Frank Newman: Newshub Headline: "Top economist Shamubeel Eaqub slams National's foreign buyers' tax projections"

 Newshub Headline: Top economist Shamubeel Eaqub slams National's foreign buyers' tax projections

The story said, 

“A leading economist says the National Party's revenue estimates on its newly proposed foreign buyers tax are "bullshit".

“Sense Partners economist Shamubeel Eaqub appeared on Newshub Nation on Saturday morning, claiming the party's numbers don't add up.

“He joins a list of economists and politicians who believe National's tax plan has substantially overstated the amount foreign buyers will bring in.

"It just doesn't make sense," Eaqub said.

"Whoever's done the numbers and who's done the quality assurance really needs to have a really good look at this stuff because I don't believe they've got it right."

Shamubeel Eaqub should produce his numbers given his strongly worded opinions.

As a “top” economist this is the least we can expect. Presumably, he was interviewed because he is a credible expert in matters of finance, and not as a political commentator.

I must admit, my opinion of Shamubeel Eaqub is not flattering, and I have been of that view since 2012 when I was stunned by his advice that people should rent, not buy a home.

At the time the NZ Herald reported: 

“Aucklanders' love affair with property has been questioned by a leading economist who says renting makes more sense.

"Would you buy a loss-making business?" Mr Eaqub asked, pointing out that many house buyers did not factor in the huge losses incurred through paying off a mortgage, maintenance and other expenses.

Even with interest rates at historic lows, buying a house and paying it off made little economic sense compared with other forms of investment.”

So how has that advice worked out, 11 years later? 

Not well. 

The “average” person buying an “average” home with a standard mortgage would by my calculations be substantially better off today had they ignored Mr. Eaqub and bought a home instead of renting.

For most of those eleven years interest rates declined, so homeowners would pay less per week in interest costs on their mortgage. However, the median rent went up, from $330 per week in 2012 to $600 today.

Over those 11 years, the average house price increased from $400,000 to about $910,000 today, but even that is down from the peak of just over +$1m.  

Assuming the would-be home buyer had a deposit of $100,000 and used that to invest in shares instead of their own home, which was presumably one of the alternatives that Mr. Eaqub had in mind, the increase in the value of the share portfolio (as measured by the NZX50 gross index) would have been less than the total paid in rent over the 11 years. By taking his advice, their wealth would have decreased by about $65,000.

On the other hand, the home buyer would have increased their wealth by $130,000.

The numbers change when the assumptions change but those figures represent the typical home buyer scenario, which is fair given the generalised nature of the top economist's advice at the time.    

There are of course advantages and disadvantages with home ownership, as there are with renting, but on the numbers, contrary to the advice of Shamubeel Eaqub, those who have invested their equity in purchasing their own home would be substantially better off than those who rented and invested their deposit in shares. 

The only circumstance where a person would have been better off renting is when they purchase a home freehold or with a small mortgage. In that case, shares offered a higher return on their equity but with greater investment risk due to their inherent volatility. That is demonstrated by the fact that the NZX50 gross index declined in two of the last ten years and in one year was virtually unchanged. 

Perhaps Shamubeel Eaqub should be a little more careful when accusing others of talking “bullshit”.

Sources: 

Newshub story Here >>>

NZ Herald story Here >>>