Quote:
Originally Posted by slide_rule
if you had access to several years of a real estate company's books, you'd be much less apt to list off my accusations as inaccurate. the real estate companies and the banks have a symbiotic relationship, their access and use of capital and friendly tax laws have allowed them to purchase more property and garner higher profits. they are the largest driver and ultimate winners of asset price inflation.
accelerated depreciation schedules, low capital gains taxes, interest expense deductibility DO impact real estate prices because they allow the real estate companies to purchase and effectively bid up property. a lower tax bill for bob rennie or whatever provides incentive and frees up more investment capital. lowered expenses (e.g. capital gains exemptions and higher depreciation rates) have the same impact as increased revenues. they both allow the real estate company to have more capital to engage in profit seeking activity.
the previous paragraph concentrated on the theory. in practice, we see real estate prices becoming detached from the traditional case-shiller (income to property cost) ratios starting around the early 80s, the same time the reagan/thatcher/university of chicago trickle down increased depreciation and lowered capital gains changes took place.
there are articles written by economists expounding on what i have said. they will provide more detail and and say it more eloquently.
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I do have access to several years of a real estate company's books, I work in the industry, and like I said in my post, most of what you said is correct, I just disagreed with some of what you said. I dont know why you didn’t bother to ask what I disagreed with.
First off, I'm sure you know that REITs are no longer tax avoidance schemes, and even when they were, it is not the fault of the board for adopting a IT structure, but of the government for making it such an attractive alternative to incorporation. Second, I dont think Godfrey being on the board of RioCan does not make him the boss, he is a board member and nothing more. The inherent conflict of interest you attempt to create is not very likely, as the much more likely story is simplly shoddy journalism and sensationalist titles. Drivers of RE prices are much much more deep seeded than confidence in the industry, and Godfrey knows this, making some price influencing media conspiracy theory just not very likely in my opinion.
Second, I would hesitate to call the Mainland Chinese investors amateur. Though they may not be corporate or institutional investors, most mainlanders with money are well educated and of the business class, and would likely therefore be somewhat sophisticated, at least sophisticated enough to hire an advisor or consultant when making an international investment, especially in real estate.
I do agree that the banks and RE industry have a very close relationship and a vested interest in keeping prices rising, and like I said, I took this away from your post and disregarded the rest.
With regards to your latest post, I have some serious issues with your logic. Double declining depreciation does not allow for heavier reinvestment. First off double declining depreciation wipes assets off ones book sooner rather than later, making it difficult to secure debt financing as there are less opportunities for asset backed collateralized loans not to mention the damage it does to a firm's financial metrics. As well the benefits of DD depreciation do not show up in a company's ability to capitalize projects, as CAPEX is a pre-tax expense and therefore a product of free cash flows and not after tax NI, which is what is benefitted by DD depreciation. I am not even aware of many firms double declining their land assets, in fact im not even sure that would comply with GAAP, but I'm not an accountant so I don't spend too much time looking at various firm's depreciation methodologies. The DD depreciation method does not allow for a firm to invest more in CAPEX, but merely allows it to report a lower taxable income without affecting its cashflows... very handy for sure, but not a contributor to the raise in re prices.
Lower taxes on capital gains on the other hand certainly could be argued to have had an effect, but this is a very divisive issue and there are pros and cons to lowering capital gains taxes... and that is a very long and protracted debate that I dont know anyone here wants to sit through, and frankly belongs in its own thread if anyone cares to talk about it.
Finally, tax shields certainly allow a firm access to more capital, both from making a shift to higher leverage attractive, and freeing up more capital from a firms tax bill, but that is an issue that affects the entire economy, not just the RE industry, and has more positive effects than negative. Don't really know why taxes would be paid on income tax expenses anyway... they are expenses afterall.
Ease of access to capital was, and still is, the prime casue of the rise in RE prices. There are so many causes and symptoms of that it could, and has, literally filled volumes of books. If you would like to discuss that one further please create a thread entitled "The financial crisis of 2007 and how we haven't actually fixed a thing" and I would be more than happy to chat about it on end. I keep in contact with a lot of my profs from b-school and we have had quite a few chats about it lately. It's an incredibly interesting and complex web of mistakes and misguided policies that just can't be summed up in one post here.
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