Norman Gemmell writes that New Zealand’s new housing policy is really just a new tax package:
Economists like to talk about “optimal policy instruments” – essentially, policies that achieve their objectives more effectively or efficiently than the alternatives, and have minimal unintended consequences.
Judged by those criteria, the New Zealand government’s recently announced package of housing policy instruments is a long way from optimal. You might even call it a shambles. . .
The aim of the policy is fine, but like so many of this government’s policies, it has several unintended consequences which will almost certainly make matters worse.
Arguably, the primary target of this policy package is stopping the inexorable upward march of (mainly Auckland) house prices. Failing to achieve that would simply put it among a long line of attempts by previous governments (National and Labour) over the past 20 years at least.
In all cases, the biggest problem has been insufficient political commitment to boosting housing supply. . .
And in spite of its supposed focus on wellbeing, reducing poverty and solving the housing crisis, this government is not tackling the root causes of too few new builds.
All taxes cause “distortions”, mostly unintended, which need to be mitigated. Furthermore, policies that have conflicting objectives are “incoherent” and typically among the most distorting. This applies to the housing package’s removal of interest deductibility. . .
That wasn’t, as the government claimed, closing a loophole. It was treating landlords differently from every other business which can claim interest as a tax deductible expense.
Making matters worse is extending the bright line test to 10 years.
It would be rare to find a liability based on transactions and timing among the principles of a good tax policy. But the bright-line test manages both – it incentivises delaying property sales to avoid the tax even when selling would otherwise be in the taxpayer’s best interest.
It was originally introduced in 2010 with a two-year threshold, without supporting evidence, supposedly to stop so-called speculators from flipping properties for quick profits. A 10-year threshold cannot be branded an anti-speculation policy, it is simply a back-door CGT.
As with most back-door policies, this CGT is inevitably less transparent and coherent than a policy designed to tackle the problem head-on would be. . .
It might, as taxes can, contribute more to the government’s coffers but it won’t build more houses.
If there are better alternatives, they do not lie in even more ad hoc fiddling with a coherent tax regime.
Instead, like the famous real estate mantra of “location, location, location”, the mantra for New Zealand housing policy should be “supply, supply, supply”. Specifically, supply in Auckland.
Successive governments have aimed policies nationwide when rapid house price inflation is almost exclusively urban and essentially an Auckland phenomenon.
Without policies that reform construction sector regulations and open up more land for urban housing, there is little prospect of Auckland house prices stabilising while current demand-driven trends persist. To make matters worse, the government’s first-home buyer schemes will merely raise demand without incentivising supply.
With too many objectives and the probability of numerous unintended consequences, the government’s housing policies risk being seriously incoherent.
What would help are policies which make it easier, less expensive, and less time consuming for new builds.
Complicating the tax system won’t do that but it will increase rents thus making life even harder for the poor and those already struggling to save enough for a deposit to buy their own homes.