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Kim Hill grills Andrew Little on Tax Loopholes

The amount people are borrowing for their first home has increased 43% in just the last two years. Even the most casual observer must see that as freaky. Labour has rightly warned of the growing risk being taken on by first home buyers, especially if the economy turns or interest rates rise. However on Morning Report yesterday Kim Hill drove a bus through the holes in Andrew Little’s response to the housing crisis. 

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How long do houses stay ‘affordable’?

Kim’s concern with Labour’s Kiwibuild policy is that these new houses they intend to build will only be affordable once; the first time they are sold. The lucky buyers will get a one off windfall, and pocket the difference. Realistically the buyers will be relatively well off young couples that can afford to buy a new home, not the people that really need the help. It is hardly a policy that is giving everyone a fair go.

Even the Government acknowledges there are supply issues. National are hiding behind their ‘comprehensive package’, which seems to get added to every month or so. They claim it will take time for the supply to come on stream. However, supply is only one side of the equation. Demand is important too.

Xenophobia over foreign buyers

Labour’s response to excess demand is to ban foreign buyers from buying existing houses; they would have to build - as they do in Australia. Andrew Little is convinced that as decent data appears the true picture will show much higher numbers of foreign buyers than the current data shows. This may well be the case, but so what? For starters, these foreigners are simply exploiting the same tax loopholes we all are. Secondly, just as Mr Little points out, it can be hard to get real data on foreign buyers. For the same reason it can also be very difficult to ban them. We live in an open economy where foreigners can use companies, trusts or work through willing locals to buy property.

Of course the key point here is that banning foreign buyers hasn’t stopped house price escalation in Australia. Neither has a capital gains tax. It simply isn’t addressing the real problem. 

The growing awareness of loopholes

Kim Hill hit the nail on the head by asking Andrew Little about taxing the effective income from capital. Mr Little either missed the point or deflected the question by instead talking about a capital gains tax. That however is an altogether different concept and not income at all, which is why capital gains taxes are not successful at quelling the problem overseas. The largest part of the loophole is the effective income people receive each and every year by owning and living in their own house.

It is fantastic to see a growing awareness among the media of the loopholes in our tax system. Successive governments have been advised on these issues since the 1980s when in effect they were exacerbated through tax reforms of that era.  The perception is that it is too politically hot to handle. So as a result of this negligence we have ballooning house prices, growing gaps between the rich and poor, and a massive transfer of wealth from younger generations to baby boomers.

It has all been totally predictable, and won’t stop until the loophole is closed. 

Showing 17 reactions

  • Graeme Kiyoto-Ward
    followed this page 2016-12-05 06:51:39 +1300
  • Richard Ball
    followed this page 2016-12-05 00:30:12 +1300
  • Greg Mann
    followed this page 2016-12-04 13:58:09 +1300
  • Mark James
    commented 2016-11-30 19:40:20 +1300
    The problem Ive noticed this week is the worrying deafness of John Key over predictions coming out of the reserve bank on super and the continued warning over debt.

    The reserve bank should have more regulatory power. Theyre much more impartial than politicians and now that the OCR has lost its effectiveness they need more tools to compact the dangers that growing debt will have long term. The banks have lent more and more as interest rates have dropped to the point where it poses a real risk of killing our economy.

    While it changes our constitution giving the reserve bank more tools we need more objective policy as the two main parties wont make the hard decisions we need.

    Id like to hear their opinions on your comprehensive capital tax that Im sure will be released soon.

    We as voters and politicians need to take note of reserve bank warnings. While John Key rubbished their predictions this week as a voter I will looking to place my vote with someone who takes notice of these warnings and isnt looking to buy votes with tax cuts and be bedazzled this ‘rock star’ economy nonsense built on a mountain of debt.
  • Mike Gwyther
    commented 2016-11-30 18:08:30 +1300
    Can you please clarify what you mean by taxing effective income in those living in their own homes?
  • Darrien Le Comte
    commented 2016-11-30 17:31:22 +1300
    Let me get this straight.
    You want a similar taxation as the UK house tax, on householders!

    My wife and I are now mortgage free, and we can now start fixing up the house!

    On two wages, we get 62 k gross, approx.

    I work in a low paid service industry job, and my wife works in customer service.

    The purpose of capital gains tax, is to pay back the government, the millions of dollars that landlords receive indirectly by their tenants receiving the accommodation supplement support benefit.
  • Darrien Le Comte
    commented 2016-11-30 17:31:19 +1300
    Let me get this straight.
    You want a similar taxation as the UK house tax, on householders!

    My wife and I are now mortgage free, and we can now start fixing up the house!

    On two wages, we get 62 k gross, approx.

    I work in a low paid service industry job, and my wife works in customer service.

    The purpose of capital gains tax, is to pay back the government, the millions of dollars that landlords receive indirectly by their tenants receiving the accommodation supplement support benefit.
  • Darrien Le Comte
    commented 2016-11-30 17:31:19 +1300
    Let me get this straight.
    You want a similar taxation as the UK house tax, on householders!

    My wife and I are now mortgage free, and we can now start fixing up the house!

    On two wages, we get 62 k gross, approx.

