How Minister Smith Could Deal with Land Banking

Geoff SimmonsEconomics21 Comments

The average price of a house in Auckland is predicted to pass $1m when official figures are released later this week. In an interview on TV3’s The Nation over the weekend the Housing Minister Nick Smith (dubbed by Paddy Gower as the “Million Dollar Minister”) pointed out that the Government doesn’t control house prices, and claimed that all they could do was get the incentives right to build more houses.

The Housing Minister appears to have abandoned his previous housing affordability goals. He wants to see housing prices return to single digit inflation and not fall. This means that the only way to return housing to affordable levels is for incomes to grow faster than house prices. Realistically this will take decades to happen; few of us will see affordable housing in our lifetime.

When questioned on the persistent issue of land banking he claimed he was doing all he could within the law. The fact is that the Government, and even Auckland’s mayoral candidates have powers that they could use to reduce land banking, if they chose to use them.

What is Land Banking?

To calm house price inflation the Government’s focus is on getting more houses built. However some of their Special Housing Areas are still lying empty and undeveloped. Minister Smith pointed out the Government can’t force a land-owner to invest in a housing development. In other words they are powerless against a practice known as land banking.

If the price of land is increasing quickly, it can be more profitable to not develop it. Instead the owners just hold on to the land and wait until the price of the land rises further; a practice known as land banking. If there is demand for development and enough people hold on to their land then the price of the land is certain to rise.

The only way to break this cycle is to stop the price of land increasing quickly. One way to do this is to allow more development on a given parcel of land, which has been achieved in some areas through the Unitary Plan. But there are other ways.

Comprehensive Capital Income Tax

A Capital Gains Tax might help reduce land banking a little bit, but not much. The current bright line test hasn’t stopped people flipping houses quickly; they are still making a profit the only difference is now they are paying a bit of tax on it. We have seen similar results with Capital Gains Taxes overseas failing to prevent housing bubbles.

Instead the Morgan Foundation has proposed a Comprehensive Capital Income Tax (CCIT). This would treat all investments in the same way as a bank deposit. For investments that aren’t generating a taxable return, e.g. vacant land, the investor would be taxed the same amount as if they had the value of that asset in a bank deposit. Paying a CCIT would reduce land banking by providing an incentive to make the most efficient use of that land immediately, rather than hold onto it waiting for untaxed capital gain.

A land tax would have a similar impact as the CCIT on land banking. But why should we only require land to be used efficiently? Don’t we want the same for all assets owned by New Zealanders?

Compulsory Land Acquisition

Economist Arthur Grimes recently recommended using the Public Works Act to acquire land for housing development as part of his . In fact he suggested using the difference between the price paid in compensation and the eventual market price of the land to pay for the infrastructure needed to develop the land.

This would be an extreme measure, an erosion of private property rights that would be certain to raise the hackles of the ACT Party and upset core National supporters. A tax as described above would be less disruptive in that respect, but compulsory land acquisition is an option nevertheless. We use compulsory land acquisition for key infrastructure like roading, so why not housing? The question we have to ask ourselves is whether housing is a right, a fundamental part of our infrastructure, or is it an investment to make money off?

Auckland’s Mayoral Candidates Could Act Also

Even Auckland’s mayoral candidates could help nudge land bankers to develop their land, but only one candidate has a policy that would achieve this. The youngest candidate Chlöe Swarbrick proposes shifting the rates calculation formula entirely over to land value. This would mean that a patch of empty land would pay the same rates as the house next door, providing a strong incentive to develop the land.

In short, the Housing Minister has plenty of tools at his disposal to deal to land banking. His Government just chooses not to use them.

 

How Minister Smith Could Deal with Land Banking was last modified: August 29th, 2016 by Geoff Simmons
About the Author

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

21 Comments on “How Minister Smith Could Deal with Land Banking”

    1. They have an asset on which they cannot pay the running cost. Because it is a house it is special. If it was anything else the obvious step would be to sell it and change to something where the running costs are affordable.

