By Jason Krupp*
The recent announcements by Minister for the Environment Nick Smith that the Resource Management Act (RMA) is set to undergo a major overhaul is welcome news, representing the first meaningful policy change aimed at tackling the housing affordability crisis gripping New Zealand’s biggest cities.
Although the detail on the changes has yet to be seen, the direction is promising as the RMA has long served as grit in the gears of the housing market, restricting sub-divisions, slowing the build rate, entrenching NIMBYism, while allowing fast growing councils to use it as an excuse to stall development and growth planning.
Research by The New Zealand Initiative, Motu and the Institute of Economic Research have all independently shown how onerous regulations and limits on land supply have contributed to limit housing supply and drive up the price of home construction. These findings echo similar research overseas, with the conclusions broadly summed up as excessive red tape leads to house price inflation.
Yet one voice appears to dissent on this view, with Gareth Morgan claiming supply is not the issue, and that changes to the RMA will only deliver sprawl, not affordable housing. Instead he believes New Zealand’s tax treatment on mortgage expenses and the Reserve Bank’s view that housing is a low-risk asset class are responsible for eye watering house price inflation.
Is Morgan right? Has the economic establishment been guilty of group think on housing, pointing to supply as the problem, when all along it was a demand problem?
It is somewhat tricky to answer this question quickly, as variations in different housing markets mean there is no diametrically opposite comparison to point to. But we can look at different jurisdictions to see if Morgan’s argument stands up.
Tax is an obvious place to start. Under New Zealand rules, owners of an investment property can claim the difference between their mortgage expense and rental income as a tax deductable, a process called negative gearing.
In addition, capital gains on the asset are untaxed, which combined creates a climate favourable to property investors.
Yet the international track record of capital gains regimes suggests taxing the value uplift on property will do little to curb house price inflation. Australia and Britain both tax capital gains on property, yet the latest Demographia report shows London and Sydney are among the most expensive cities in the world in which to buy a house. This phenomenon is not limited to these cities, with most urban areas in both jurisdictions rated as severely unaffordable by Demographia. Notably, both countries have restrictive urban planning regimes, just like New Zealand.
The United States offers some interesting insights. Similar to New Zealand, property owners in the US can deduct the interest expense on their mortgage from their tax bill. Yet the Demographia report shows that this is a very poor predictor of house price affordability, with the US accounting for some of the most affordable and least affordable cities in the Demographia rankings. If negative gearing was the cause of house price inflation, a stronger trend would be obvious in the affordability rankings.
Furthermore, the US Federal Reserve has the same view of property as a low-risk asset as the Reserve Bank does, with rules for private banks aligned along similar lines. But again, the variability in the US market suggests that this is not the root cause either.
So what is the root cause?
Again the US offers an interesting insight here, with a strong link between the restrictiveness of the planning regime and house price affordability. Cities with a laissez-faire approach to urban planning, like Houston, have some of the most affordable houses in the US, whereas those choking in planning red tape, like San Diego and San Jose, have pushed home ownership out of reach for many.
The lesson can be extrapolated to New Zealand, where legislation like the RMA has restricted the supply of land and housing in many of the country’s biggest and most economically important cities.
In New Zealand, and Auckland in particular, housing supply has failed to keep up with demand, with fewer than 15,000 housing units produced nationwide in 2013, well down on the 35,000 a year mark seen in the mid-1970s when population pressures were weaker. The build rate has since picked up, but the momentum needs to increase further if we are to house the growing population.
Morgan is correct in noting that the tax treatment, negative gearing, low interest rates, and the Reserve Bank’s preference for housing as an asset class play a role in the overall problem, as does increased demand from immigration and population growth. But these are only factors at the margin because there is a logjam in the supply of housing.
Put another way, a properly functioning market is like a pair of scissors, with demand represented as one blade and supply the other. However, where one blade has been rusted in place by onerous legislation like the RMA it is easy to point to the demand side and say that is where the problem is.
