Like Jack Tame, I’m surprised by the slow update of apartment living in New Zealand. I am also bored by the degree to which “wheel estate” dominates the public discourse, which I suspect is symptomatic of wider policy issues.
No other country in which I have lived dedicates such a disproportionate amount of oxygen to the machinations of a single, relatively uninteresting market. Property seems to be the default topic of conversation, and default investment, for normal everyday people. This suggests that the returns to investment are too high relative to other potential investments, and by extension that a disproportionate amount of domestic capital will be invested in property. Notwithstanding the over-allocation of domestic capital,
This raises the question of how might we reduce demand for houses, without reducing the supply of housing itself. There see to be two areas where action might be required.
First, Auckland Council needs to drop many of the density controls which are inhibiting the supply of housing in central areas. The Unitary Plan contains a preponderance of absurd residential rules that are ultimately ill-suited to urban areas. Second, Central Government needs to change policy settings that seem likely to stimulate excessive demand for residential property. This includes domestic tax settings that seem likely to attract capital from both domestic and international investors.
Central Government has heaped blame on Auckland Council, without accepting that it also bears some responsibility for problems arising from excessive investment in property. The failure of Central Government to step up to the plate has seen it cop some deserved criticism.
In their defence, the Government earlier this year announced a number of measures designed to curb demand for residential property investment, most notably
- Redefining “intentions” – Whereas previously the onus was on the IRD to demonstrate that the people buying/selling properties were doing so for investment purposes, a new brightline test assumes residential property bought and sold within two years is investment and as such is subject to normal tax rates.
- Collecting information from international investors – The Government will now collect information from property investors who are tax residents in another country. This is designed to reduce opportunities for money laundering.
- Applying a new withholding tax to foreign investors – The Government also announced its intention to introduce a withholding tax on sales of property by non-resident investors. Few details on this withholding tax are currently available, although it is expected to come into effect in 2016.
- Increased funding for tax compliance measures – A further $29 million will be provided to the IRD for monitoring and enforcement to ensure compliance with tax obligations.
The Government’s announcements were announced hot on the heels of initiatives being implemented by the RBNZ, such as applying tighter loan-value restrictions (LVRs) on residential property investment in Auckland.
So what’s happened to property prices since these measures were announced? Well, they seem to have kept rising. That’s actually not very surprising, given that net migration continues to run hot, while the RBNZ has also decided to cut interest rates in response to falling prices for NZ exports and increasing volatility in global financial markets. Moreover, most of these measures have only been announced and have not yet taken effect.
One of the more interesting piece of information to emerge in recent months is discussed in this article, which reports analysis by MBIE. This shows Auckland’s housing market has followed similar trends to capital cities in Australia. This suggests two things. First, it reinforces the view that global factors are partly behind increased demand for property in New Zealand and Australia. Second, it suggests Australia’s recent efforts to restrict investment by foreign investors have not been particularly effective.
Should we expect the aforementioned changes to the tax treatment of property to dampen investor demand for houses?
First, I want to emphasise that we probably don’t want measures to have too great an impact too quickly, i.e. we don’t want to manufacture a rapid slump in property values which threatens the stability of the wider economy. The better outcome, in my view, would be to implement policies that gradually reduce real house prices over a long period of time.
On the other hand, there’s a general consensus emerging that the Government’s changes are at the mild end of the response spectrum. To provide an example, the so-called “brightline test” for defining property investment applies only up to 2 years after the property is purchased. This is a relatively short time-frame, which seems likely to not capture many property transactions that are undertaken for investment purposes.
Back in 2010, Treasury provided the following advice to the Minister of Finance about the length of the brightline test (source):
“Any brightline period is inherently arbitrary. We consider a 5 year test would be the minimum that could apply before the advantages would outweigh the disadvantages. There is currently a 10 year brightline test that applies to property dealers and developers, so this period could be used as a precedent to apply to other real property sales such as residential investment property.” (page 2).
This Treasury memo also contained the following table , which summarises brightline tests which are applied in other jurisdictions. This highlights how the 2 year period proposed in New Zealand is relatively short.
On the “bright” side, the Government may argue that getting the “brightline test” adopted is a first step. Thereafter, the length of the test can be extended, as and when required to manage house price inflation. Beyond this, however, there’s not much more the Government can do given current policy levers. I guess the proposed withholding tax for non-resident property investors could be adjusted upwards if investment from those sources was found to be a problem, but it’s only addressing a small part of the demand curve.
So what’s the verdict?
Well, while the Government’s proposals are a step in the right direction, they are relatively timid and unlikely to have a meaningful impact on behaviour. Most notably, even with these policy changes, we will still be taxing property relatively lightly compared to other countries. I think there’s an argument to move much more strongly; there are some real macroeconomic risks in the global economy, e.g. Greece and China. Moreover, net migration to New Zealand is highly volatile, and could drop significantly from current levels if the global economic outlook improves.
My personal preference would be to implement a fiscally-neutral national land tax . This could be implemented gradually over time, e.g. start at a rate of 0.05% and increase it in 0.05% increments annually until house price inflation drops to reasonable levels. Revenue generated from such a tax could be used to reduce taxes elsewhere. Hence a land tax would be pitched as a tax shift, rather than a tax increase.
For now the Government seems focused on the progressing the measures it has announced. All I hope is that this represents the start of policy initiatives designed to address New Zealand’s hyper-active interest in property investment.