Stories of the impending rental crisis in Wellington have reached fever pitch in recent weeks. A perfect storm of mismatched supply and demand, short-sighted Government policy ( such as the tertiary policy driving more students into the city), and the overarching inability to fix our tax system has led to a situation where rents are predicted to rise around 20% relative to this time last year.
We can finger point and lament poor Government policy (past and present) all we like, unfortunately this will not help us drag our property prices (and along with those, rents) back to affordable levels. Yes, the new Government is barely dipping its toes into their first term, but they have already thrown away their biggest asset in achieving housing affordability having hamstrung their tax working group with a long list of terms that makes any real improvements hard to envisage.
The reality is these continued price hikes are felt most acutely by the poorest in our society and continue to widen the ever-growing inequality that we have. We already have a situation where more New Zealanders than ever are spending over 30% of their income on housing (the percent that is considered the threshold at which housing is considered as being ‘unaffordable’), and as far as we can tell, things are only getting worse.
What are we doing about it?
Some of the policy changes that we have seen, in an isolated sense and to varying degrees do alleviate some pressures. Building more houses will help, and even bright line tests ensure that at least some of the financial gains from housing speculation are taxed. The problem is that most are incremental fixes and are focused on the symptoms rather than the cause of the long-term housing disequilibrium (we have written about here).
So, what is the answer?
Under our tax system, owner-occupiers of houses do not pay a cent on the effective income they earn each and every year. Yet those working the 9-5, the double shift, or two different jobs, just to make ends meet, pay by far the highest portion of their income to tax. And, once that money is in the bank, they are taxed on the interest gain too. Meanwhile, those who have their wealth in property pay next to nothing and as a result get to enjoy semi-permanent tax-free capital gains because of that tax loophole! The average New Zealand house rose in value $48,142 in 2016. If that was earned through wages, they would be required to pay around $10,000 in tax. Teachers, doctors, lawyers, checkout operators, none can escape being skimmed by the swipe of the tax brush, yet property owner-occupiers are exempt. The worst part is that investing in housing is actually costing our society income – in the form of a crippling drag on productivity that such low-returning investment engenders.
By closing these loopholes in our tax system and making owners of assets (not just those with owner-occupied housing, but all owners of capital assets that continually declare lower than market income) pay their fair share we can lift the tax burden from wage earners. This will allow us to reduce every single New Zealander’s income tax rates by around one third. For the average Kiwi, this works out to be around $3,000 a year in your back pocket. Not only is this great for the vast majority of us, it also means house prices should steady and become more affordable as there is no longer any incentive to bid the prices up against one another – as we scramble to enjoy the tax advantage of ownership. Meanwhile, all that money that was once stored in housing gets funneled back into the productive economy, helping kick start our stagnant wages and productivity levels.
It’s human nature to dislike change, but often the greater evil is to do nothing. Yes, we should build more houses, yes, we need better rental standards, all these things help. But, unless we address the crux of the issue that is a tax loophole, expect little to change.