This is why RMA reform focused on the urban environment and housing is urgently needed. The reforms are also need to stop councils from using the RMA as a scapegoat to resist urban development they are either ideologically opposed to, or don’t want to wear on their balance sheets.
No one is naïve enough to suggest that RMA changes are a silver bullet solution to the housing crisis. We still need to shift the anti-development bias among many councils, but that is best tackled through incentives. However, without meaningful and urban-focussed reform of the RMA, we are not going to put the dream of home ownership with reach of the average New Zealander any time soon, if ever.
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*Jason Krupp is a research fellow at the New Zealand Initiative. This is this week's NZ Initiative weekly column for interest.co.nz.
29 Comments
Sorry, but to argue the RMA changes to help the house building problems is very premature when nothing has been published about what those changes are.
This is typical of Business Round Table speak from its successor and the NZ Initiative carries on with the babbel.
Isn't the tax issue also about fairness and not just whether or not it would damp house price inflation?
For example, why should I as an aspiring home owner pay large amounts of tax each year for productive, useful work, whilst owners of multiple rental properties, whom I would consider a drain on society (well my family at least), pay little tax on huge fortunes which they are amassing effectively at our expense with assests which are appreciating at rates well in excess of general inflation?
I'm certainly all for a tax on capital gains in excess of general inflation provided it was offset by a reduction in either GST or income tax.
Should your home, when you get one, be subject to capital gains tax also? If property is subject to a capital gains tax, what about other investments that appreciate - shares etc?
I assume you are renting. If not for property investors providing you and your family with accomodation where do you suppose you would be living?
Good luck buying a home. Some good opportunities for first home buyers with less than 20% deposits on new builds at the moment I hear. You'll never look back!
My parents rented for a time. My grandparents rented for a time. Unless you are endowed with a deposit the day you set foot out the door it is necessary to rent for a period of time. Which good old days are you referring to frazz?
Old timers would scoff at anyone who expects to be able to buy a house without having to rent for a period first. I think most people who experienced "the good old days" will tell you about how hard they had to work to save a deposit.
My parents rented for two years and then bought a house in a moderate/ to nice neighbourhood and paid it off in 7 years on one income whilst raising a family. Both of them left education at 17. I have a PhD in a STEM subject and yet by the time we buy we will have saved for 7.5 years to get the (likely 16% - edit...) deposit together for a sub 550k house in Auckland (likely in a very rough neighbourhood). We have had a little misfortune on the way/got unlucky but have been scrimping for a long time (student loans are now gone because we thought experience overseas would help careers). How are the two experiences remotely similar?
My children could buy into modest homes straight out of school but I consider it poor parenting. If they can't raise the deposit before they leave school (or 21 for longer term tertiary courses) then it is important that they get to understand the budgeting and demands required of the huge mount of the renting model.
We see a problem with people with good or better incomes, that they can't conceive of constricted cashflow or budgetting. Because they've never faced those constraints they can't get their minds around the issue - it often requires a "train crash" event in their personal lives (eg losing job and home, or destruction of their business and career through divorce or major illness) before they are force to adapt to the circumstances.
We're also seeing a growing problem arising from the childcare model we have been using (primary schooling, and now creche/childcare). The young minds aren't used to "Lord of the Flies" interact or personal responsibillity or leadership. They're getting institutionalised into thinking the normal natural circumstances is that there will always be an authority figure to watch over them, to dictate the truth to them (once it was the pastor at the church, and the damnation of your soul) now it is schoolteachers and Childcare Aunties. And these authorities are always right, especially when they're wrong, and they're unquestionable - they're adults...you're a subject. Not only this but the facilities are far more than they or their peers could create or find, and they're provided free of charge to the young mind and the authoritarian adult dictates the rules and usage of the facilities. The child owns nothing, they consume what is provided, it will always be provided, and if the authorities change it, it is "the way of things" as the child has no ownership interest. When they grow up...well they can't grow up... they have always been told what to think, what is right, someone has always been there to punish wrongful thinking...and the only moral cost is being caught.
