Monthly Archives: June 2015

Tax Assessors Go Airborne

drone_tax_assessmentIt’s a plane! It’s a drone! It’s…..the property tax assessor? That’s right, as local governments start to look under the couch cushions for loose change, they have found a more high-tech and lucrative way to garner more tax revenue: use airplanes and high resolution aerial photos to detect property improvements. This method allows them to see improvements such as home additions, extensions, new garages and swimming pools that drive-by inspections could not observe before. They are also more likely to catch those giving false information on their tax assessment forms.

Local governments in the U.S. are now joining other international governments in using aerial and satellite imagery to find more taxable wealth. Already back in 2010 the Greek government was using Google Earth to find unreported swimming pools; they found in the suburbs there were not 324 pools as reported, but actually almost 17,000! The Irish Tax Commissioners also followed suit. Then in 2013, The Daily Mail reported that Officials at Her Majesty’s Revenue and Customs were using Google Earth and Google Streetview to find fancy cars, home additions and new construction in the UK to try to decide whether to investigate homeowners they suspected of paying too little tax. They even reported that tax officials would add extra details to their searches such as people bragging on Facebook about a new car or exotic vacation. The Long Island community of Riverhead also used Google Earth to find pools that were constructed without filling out the proper paperwork or paying the permit fees, bringing the town over $75,000 in fees.

It shouldn’t be surprising that even governments will eventually adopt the latest technology if it means more revenue for them. What is interesting is how these stories illustrate an embedded disadvantage to holding wealth in the form of real estate. Real estate, unlike other assets such as precious metals, almost always carry a real estate tax which is usually assessed annually based on its estimated value. So even if you fully own a piece of property or land, there will still be an annual cost to holding it. Further, if the perceived value of the land goes up, the tax will likely go up as well. Precious metals, held outright, do not have such a tax. Currently the only possible tax would be on the gain realized after selling it; but at least as the value of the metal appreciates, there is no annual tax also increasing.

The other variable with real estate is how the real estate tax or anticipated real estate tax can affect the property’s value. If it is believed real estate taxes are expected to increase significantly in an area, the value of the property will likely decline compared to other areas where the real estate tax is not expected to be as high. An interesting example of this we may see in the coming years could be in Chicago which has expected pension payments to spike in 2016. It is estimated that to fully fund these pension payments, Chicago would have to increase homeowner property taxes by approximately 50%! This isn’t to say real estate will not remain a good option for holding wealth, but it is important to note some of the advantages and disadvantages of location and other factors when comparing alternatives.

Chris Kuiper, CFA is currently a student and researcher at George Mason University pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.

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Venezuela’s Currency Plunges…Again

The bolivar People exchange US dollars and Venezuelahas taken another sharp drop this past month, decreasing nearly 30% and falling as low as 423 bolivars per dollar, down from 279 at the start of the month as Bloomberg recently reported. The current exchange rate of nearly 400 bolivars means the currency has weakened 82% in the past year alone. This of course is the black market exchange rate, as the legal exchange rates still stand at 6.3, 12 and 199 bolivars per dollar (the government has instituted a three tier exchange system).

Unsurprisingly, Bloomberg noted inflation stood at 69% last December, but a recent report by investment bank Bank of America/Merrill Lynch indicates inflation may have reached just over 100% year-over-year this past April. Of course, the analyst of the report had to use both official and private sources to compile the data, as Venezuela’s central bank stopped publishing the consumer price index in December. Even more troubling is a recent analysis by the Cato Institute’s Steve Hanke who found that, using the principle of purchasing power parity, Venezuela’s year-over-year inflation will likely be 510%!

This is nothing new as the bolivar’s severe debasement has been going on since as early as 2011 (and even in the 80’s they were experiencing double-digit inflation already.) What is new according to the Bloomberg article is that the black-market rate is no longer tracking the so-called “implicit rate” which is the number of bolivars in circulation divided by foreign reserves. Starting last year, the black-market rate began to diverge sharply from the implicit rate and is now about three times higher.

Why? Venezuelans believe the debasement will continue far into the future, perhaps even at accelerating rates. As Bloomberg News notes, “To put it simply, it appears that Venezuelans have lost all faith in the bolivar and seem willing to pay whatever it costs for greenbacks.” Indeed, when the last vestige of faith disappears from paper currency, nobody wants to hold any of it at any price. Some people may wonder why you wouldn’t want to hold a currency that is “undervalued” compared to the reserves (such as gold) the country has in the bank to back the currency. Wouldn’t this be like buying a company that is trading for less than what it holds in cash? Yes, in a sense. But if a company is selling for less than the value of its assets or even the cash it holds, then the market is saying something – namely they expect the company to burn through most of that cash or assets, making it worth even less in the future. The same is true for Venezuela. Its citizens now believe its government will continue to print money and deplete any remaining reserves.

The bad news is this will continue to be a disaster for Venezuelans who have already been coping with food and essential goods shortages. But perhaps a silver lining is that the end appears to be near, which will hopefully bring about change and an end to their worthless paper money.

Chris Kuiper, CFA is currently a student and researcher at George Mason University pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.