties to Aussie investors, with the pitch “will try to obtain for you 80% finance from selection of 12 New Zealand banks/financial institutions.”

NZ First leader Winston Peters says the New Zealand economy is simply too small and our land supply to stretched already, to also be used as the world’s go-to destination for houses.

“We have been arguing for some time for a New Zealand house and land register, same as you have in Queensland, but the government has been in total denial and obfuscation on that matter. You’ve got numerous reports – the OECD, Reserve Bank and Treasury – all saying that it’s having a profound effect.

“Now, first of all you have the LVRs [loan to value ratios] which were raised nationwide, but that’s a pretty crude instrument to attack house price rises in Auckland. The LVRs apply from Kaitaia to Invercargill where there is no price escalation going on of the kind we’re seeing in Auckland, in fact there’s even depreciation in some areas.

“Then you have the same excuse being given for the official cash rate going up – inflation caused by house price increases in Auckland. And again, that’s been applied across the nation – high interest rates – for a localised problem.”

Peters alleges the Asian investment may also be fuelled by the proceeds of crime, just the same way that billions in Japanese Yakuza money was laundered through New Zealand commercial property purchases in the 1980s and 90s:

“There is significant money laundering coming out of China. When the premier of China announces at his inauguration that the number one problem in China is corruption, I think we should take notice of it.

“Now if you’re parked up in China and you want to ensure you don’t have money hanging around that could possibly attract investigation,  then placing it offshore in New Zealand, a long way away, is a very sensible idea. They’re not concerned about getting high speculative returns in this matter, they’re simply wanting to get their money away from the place.

“You’ve got a number of devices; you’ve got nominees, you’ve got shell companies – New Zealand registered but overseas owned – and you’ve got trust arrangements. This isn’t exclusive to China, you’ve got it coming out of Luxembourg and other places as well.”

Of huge concern, says Peters, is the fact that wealthy Chinese appear to be buying favour with Labour and National by making huge financial donations in return for citizenship or being able to make further policy suggestions on migration and investment. Nearly every major political scandal since 2008 has involved Asian migrants or investors or donors in some capacity. Often, the donors are able to remain anonymous.

“It’s serious to the extent that they’re using a number of devices, the most obvious of which is the $10,000 a plate dinner and you don’t even have to bother to turn up. Truly! And it’s called a donation to a ‘charity’.

“From a personal experience I had, I was offered a quarter of a million dollars to travel up to China to discuss this matter, and I rejected it, I think I’m onto something here. They said ‘we’d like to help out, fly up to China and there’s a fair bit of money in it for you and the party’. That was before I came back – in mid 2011. Now if you’re offering that sort of money to someone who is outside of politics at the time, guess what’s going on inside [the political process].

“Donghua Liu – that’s the one Maurice Williamson is connected with – Maurice made three separate representations to the Immigration minister on lowering the investment threshold.

“It’s not business investors at all, it’s just somebody buying a damn home,” growls Peters.

“Now, the government when it’s faced this issue in the last few weeks and months has been in total denial. When [housing minister] Nick Smith said last week in the House that he’s done some research and found there are only 22,000 foreign owners. Now you couldn’t be  more deliberately obtuse if you tried. Is he suggesting they’ve only got one property each? They have a multiplicity of properties.

“It’s having a profound effect on the Auckland property market. When I have all sorts of people coming to me, property developers who can’t buy land because they’re being squeezed out – and look around the boundaries of Auckland where any new development might take place, guess who’s bought all that land up?

“Real estate agents say they’re being squeezed out too, because they get a customer up, get down there and they’re about $400,000 shy.

“One disquieting feature is the number of people who will tell you privately but won’t go public, they’re too scared of the environment in case it squeezes them as well. They’ve got a real concern about how it will affect them if they say something publicly. You’re stuck there without the witness you need. How many times has that happened in our lives?,” he chuckles grimly.

The bottom line, however, is that every time the government lectures New Zealanders on house price inflation, it is not ordinary kiwis to blame – it’s a government policy change in 2011. It’s a massive extra tax on all households, and New Zealanders need to understand who is responsible.