Closing Tax loopholes

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.


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. 

Showing 25 reactions

  • Tom Test
    followed this page 2017-01-31 06:54:30 +1300
  • Ted Johnston
    commented 2017-01-29 12:53:03 +1300
  • Oliver Krollmann
    commented 2017-01-28 10:43:47 +1300
    We built a new 150m2 three-bedroom home two years ago. No carpet, no lawn, very un-Kiwi. Most neighbours don’t like it at all and think it’s way too small. “It’s just not what you do”, is what we’re told. Nothing to show off or boast about, just shelter. But it suits us perfectly, has all the little bells and whistles we wanted and needed, and it cost us less than buying a 5-year old home in the same area.
  • duncan cairncross
    commented 2017-01-28 10:04:42 +1300
    Hi Steve
    My house is 160m2 – yes it is bigger than a three bedroom house would have been 40 years ago – but not that much bigger and it cost – despite me doing a lot of the work – about 20% more than its “value” once finished
    But it is lovely and comfortable
  • Steve Cox
    commented 2017-01-28 09:59:33 +1300
    Is it the cost of materials that is the problem or the quantity of materials?
    Does every new house have to be a 350 square metre McMansion?
    OK, not every new house is a McMansion but to me it seems the average size of a house is growing as the average family size is falling.
  • duncan cairncross
    commented 2017-01-27 22:42:17 +1300
    I am going to mostly agree with Damien here,
    One of the main problems is simply the cost of materials
    Materials are damn expensive here!
    I disagree about compliance cost – IMHO that was actually very reasonable
    But in “the provinces” building a half decent home costs MORE than it is “worth” – and if you build something within regulations but down to a budget you are straight back to “warmest place I have lived with the coldest houses”
  • jill Chalmers
    followed this page 2017-01-27 15:26:34 +1300
  • Earl Mardle
    commented 2017-01-25 15:03:59 +1300
    Steve. My thought would be that capital gains are in income like any other. Especially the TOP proposal. I would tax the difference as income added on top of your existing income. As for inflation, yes, its a challenge because assets can change much differently from other prices. Probably indexed to the average of price rises in the suburb/electorate, but all of this stuff eventually falls to a “deemed” change in value anyway. The advantage of CGT is that it is levied at a time when there is actual cash available rather than having to extract it from assets by debt, for example.
  • Steve Cox
    commented 2017-01-24 19:35:41 +1300
    Earl, yes it has to be a package, but the right package.
    I’m opposed to a capital gains tax rather than an addition to all your other income. Why? Politicians. They’ll start playing with a capital gains tax, changing its rate at will to pander to their voters. Where is the effect on housing inflation if the capital gains tax is only 5%.
    And speaking of inflation will it be the inflation figure used by the Reserve Bank or a special housing inflation figure?
  • Damian Wheeler
    commented 2017-01-24 18:01:02 +1300
    1) Don’t make the mistake of treating the whole country like it has Auckland’s problems.
    2) Not everyone who has vacant land is “banking” it. We’ve had land vacant for nearly three years for various reasons mostly time and design decision related.
    3) I have no problem with the concept of build, live in it for a few years, sell it and build again if they only own one house at a time.
    4) The cost of building a new family home is ridiculous. Do something about the costs of building the actual house (materials, compliance etc) and it will be more attractive.
  • Paul Brigham
    commented 2017-01-24 17:41:11 +1300
    Oliver, my wife and I became freehold by foregoing some of the nice things in life, even denying our children some of the nice things in life (these are sacrifices). We did this to ensure that we had as few encumbrances going into retirement as possible. Paying tax on our freehold house is a penalty I’d rather not take into retirement – I’d rather put our house into a family trust and pay a nominal rent. Your policy will encourage some to find other loopholes and the average worker/homeowner will be no better off.
  • Earl Mardle
    commented 2017-01-24 17:16:36 +1300
    Steve Cox, absolutely not. There is no way I am going to support them passing laws making it a taxable income THEN trying to get them to tax the capital gains appropriately. Has to be a package or no deal.
  • Oliver Krollmann
    commented 2017-01-24 17:13:18 +1300
    Paul, why is becoming mortgage-free a hard road, or a sacrifice? It’s rather the smart choice, because no debt is the best debt.
    You’re right, you’ve made an investment, and it’s providing you with a return – a roof over your head that you would otherwise have to pay rent for.
    There have been various math examples in previous posts for different scenarios, but with the two numbers you provided and assuming no mortgage, you’d be very likely among the 80% who would benefit from the policy.
  • Paul Brigham
    commented 2017-01-24 16:57:35 +1300
    As a property owner I do see some unfairness in this tax policy but I do agree that something has to be done. The unfair bit is that my wife and I have worked hard, saved hard and “invested” in a place that we like to call home. I like to think that the returns on this “investment” is a result of the work we have done and the sacrifices we have made. Other people have chosen to live another type of lifestyle with the new cars, overseas trips etc and have not focused on becoming mortgage free. Now I am to be taxed for taking the hard road?