      If that seems a bit harsh (but I have lived here for 40 years …) then set things up for the CCIT (that they can’t afford) to be a charge on the estate. There would be some details to work out when the first one dies etc etc but nothing is insoluble. You could even do the student loan thing and make it interest-free ….

      1. and change to something where the running costs are affordable
        ……….
        one of those summerhill stone single level row houses that are two meters from a paling fence?

        1. Whatever.

          If you can’t afford to service an asset then the rest of society has no obligation to help you keep it. OIdies rattle round in the family home which once held five or six people. They can’t afford much maintenance (carpets/wallpaper getting a bit sad) or the rates. They bleat about needing relief, so they get some. WINZ and/or the local DHB throw in some lawn-mowing, gardening, home care and subsidised meals on wheels. Plus the Winston Card of course.

          Why should we offer special help to a 70+ year old with a million-dollar debt-free house and not enough cash to run it? Why should such people be excused off any of the societal costs that everyone else has to pay?

          BTW and FWIW I am 70 …..

          1. The idea that the housing market is structured in nice stepping stones down from a family home to an apartment is false (as far as I can see). What has happened, perhaps reflected in the fact that we have a low paid economy, is a developer bowls an old house and jams 6 houses on it. In one of Olly Newlands books he talks about gold plated taps for the wealthy but then refers to “the crappy end of the market”. Apart from cherry picking are any of the housing pundits looking at what is out there?

          2. Lots of oldies downsize to the institutional ripoff called “retirement villages” ….

            Getting a bit off-topic … but let’s say I’m 70 years old, have a million dollar house, the pension and nothing else. So I sell it because it’s too big, old and needs money spent. Now I need to buy another one … right?

            Do I really have to? Am I going to live forever?

            Houses in today’s market rent for a bit under 5% gross return. $50k/year for a mil.

            I’m probably willing to live in something a bit smaller with fewer upkeep etc obligations. So I might find something acceptable for $40k/year = $800/week. In doing so I also get rid of the $100/week that rates & insurance & maintenance were costing when I owned the mil house. If I put the mil into something safe and stodgy (like power company shares or the Warehouse or Air NZ) I can get 5% after tax with no significant capital hazard. That will more or less than pay the rent.

            I am unlikely to live much more than another 15 years. Even if I do my lifestyle won’t cost much if I live to 90, so I can draw down the capital a bit. Spot of travel while I can, a new car, help the kids a bit here and there.

            Cash rich and asset poor. A comfy life.

          3. Lawn mowing & homecare is also given to renters. From WINZ if I have it right.

            Of course we can always bring in euthanasia. Be a darn site cleaner. And quicker. Less anguish that way.

            It’s not worth a million until it’s sold. Also is it a million under these conditions or a million prior to the oversupply of workers in this country to the houses for them to stay in? is it an old $30,000 dollar house vastly over priced?

            The next step is what will it cost them to buy another houses the same as the one they have now? If it’s the same cost, then there is no real gain.

            Cheers.

      2. But the bottom line Ian you NEVER own your own stuff. Start with the house you needed for your work. Without the ability to claim as an expense. Then an asset grab when your to old to work.

        Where does it stop? The engagement ring for the nightmare of your life. She ends up paying CCIT on it years after you breakup? No ladies it wouldn’t work the other way round you don’t buy us such stuff 🙂

        The car you bought to get you to and from work. Always a liability. But always classed as an asset. And for the working person not an expense tax claim in sight.

        Want to save the country some $. Stop tax breaks period. If the worker can’t get it neither can anyone.

        Anyone notice how often a politician has said we can’t afford X. Yet we could and did afford tax cuts. Anyone out there end up paying less tax? Or like me did you end up paying? Not much more. But.

        Cheers.

  1. Sorry Geoff. You know what I think of CCIT. As before CCIT is fine IF you have enough money to pay the tax on your assets. If you don’t you lose those assets. Either slowly through capital erosion to the council. Or to a loan shark as you borrow to pay the tax. Either way what was once yours will never be again. Once CCIT comes in.

    As for land banking it’s been going on for years. What makes it stink now is the demand for housing. IF that wasn’t there then land prices would be lower.