So it is with the economic model. the new adults expect to spend everything, because "an authority figure" says it is ok, and tomorrow is the adults respoonsibility, not theirs.
(all they have to do is make sure their homework is tidy)
Of course I think my home, when I get it should be subject to capital gains tax (subject to an adjustment for inflation seems fair to me). It is effectively income when the house is sold so why is it not taxed? My point is that we are happy taxing productive members of society and are letting rentiers generate very large tax free current/future income.
If you put 300k in a savings account, you would think the interest returns would be taxed.
But would you be as happy to see the Time Value of your money taxed as well?
Say you put 300k into the bank for 5yrs, would you be ok with only getting 260k back after "Capital Gain [time value] tax" ? because that _is_ what you're proposing.
Improvements should be taxed...but most of them actually lose money so a CG tax wouldn't work there. And substantial DIY is now illegal in NZ.
You fail. Unlike you I actually do the work and have the papers and experience.
Interest is the purchase price a third party gives you for the use of your asset. It is revenue, remove the expenses and you have the distributable profit. This profit is income and is taxed.
A rental house the third party payment is rent, and the distributable profit is taxed.
A bank deposit the third party payment is interest, and the distributable profit is taxed.
A self-owner home is consumptive use of capital sum (no return).
A self-invested dollars in the mattress is consumptive use of capital sum (no return).
The time value of a mattress investment, reduces the value (the service provided by the asset, in this demonstrated by the purchasing power of most items).
The time value of a home is moderately static because the service provided by the maintained asset does not diminish. It does not lose purchasing power like the cash does, this creates the appearance of a capital gain - because the mattress value of the money used to buy it has fallen. If you buy a house for 300k, it _might_ now be market price of 330k, 5years later (or it _might_ be 270k if outside Auckland.)
So the money in the bank. Just like the house it hasn't changed, so should you be paying tax on the lack of devaluation ? Should you only get 270k back?
Capital hasn't changed on the house, only the mattress value of the currency has changed.
Still not quite there yet I'm afraid - do keep trying though! I pretty clearly stated above that I thought that only increases in the value of capital above inflation should be taxed. How hard is that to understand? No increase in the value of capital above inflation, no tax. Exhorbitant increases in value of capital above inflation (say due to speculative behaviour) result in tax. I hope you get it this time! Good luck!
Oh I agree. however it is the localised market inflation (houses vs houses) that determines the inflation on that asset. This is why the US has it's '4k provision (sell an asset, and re buy in the same asset class, there is only tax on the surplus).
But are you talking Auckland house inflation (7-12% last 12 months) or Palmerston North (-5%) - (-10%) last 12 months.
Would you pay tax if you were holding gold? (a similar asset that doesn't change it's purpose much) What about jewelry?
speculative behaviour IS ALREADY TAXED.
It's a trading activity, the resulting trading profit IS taxable and taxed. Because it is _trading_ profit. The properties are NOT capital, they are stock (inventory).
That is why the difference is in purpose of buying - is it stock to be sold - then it is a cost and profit revenue. If it is a capital asset - it is not stock - it is a capital item purchase and the disposal is a direct trade of recovered value.
In a carton making shop the printing machine is capital item, for printing saleable items. It is the items that are inventory. The disposal of the capital item (remember capital items are NOT tax deductable so the tax on the currency exchange has already been paid)
However the printing machine sale company, the printing machine IS a inventory item, trading in them is COGS and done as the revenue source. Selling a printing machine is normal trade for profit, not asset disposal. The money used to exchange for the inventory unit is tax deductible, and it's profit on sale is taxable.
that's why it's so important to work out what is "for trade" and what is "capital item", and the clear demarcation is the purchase a "Purchase" in COGS, or is the payment a "Capital purchase" which is not on the Profit and Loss, and is done out of tax paid funds. Note: TAX PAID, not merely Distributable Profit. [edit: in case you missed it, that means taxing disposal of a fixed asset would be a double taxation]
I don’t think the housing affordability debate is every going to end – and I don’t believe a first house is ever really ‘affordable’. Getting into your first house takes commitment and means GOING WITHOUT. Hard for most people these days when just about anything is easily available ‘on tap’. Frankly I am sick of the whinging.
