Closing Housing Tax Loopholes Would Solve Demand AND Supply Problems

In a new report the Auckland housing market has now been ranked as the fourth most expensive in the world (behind Hong Kong, Sydney and Vancouver), with houses worth 10 times the average household income. What is even more worrying is that other centres such as Tauranga are rapidly catching up. 

This is a crisis folks, there is no mistaking it. Every day that house prices rise faster than incomes, the situation is getting worse, not better.

The new report has sparked the usual hand wringing response by Establishment Parties, as they compete to show they will build more houses than the other. Their responses either reek of denial or economic illiteracy.

It is time to admit that the strategy to increase supply has been a failure. It has failed for two reasons; because demand is an issue too, and because the tax loopholes on housing are constraining supply also.

Demand Matters

For decades, we have had excess demand for housing because we see it as an investment instead of shelter. This excess demand has existed since the 1980s when the tax loopholes around housing first appeared, and our housing has become slowly more unaffordable since then. TOP Policy #1: Tax Reform would close these tax loopholes, make 80% of people better off through tax cuts, stop the rise in house prices and channel our investment towards productive things like growing businesses which provide exports and jobs.

Immigration is an exacerbating factor, which we discussed in our TOP Policy #2: Smarter Immigration. The way the Reserve Bank favours housing debt over business debt is also a problem. What asset can you leverage up that much to buy? We will return to this later, as it is having a perverse impact on supply.

Supply

Even the supply response touted by Establishment Parties has failed, and it is time to explain why. In case you didn’t guess already, the game is rigged folks.

National has already had a go at lifting housing supply; remember the Special Housing Areas? They like to blame the Auckland Council for the failure of their attempts to increase supply, but there is another explanation they don’t like to dwell on. The reason that land isn’t being freed up is because of land banking. Why take all the risks of developing a property when you can make more money leaving it vacant?

What is worse is that large developments (such as the St James apartments in Auckland) are struggling to get funding to go ahead, despite clear demand. There are two reasons for this. Firstly banks are running out of money to lend, and they would much rather lend it to people wanting to buy existing houses than to businesses looking to build new ones. Thanks to the tax loopholes on housing, it is a low risk investment for any bank, far lower risk than any business. The second reason is that banks have a vested interest in making sure house prices rise – they don’t want to crash the market by having too many houses built.

The National Government has no answer to this problem because in their ideology the market is supposed to work, and they refuse to acknowledge the root of the problem – the tax loopholes around land and housing. Well to be more truthful, they do recognize this privately but do not have the political gumption to front up to New Zealander’s tax-driven obsession with property speculation.

Of course Labour’s response is that government should step into the breach and build the houses themselves. This response is equally economically illiterate. Why take on the job of the private sector, with all the risks that entails? Social housing is fine, but does the government have to build all the houses?

Closing the tax loopholes around housing would mean those sitting on bare land would get a tax bill. Along with stopping the rise in land prices, this is a pretty strong incentive for owners and banks to get building so that the asset can realise its value. This tax switch would also push more funding to businesses and away from people speculating on housing. Businesses could use that funding, amongst other things, to build more houses.

Instead of trying to replace the job of the private sector, lets fix the underlying drivers so that the market works properly. That is central to TOP’s tax rebellion. Oh, plus it would make 80% of Kiwis better off.