Closing Tax loopholes

Foreign Buyers – The Villain or the ScapeGoat

Does anyone seriously think that Labour’s first loud policy initiative is anything but window-dressing for the masses, a solution chasing a problem that hasn’t even been evidenced? Sure, Phil Twyford doesn’t like Chinese-sounding names, but that is hardly evidence.

Where is the evidence that foreign absentee owners are the fundamental driver of the soaring house value to income ratio in New Zealand? It makes for a great conspiracy and maybe for a politician seeking accolades for slaying the dragon, but otherwise Labour’s witchhunt is little more than populist candy. And the government’s foreign buyer register will hardly be difficult to circumvent. Are we heading back to a world of reactionary, populist politics that seek to blame anyone but ourselves for our dilemma?

Bans and taxes on foreign buyers have been tried and failed overseas where there is much better evidence that foreign buyers are a problem. Vancouver’s much vaunted foreign buyer levy did little more than stall the market for a while, much like our own Loan to Value Ratios did. Now prices are on the rise again, and that measure is now under review. Meanwhile Australia has done exactly what the Labour-led Government is doing and house prices have continued to rise.

Why? Maybe foreign buyers aren’t the real problem, or maybe they can find a way around the regulations. The rational response for a businessperson is obvious. Entrepreneurs out there will create businesses that set up legal NZ entities to purchase residential housing, one entity per dwelling with each one funded by raising debt finance from a foreigner. This should nicely circumvent the intent of Labour’s attempt to remove foreigners from the residential property market and business as usual will be restored.

Regardless, banning foreign buyers doesn’t deal with the real issue. The last two Tax Working Groups identified the fundamental issue with housing, and TOP promoted their advice as our flagship policy. There is a hole in the income tax regime that makes it rational for us all to invest as much as we can into owner occupied housing. Investors, foreign or domestic, know this and throw all their money into housing too knowing you and I will keep buying houses.

Why should the annual benefit from owning a bank deposit or a business be taxed, while the annual benefit from owning & occupying a house is not? Fix the income tax loophole and see – a rise in productivity, more employment and higher wages; and a reduction in inequality. Not to mention the realignment of house prices with the demand for accommodation as opposed to being driven by the tax-free investment return.

Neither National nor Labour are prepared to follow evidence-based policy and instead they opt to either do nothing or chase shadows. This beginning from Labour in the economic policy arena is inauspicious to be kind.

House prices may stall for a while, but it won't be because of this change. The market was inflated under National, and will now be very wary of a shaky international economy and a new Government that will restrict immigration and review the tax settings around property speculation. But unless the Government has a second term and finds the will to implement tax reform with some real teeth the long term pattern of unaffordable housing should continue.  

 

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    • John Hurley
      commented 2018-06-08 18:22:13 +1200
      here’s a marketing concept: stepping stones: solid versus shaky where you fall and drown?
    • John Hurley
      commented 2018-06-08 18:17:16 +1200
      maybe there is a better way to sell the “tax the family home” message. The benefits have to be part of a positive vision?
    • Mark Williams
      commented 2017-11-29 20:44:05 +1300
      Oliver , i have to disagree with your statements ….. owning your own home is one of the most important things you can do to secure your future. If you are referring to the astronomical increase in property values over the last 20 years you will find that domestic owner occupiers would rank down the bottom of the list when it comes to driving forces for price increases. Never before in recent history has money been so cheaply available , never before has property speculation been so rampant and lastly but certainly not leastly our govt has subsidised both banks and private landlords via the accommodation supplement. Without the availability of both “cheap” money and govt subsidies i very much doubt that private domestic property investment would be as high as it currently sits. Foreign investment in both farmland and residential property is certainly something that has not helped but the statistics surrounding these investment deals are either wildly escalated or so murky to decipher , the true effect cannot be correctly ascertained. If our Govt got off it’s arse and started collecting tax from corporations that actively avoid it in NZ this would probably raise just as much capital as TOPs proposed housing tax with a hell of a lot lower social cost.
    • Oliver Krollmann
      commented 2017-11-29 16:19:43 +1300
      Mark, owning your own home (and working your bum off for it) is neither a must nor a predicament that deserves leniency or special treatment – it’s a valid investment decision just like any other, e.g. shares or term deposits or rental property. The sacrosanct “Kiwi way” has to change because it’s unsustainable. Stubbornly sticking to a certain behaviour because “that’s what you do” doesn’t move us forward or get us out of a mess we’re in. We should be smarter than that.
    • Mark Williams
      commented 2017-11-29 12:59:36 +1300
      This thinking is exactly why i’m opposed to your housing policy. Leave the OWNER Occupied houses alone and create incentives for property investors (be they foreign or otherwise) to invest in something that actually creates REAL value for our country. Taxing those that have busted their collective ass’es to own their own home is counterproductive to the “kiwi way” . Taxing those who employ a pyramid approach to building a property portfolio would go a long way towards solving our problem ….. Banks AND politicians have a lot to answer for in this regard.
    • Philip Lissaman
      commented 2017-11-28 16:51:43 +1300
      Agree Carl. A new fairer tax system is needed, and as well any delaying mechanisms to buy time for implementing the main system. But I guess we have to remember that whatever tax regime is implemented there will be ‘clever’ lawyers and accountants out their doing their level best to find ways around it and it is the wealthy who can afford to pay for that knowledge!
    • Carl Barlev
      commented 2017-11-28 15:55:56 +1300
      I mostly agree, certainly with the fact that we need to close the tax loophole. I do believe this will create more job opportunities and wealth for Kiwis (once we recover from the crash), while simultaneously reducing inequality. I don’t agree that we shouldn’t also consider banning property ownship by non-citizens and/or non-resident citizens. While “making it difficult” won’t stop all investors, it will put some off and the “delay effect” will at least slow others down, buying us time to review how effectively our tax reform policy is working. I would vote to do both.
    • Oliver Krollmann
      followed this page 2017-11-15 23:29:11 +1300