    Solve the problem at source. Not half way up the tree.

    There are two sources. One is government and it’s immigration addiction. And two WE don’t jump up and down enough to stop the government addiction to immigration.

    Also there is no other party that has a chance of ousting national. So they can do pretty much whatever they want. As in all democratically elected dictatorships the people get no say in what is to happen. With labor coming so close to making homosexual behavior compulsory under Helen. I’ll never vote for them. While I like Winnie. Not sure I want to see him as dictator of the country either.

    In an age of internet banking. Why don’t we have self rule no politicians. And a country manager that does what the majority decides on? That way we get past party politics and party bias. Getting down to what WE really want our country to be like. And if we think over 50% (1.7 million) immigration is what WE want. Or do we want our people to be trained up for the jobs in our country.

    Cheers.

    1. WE don’t jump up and down enough to stop the government addiction to immigration.
      ….
      It doesn’t help that TV One run programs like Nigel Latta’s based the rosey views of people like Professor Paul Spoonley with his cargo – cult mentality.

      1. Haven’t watched it yet.

        But anyway you cut it Kiwi born have been short changed. From 1/ 3 millionth to 1/ 4.7 millionth share in NZ. Given away by politicians without a mandate to do so.

        While over 1.7 million folk have been bought into NZ. Over half our 1974 population. It took over a hundred years to get us to 3 million. And as a country we don’t generate enough kids to replace our dead. So we do need to have immigration.

        But so many so quick we don’t have what they need when they arrive here is criminal. That so many Kiwi can no longer expect a decent life in NZ, is worse than criminal.

        All done by national and labor. Using the disguise of needed specialists or for jobs Kiwi don’t want. Yep 1.7 million specialist jobs…. Yeah! Right!.

    2. CCIT is similar to a system promoted by Thomas Piety in his book, Capital in the 21st Century. To put some of the detractors minds at rest, he advocates rates of only 0.1 or 0.5% on under 1 million euros of assets, with a sliding scale applied up to perhaps 5-10% on fortunes of several hundred million or billion. Granted his aim is partly to reduce inequality, but the principle is the same. There could even be a threshold of, say NZ$500,000 to cover a modest primary residence. The value of assets would be net of loans, so those with high mortgages would not pay much, if anything, in the early stages of their house ownership.

      Our system has relatively few taxes set at relatively high rates. Individuals and businesses are therefore encouraged to manage their income and assets into areas that minimises their tax. The key is, I believe, to have a wide range of taxes at a relatively low rate. That would discourage people and businesses from managing their affairs to reduce tax as they would gain little if anything by doing that.

      1. Government is trying to get folk to invest in business where most business fail within the first five years. Would you seriously consider throwing your money away on that gamble?

        Secondly they want us investing in business through the stock market. How many millions of people have lost their shirt there?

        In currency trading if you arn’t one of the BIG banks. Your in trouble. If your an average Joe you have a 90 to 95% chance of losing. While the BIG banks have a 90 to 95% chance of winning.

        I can’t blame folk for getting a house asap. I’d have like to earn enough to do the same. The old Kiwi dream a house with a shed out the back 🙂


        As for those who have more than one and rent them out I have no problems as long as they are treated like a business. And not a tax claim.

        But any tax or rate that gets charged when folk go onto a pension no way.

        Most of what we purchase in life has more than a little to do with working. House. food, clothing, car. All needed to get to work rested with energy to do a good 8 to 10 hours. Then go home and repeat it again the next day.
        Isn’t that more than enough freebee’s for the tax and rate system without screwing us for more.

        Cheers

    3. Bob, In response to your comment about the majority deciding, perhaps I can draw your attention to a quote by Gilbert K Chesterton:
      DEMOCRACY MEANS GOVERNMENT BY THE UNEDUCATED, WHILE ARISTOCRACY MEANS GOVERNMENT BY THE BADLY EDUCATED.
      Not sure which is preferable!

      1. Democracy also has those badly educated and the better educated in the mix with the uneducated. And while many don’t have much education it doesn’t mean they are dumb.

