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Betting on House Prices: Housing Speculation in Auckland

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Until now the Income Tax Act’s intention test has not been used to curb housing speculation in Aotearoa.

This Act could allow government to effectively control housing speculation. This paper uses a simplified equation to determine the initial (first-year) cash-on-cash return or net rental yield of a property in Auckland between 2002 and 2016. Each property purchased and rented was assessed as speculative or not, by benchmarks around modelled net rental yield against alternative investments available at the time of purchase. Benchmarks included the prevailing 6-month term deposit rate and a ‘fair rate of return’. Using this model, nearly all rental purchases in Auckland from 2002 through 2016 were speculative to some extent with the vast majority being negatively geared and operating at a loss. That behaviour contrasts to the Auckland Property Investors Association’s stance that investors focus on rental income, invest only when adequate returns can be had and do not consider capital gains when buying. Using the modelling contained in this paper to assess investment property purchases against the intention test is a way to lessen the widespread ‘betting’ behaviour of Aotearoa’s housing market.

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