Recent changes to the taxation of residential property in New Zealand

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Recent changes to the taxation of residential property in New Zealand

Practical responses to the housing crisis or ‘barking up the wrong tree’.

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Motivation

Contemporary and contentious issue Dispute about causal factors Debunking the case for supply side causes (from the Right of centre ) Debunking the efficacy of tax policy tools. Isolating easy credit availability and price (interest rates) as the key crisis drivers.

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The thesis

Supply factors are systemic , long run influences on the NZ residential property market. The crisis/Crises Are cyclical . Supply factors: RMA, Local Government consenting process, land availability, reluctance to invest in infrastructure expansion, industry structure, materials’ cost. These factors may describe a less than ideal supply situation, they do not explain Crises.

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How can we link supply factors to the Graph?

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Tax is not the problem, nor is it the solution

Past attempts to use tax policy to subdue housing prices have failed. Countries in which comprehensive capital gains taxes apply have experienced similar bubbles (Canada). The current ‘speculative, house flipping/property investor’ is the last bogeyman left standing. The Foreign investor and ghost house targets have not worked, targeting investors is also unlikely to work.

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Credit conditions supply the best fit with observations

Easy credit conditions (availability and price, as interest rates) provide most of the explanation. These factors ‘fit’ observed trends in house prices. They lend themselves to ‘ready to hand’ solutions. Tax policy may be part of the solution but it can only be a minor player.

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Cost-Volume-Profit analysis

calculating break-even point and target profits

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Recap

Fixed costs are those that do not change with activity levels eg. Factory lease payments. Variable costs change with activity levels eg. The wood used by a cricket bat maker. Mixed costs share attributes of FC and VC, eg. Electricity, which has a fixed monthly supply charge and a variable charge for units consumed. Contribution margin is the contribution to fixed costs (and once these have been met, profit) made by each unit of production (and sales) eg. A manufacturer produces Product A with a Selling price of $7.50 and a Variable cost of $5.00. $7.50 - $5.00 = $2.50, which is the contribution margin per unit.

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Example: Single product Break-even point

Continuing from the previous example: Selling price (marginal revenue) is $7.50 Variable Cost per unit (marginal cost) is $5.00 Contribution per unit ( CMu ) is $2.50 Add: Fixed costs of $20,000 Then: FC divided by CMU (contribution margin per unit) or FC/CMU is: $20,000/$2.50 = 8,000 units or (8,000 x $7.50) = $60,000 in sales = Break-even point ( BEP ).

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Tip

FC/CMU = 0 = BEP . Be careful to read the question and understand what is being asked of you. So, if the question asks ‘what is the BEP in units and sales?’ make sure you pluck the low hanging fruit by providing an answer to the second part of the question and don’t stop at units only. If you have a BEP of 8,363.4 Units, the BEP is 8,364 Units because you cannot sell 0.4 of a unit.

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Target or desired profit calculation

[required] Sales in units = (Target Profit + Fixed Costs) / Contribution margin per unit This simply extends the previous example a small amount. Again, using the previous example, but adding a target profit of $25,000, we proceed by. 1. Calculating the contribution margin ($2.50) 2. Adding fixed costs and the target profit ($20,000 + $25,000) = $45,000 3. $45,000/$2.50 = 18,000 units (18,000 x $7.50) = sales of $135,000

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