    I work in a low paid service industry job, and my wife works in customer service.

    The purpose of capital gains tax, is to pay back the government, the millions of dollars that landlords receive indirectly by their tenants receiving the accommodation supplement support benefit.
  • Oliver Krollmann
    commented 2016-11-30 15:26:35 +1300
    Nick – that is so true, I also don’t understand why everything and everyone is supposed to gravitate towards Auckland. We need a fresh approach to our work lives, for example if you’re driving a computer at a desk you might as well work from home or a shared office space in your town, rather than waste hours on the road commuting to and from a workplace in a crowded CBD. Of course that won’t sit well with managers who favour a work culture of sweatshops because it requires a certain level of trust as well as well-defined goals and deadlines, rather than watching over people’s shoulders or micro-managing them – but it would boost productivity. My last role allowed me to work remotely from home, with going to the regional office in town once or twice a week for team catch-ups and videoconferences, and my productivity went through the roof, compared to when I was working in the head office and got shoulder-tapped and distracted many times every day.
    So there is potential to think about decentralisation and supporting the regions, particularly with ultra-fast broadband becoming more and more available, rather than putting all your eggs in the Auckland basket and complaining all the time about the strain it puts on the resources, and the man-made side effects. I understand that approach won’t work with every job, but for those of us working in the service business the 21st century technology would allow us to do that from pretty much anywhere we want – if we were able to let go of old-fashioned workplace environments and ways of working together.
  • Grant Hodgson
    commented 2016-11-30 15:11:34 +1300
    Tell us more about how you work out effective income, and how taxing effective income works…
  • Nick - Nick

Last name -
    commented 2016-11-30 14:40:21 +1300
    Not only do we have an obsession with property, we also have an obsession with Auckland being “the problem”, so part of the policy mix needs to be making other places more attractive. Many people would happily move to provincial towns if they could find work there.
  • Oliver Krollmann
    commented 2016-11-30 13:27:09 +1300
    I think expectation is the operative word here, as Colin pointed out. I have trouble understanding our obsession with property, the expectation that everybody deserves or has some kind of irrevocable right to be a home owner, and why we are even willing to pay through the nose for an overvalued property that isn’t worth it. Would you pay $20 for a loaf of bread? You wouldn’t. So why are we not smart enough to just walk away from that part of the property market that is bubbling, and buy or build elsewhere, where it is in fact affordable? That’s exactly what we did, and we even paid less for a brand-new home on a larger section than back in the Old World 22 years earlier, when we built our first home (which by the way we weren’t able to sell for a profit when we moved to NZ).
  • Colin Smithies
    commented 2016-11-30 13:14:17 +1300
    There are markets around the world where rising house prices have been blamed on foreign buyer influence and they can prove it as they keep better data than us. London for instance has shown their rapid price gains are due to the influence of foreign buyers and it has nothing to do with increased demands it is all about the economics of the auction market (English or first/second price sealed).
    The winner of any bidding process is the person that is willing to pay slightly more than the bidder with the second highest valuation (or willingness to pay), so effectively all the people in an auction are immaterial, only 2 people count. So even if there are 100 people in a market, if 1 of those is a person with a different price paradigm and is pushing the price higher…even if a local wins they are driven by the outsider’s valuation of the property. So rather than being about increased demand it is more about price distortion.
    Now when a property sells for well above the valuation for an area then this changes both buyer and seller expectations and the market is forever changed. Mucking around at the edges will not change anything as most markets are driven by expectations…altering expectations is the key to solving this housing market problem.
    In a pure consumption market this is as simple as increasing supply (or a rationing of supply to limit consumption) to ameliorate excess demand, in a pure investment market then taxing the returns on the investment will change expectations of return and therefore alter demand. But housing is a mixture of consumption and investment therefore the mixture of supply/demand manipulation and taxation is required. So the obvious policy implications are:
    • Increase supply of cheap houses, not a quick or easy thing to do.
    • Reduce the market distorting influences (no foreign ownership permitted).
    • Capital gains tax on non-residential houses (the investment ones) or if a house is bought and sold within two years.
    If we ignore or the emotive arguments and stick to just what the issue is and how to fix it we can come up with a portfolio of policies that will work in the long run. This market has been 50 years in the making it cannot be fixed overnight but if a political will to bite the bullet and do what is best not popular will see benefits in the long run.

    Now let the keyboard warriors attack this… I am expecting a lot of comments that start with …“I am not an economist but…”
  • Oliver Krollmann
    followed this page 2016-11-30 13:10:18 +1300
  • Matt Walkington
    commented 2016-11-30 11:06:50 +1300
    Without naming it, it’s pretty clear what demand side measures TOP will adopt as policy.

    The unknown is: will TOP call for much more socialist supply side measures where affordable housing is not released freely into the general housing market? For example, a lot more housing that stays in government ownership and is available to rent affordably (as defined by fraction of household income) but not to purchase.
  • Alan MacDonald
    commented 2016-11-30 11:06:11 +1300
    Can we make a condition of entry for immigrants that they have to build a house? Not speculate.
  • Matt Walkington
    followed this page 2016-11-30 10:54:00 +1300