Closing Tax loopholes

Cracks Beginning To Appear For Kiwibuild.

When the Kiwibuild program was first announced we wrote that there was a chance it may simply crowd out private sector building.  We were not alone in harbouring this doubt as various industry commentators have shared similar views. It appears this, along with other concerns such as the lack of capacity, cost blow outs and affordability problems, have led quietly to a change of scope. The official documentation now states Kiwibuild will “facilitate the delivery” of the planned 100,000 homes, rather than “build”. It may seem minor, and arguing about semantics is never very productive, but it does further expose Labour’s flagship policy to criticism. Analysis from economic modeling firm Infometrics showed that the policy could see as few as 9,200 additional properties added to the dwelling stock over the next four years, representing less than one-third of the program that is penciled in for that period.

While failure to successfully implement the program will come with significant political consequences, the real losers are the families who will see house prices continue to rise much faster than wages.  This distortion is what drives the growing number of ‘working poor’ cases we seem to be seeing almost on a daily basis in the media, where families and individuals holding down full-time jobs are stuck living from payday to payday. It’s a situation that is worsening by the year and one that is compounded by our failing welfare system. Unfortunately, there is little to suggest there is an end in sight. Even if policies like Kiwibuild were successful, failing to address the demand side drivers means they’re unlikely to do anything but offer breathing space until the inevitable rise in demand once again pushes against the (new) supply ceiling.

This questions the rationale behind Kiwibuild in the first place. Mr Twyford explained that such a policy is required due to a “broken market”."Our philosophy is that when the market fails, it’s time for the Government to roll up its sleeves and get in there and fix the problem".  Yet the market is not broken, it is doing just what the tax system incentivises, speculating in land and investing in the tax exemption allowed for owner occupied housing. It should be no surprise that the massive difference in effective rates of return from alternative assets creates an incentive to invest in one rather than the other. The tax privileges offered to owner occupiers of property underpin a permanent year-by-year benefit, and the market is simply taking advantage.

Even so, the premise of Kiwibuild to get Kiwis who are currently priced out of the market into affordable homes should also come under the microscope. Assuming first the Government can deliver these houses, particularly in Auckland at $500,000 – $600,000 (measurements have already be adjusted since the election to cost by ‘room’), this would still give a house-price-to-income multiple in Auckland Metro (a simplified, yet internationally recognised measure of housing affordability) almost twice what this metric considers “affordable”. To put into perspective, Kiwibuild houses in Auckland would still be less affordable than housing in almost every main centre south of Hamilton. In fact, MBIE estimated households in Auckland would require an income of $114,000pa to purchase a Kiwibuild home, well above the median for the metro area of $92,474.

The Government runs the real risk of building houses that the people they are actually trying to target cannot afford. We then have the problem of simply putting money in the pockets of the people lucky enough to buy them. The Government are looking at measures such as a minimum length of stay to prevent new buyers flicking on the houses, yet along with being hard to enforce, it shows that they are preparing for the very scenario of continued speculation. Was this not the entire purpose of Kiwibuild in the first place, to prevent rampant house price inflation?

Until we deal with the underlying drivers that incentivise speculation in housing, we cannot expect to truly solve the problem. Sure, supply constraints play a role ( and yes that includes the RMA), but addressing these first and hoping they solve the problem is a fallacy.

Kiwibuild may have been planned with the best of intentions, but execution of ideals is one thing that has so far eluded the new government. Again, it’s the ones who are struggling who wear these failures the most.

Andrew Courtney 

[email protected]

Showing 3 reactions

  • Terry Woods
    commented 2018-06-10 22:58:10 +1200
    In many areas it’s the zoning of land that’s caused price inflation, yet there seems to be little effort to free up land for building. Why not? This might not be the answer for Auckland (where there’s simply little land available near the centre), but there must be many areas where it would help dramatically.
  • Oliver Krollmann
    commented 2018-06-10 13:55:40 +1200
    So for decades we’ve been ignoring climate change, but now we’re looking at a carbon-neutral approach by 2050. And for decades we’ve been accepting plastic bags, but now we’re getting rid of them.
    There might be hope yet for plugging that tax loophole, and getting Kiwis off this insane obsession with property.
  • Oliver Krollmann
    followed this page 2018-06-10 13:51:28 +1200