Auckland’s housing market is now almost certainly in bubble territory, the most certain sign being the irrational reaction to the Reserve Bank Deputy Governor’s comments two weeks ago. Bank economists and politicians alike have been flailing, claiming that taxing housing isn’t the answer but unable to provide any viable alternatives.
The Reserve Bank is late to the party with its call for changing the tax treatment of housing, but right. These changes should have been done before Brash, before Bollard – that means more than 25 years ago.
These problems caused by tax loopholes and favouring of mortgage lending continue to build a massive misallocation of investment in New Zealand. This undermines our growth, because we do what the tax system tells us to do and invest in housing rather than businesses. The resulting growth in house prices is also the largest driver behind increasing inequality in the Western world.
The reaction from bank economists was predictable – Tony Alexander claimed this is the worst possible time to tax housing, as house prices are so high it could send them crashing and risk destabilising the banking system. Has there ever been a more nakedly self-interested claim made by a bank’s economist? It is a bit like saying to the drug addict – “Sorry, we won’t bother rehabilitating you, you’re so hooked you might find the withdrawal a bit rough. Here, have another syringe.”
The longer we wait, the harder this problem will be to sort out. Where will the political leadership come from? Sadly, it doesn’t look like the present crop are up to that challenge. National continues to claim there is no crisis, or if there is it will be saved by building over the Bombay Hills. Labour has abandoned its capital gains tax and is cuddling up to National in the centre. Only the Greens are holding on to what was always a poorly designed policy. We need to tax the effective income from housing, but a capital gains tax is the worst way to do it – particularly if it is riddled with exemptions.
Again, theirs is a naked self interest. No politician really wants to burst the housing bubble, it makes them look like a kill-joy. Better to let the bubble burst naturally, causing twice the damage but ultimately leaving no one to blame.
If supply were truly the key problem as National claims, why aren’t we seeing Auckland rents rise commensurately with house prices? At present prices the rental return on the Auckland housing stock has dipped below 3 per cent (before depreciation), so any investors buying now must be doing so in expectation of prices continuing to rise. And why wouldn’t they, as they have for the past 45 years?
That is why the Reserve Bank has thrown up its hands and called for changes in the tax management of housing. We can’t expect the bank to do the heavy lifting by putting more and more controls on investors or foreigners. Many banks already do this so it is unlikely to make much difference, and complicated rules can always be worked around by a determined investor.
It is worth noting the Reserve Bank didn’t actually call for a capital gains tax as many in the media claim. It knows better than anyone that this is a complicated beast, only worse when there are exemptions on the family home as Labour and the Greens proposed. The average Kiwi may not like getting taxed on the effective return from the family home, but they need to know all exemptions simply create loopholes, which means more income for those who can exploit them as well as their accountants and lawyers.
Wherever there is a loophole, there is a way for a rich person to avoid paying tax. Note that we say “avoid” not “evade”. This is perfectly legal. Accountants call it tax planning, and property is one of their key tools. Mum and Dad Kiwi investors may want to hold on to their tax loopholes, but they can be assured that the rich are using those same loopholes to a far greater effect than they can.
There are ways to tax housing that are simple, impossible to avoid and would correct the bubble instantly.
The Morgan Foundation has suggested a Comprehensive Capital Income Tax, which puts a minimum tax on all equity in housing and land as if it were a bank deposit. This would rid us of the housing bubble overnight, and generate a huge revenue stream for the Government to share with all New Zealanders.
Gareth Morgan and Geoff Simmons work for the Morgan Foundation.