    I would like to see an example where there is a house income of say $100,000 and the house valued at $500,000.
  • Oliver Krollmann
    commented 2017-01-24 15:46:12 +1300
    Russell & Craig – I’d be very, very surprised if under a TOP 1 tax policy both of you were worse off. From your responses I’d see both of you in the 80% group who’d benefit. Craig – you’d probably be paying much less income tax on the salary from your part time job, which would easily offset the asset-related tax. Russell – the policy doesn’t just target the elderly with mortgage-free homes, as it is often portrayed – it includes ALL property owners, including speculators.
    Stop focusing desperately on the family home and seeing the new tax as an additional burden, when it is in fact just a redistribution. And we can’t exempt the family home, because it will not stop the build & live a few years in it & sell & build bigger & live a few years in it & sell for more & build even bigger & live a few years in it & sell for even more vicious circle. I see it happening right here in my neighbourhood.
  • Oliver Krollmann
    followed this page 2017-01-24 15:32:07 +1300
  • Steve Cox
    commented 2017-01-24 13:53:39 +1300
    Hi Earl
    I’m not averse to inflation adjusting any “profit”, but the first step is having politicians agree that these profits are taxable income and passing legislation making it so.
  • Earl Mardle
    commented 2017-01-24 08:55:35 +1300
    Steve Cox, agreed. However, given that inflation is NOT “profit”, any capital gain ought to be taxed after inflation is removed from the equation. The inflation is already stealing the value of other savings, to steal it from the only place where, so far, it has been safe to save is a double unfairness. On the other hand, as one who is firmly in the “deflation is under way” camp, a lot of these calculations are about to get increasingly irrelevant anyway.
  • Earl Mardle
    commented 2017-01-24 08:51:47 +1300
    It wont “solve” the problem, but it WILL contribute. But I see you are still looking ONLY at the capital/investment strategy, what about the tax loopholes that allow interest on debt to be deducted from income? Not to mention rates, insurance, repairs and maintenance and other “business” costs associated with property investing. Level the playing field between private ownership and investment ownership and we will start to see some action. When “investors” who chose the lazy method of buying a house, taking the tax deductions on the leverage and letting the tax-free capital value rise to cash out later, either as more tax-deductible debt or as free profit, they might switch to higher risk investments such as starting a productive business. I STILL see no mention of these other tax dodges being addressed. And until I do this gets the thumbs down.
  • Tim O’Donnell
    commented 2017-01-23 21:51:21 +1300
    I’m not sure I agree with the first policy because of reasons already given. I am considering to give it a go however since what’s already on offer isn’t working.
  • Craig Greenasbro Stenhouse
    commented 2017-01-23 21:24:17 +1300
    I agree with Russell Philips… We are a very low income family (around $25,000 pa), but have a freehold house here on the West Coast. Due to an injury, I could be on a benefit if I wanted to be – it was on offer – but I choose to work part time instead. Budget very tight, but a great life… Any tax on our property (that we worked so hard for), would put us under financially… Target the investors and leave the family home alone!
  • Roger Thomas
    commented 2017-01-23 21:21:34 +1300
    Continuing house cost increases makes GDP look good why Govt likes growth in this sector very little other growth
  • Russell Phillips
    commented 2017-01-23 20:45:40 +1300
    Really not sure on this first policy. It seems to unfairly impact the elderly. At a slightly different level The baby boomers you refer to of whom I am the very last of at 53 are many. Believe me when I say we are not all property investors.

    Some just work hard to own their own home, other work hard in business to become debt free and provide employment for others.

    It seems damn tough to penalise many of these people and lump them into one category when the option of targeting the property investors would have been fairer. Particularly so with our elderly who are most vulnerable under this policy.

    I accept we disagree on this but I am interested in why you feel it necessary to penalise all home owners with equity when it is possible to target the offending group. Is it you assume anyone who has paid off their mortgage is rich? There is a difference between not having a mortgage and true wealth but if this you must be aware. Fairly impressed with most other policies though. While is unlikely at present I will vote TOP because I am concerned this policy is unfair I am still keeping an open mind. To this end I am back listening but remain 😳 concerned.
  • Steve Cox
    commented 2017-01-23 20:18:41 +1300
    Unless the tax loophole of tax free profit is closed then no matter what else you do it is going to struggle to achieve anything.
    TOP hasn’t mentioned anywhere that this tax loophole will be closed.