        I’ll try anything to get rid of party politics where the party goal is what matters not what folk want.

        Where the politicians grease up the people knowing full well they’ll be toeing the party line not acting in the best interests of the people that elect them and the country.

        This housing crisis could be cured in one piece of legislation. Only Kiwi can own land in NZ. But politician own land and buildings they have a vested interest in what has happened.

        National AND labor have help us move from 3rd in the world to 27th in the world. It’s about time we started going the other way. Our productivity has risen year on year. But pay rates while looking better are not because of devaluation of our dollar.

  2. Why should we worry about pensioners and a CCIT when they are the main beneficiaries of the current situation. What about the generations of New Zealanders to come who are facing a perfect storm of: extraordinary personal debt, declining real incomes (including disposable incomes) and massive concentration of wealth, the Third Industrial Age – and effects which New Zealanders are either ignorant of or totally complacent about, and the costs of huge environmental degradation. Does anyone in this country look beyond their toenails?

    1. Why should we worry about pensioners and a CCIT when they are the main beneficiaries of the current situation
      ………
      If today’s pensioners are wealthy is doesn’t look good for generations coming on. It is only pensioners with more than one house or those who have had a good job who are wealthy.

    2. Have another look Steve. The number of pensioners who don’t have far outweigh those who do.
      As is the case with all aspects of our society the rich are very few compared to those who are poorer.
      That’s why the flow of wealth is from the bottom up. 2.5 million Kiwi or 4 million including those born overseas, spending a dollar every hour. Is quite significant. While one wealthy person buying a 5 million dollar house once every 10 to 20 years is peanuts.
      Part of the reason workers get such a shabby deal they generate more with no voice to complain. Where the rich hob nob with those we elect to run the country anyway they please.

  3. My wife and I moved to Australia 5 years ago when we realised we were never going to be able to buy a house in NZ and were able to buy a brand new 4 Brdm house in Melbourne. When we purchased the land there was a caveat placed on the developer by the council that the developer had the right to buy the land back at Market rates if we had not started building withing 18 months of buying the land. So simple. End of story. End of discussion. Get on with it. No Land banking where we live here in what is Australia’s fastest growing area for the last 2 years

  4. The houses have hardly changed. The land’s the same. It’s only the book value that’s been increasing.
    There’s also a steady concentration of ownership in a reducing proportion of the population.

    In the past, the solution was a) estate duties, whose primary purpose was to break up the disproportionate accumulation of property by wealthy land owners thereby making property more accessible to the general public; and b) gift duties, whose purpose was to limit the use of gifting to avoid taxes such as estate duties.

    For the National government to suggest they are doing all they can within the scope of our current law is disingenuous. Enacting, modifying and repealing legislation is a primary power of government; the activity that consumes more time in parliament than any other; and a power this and previous National governments have used to change legislation affecting housing accessibility (e.g. privatising state housing, 2016; abolishing gift duties, 2011; abolishing estate duties, 1992; market rents for state housing, 1991).

    If the National government was serious about making housing affordable to the general public, they wouldn’t be hiding behind flimsy excuses about the limited scope of current legislation, especially as they’re responsible for reducing that scope.

    1. Zenguy we have had an increase of 1.7 million people bought in from overseas since 1974. The Kiwi component of our population is 3 million. And while birth rates have finally started to rise here it isn’t Kiwi’s having kids as much as the 1.7 million newbies. Kiwi have never produced enough kids to replace the dead. So we have always had to use immigration. My bitch is with too much immigration too soon.

      Our councils and government have been sitting on their hands, and charging such a price land has been too expensive to develop. Or keeping the boundaries too tight to squeeze the highest prices out of the land that was there. It’s been a rort all my life.

      You bring in enough without building what they need you squeeze the market so hard there is only one way prices will go. Massively UP.

      You’ll notice that what national has done is ease the way for all in sundry to take over what once only New Zealand born could own. Labor has a lot to answer for as well when with Helen, it was in its full blown National phase. More National than National.

      Cheers.

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