We purchased our first home 20 years ago in Auckland in a crappy suburb. Interest rates were 18 % - extremely unaffordable. I was pregnant and hiding it from the bank as I knew they would not lend to us on a single income. The housing market was super HOT, I mean piping – to the point where you had to view a property and make an offer on the spot – if you waited to think about it over night, by the next day it was sold.
We got our first house and dropped down to one income. We had NO money – some weeks we only had $20 left and I would wonder how we would get by. We had crappy cars, everyone else was getting cell phones, not us. I only ever shopped at sales or at the second hand shop. The kids were always running around in ‘roomy’ clothes, they could still fit them next year. We only had second hand furniture for years.
We both took extra part time jobs when we could – my husband also worked full time. I worked from home – didn’t and still don’t believe in farming kids out. Obviously we very rarely went out etc. Eventually things got easier and I wanted to move to a better area. I spent 6 months looking for a bargain in a better area – it had to have a home and income (part of it was a flat) – it was the only way we could afford to upgrade. So we moved.
Now we put up with someone else in one part of the house for years – pain in the butt. When we got sick of having a tenant – we opened the house back up and we had homestays for years. All this time we both also had extra part time jobs off and on.
Eventually things got easier. Now we own 3 houses. But to get where we are - I have never spent more than $7000 on a car, we have always had budget cell phones and although we can afford now to do dinners / cafes etc, we still watch our spending. I don’t shop a lot – except on things for DIY LOL. We went through years of hardship to get where we are and I KNOW many young people don’t want to do that these days (not all of course).
Getting your first home is never easy. There are places out there that people can afford – they just don’t want them. Or they don’t want to start at the bottom and work their way up – well tough luck, because that is how most of us got where we are today.
As for capital gains tax – I sincerely hope they don’t bring it in. It is a lot of work getting to the point of owning and then maintaining a house – every time you ‘ add value’ you are already paying tax also. But I am not a tax guru so won’t go further into that debate.
Anyway - to all aspiring home owners out there - it can be done, good luck with your savings goal.
Whose fairness?
No the Tax, MUST be about what is required for Communal services to function at a reasonable level.
Anything more is just profiteer and gouging.
Anything less is ineffective communal services.
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Re: fairness
What is fair?
That a person works themselves hard at school and gets results and has good resources. They work very hard, take risk with their lifes savings on a compounding basis, frequently redevelop their market, sacrifice possible enjoyment and consumption, spend their own available time (for arguments sake, lets define that as anything after 50 hrs work a week) improving themselves or their results. They take the lions burden on supporting themselves, their business contacts, and provide a quality reliable service to their customers (a community service if every there was one). How much tax should this earner pay? (and not all are paid well)
At the other end of the scale. Someone who doesn't think they should work for the man. That gets pregnant or just trips from job to job expect the social support benefits to cover their needs. They have significant free time, but use it only for their own interests either in direct consumption or volunteering for stuff they enjoy doing. They never have enough to get ahead, and wouldn't use it if it was offered (unless it was free). They spend most of their time consuming or being supported by others. Should this low earner be subsidised by the other?
So why is it fair to penalise careful or good investment practices.
The only true fairness is to look at what services are provided, then work out the share of the cost. Otherwise bureaucrats who are the wage settors see themselves as important people, regardless of contribution, and reward themselves first.... While in reality their efforts are entirely supported by contributions from the first person.
To which it is important to consider, as a society what level of servitude and leisure do we consider "reasonable", in order to the set the goals of required workloads on ourselves? As not all people see working for companies as rewarding, yet others do (which the divide seems to be solidly along the characteristic of the decision makers on one side, everyone else on the other.... )
Stop the excuses.
Even Auckland used to have a home ownership rate exceeding 70% of all residentials.
Now it is about 50% and dropping fast.
We need policies from central government to stop the rot and reverse even if it hurts a few investors.
Some hope from this mob, friends of the speculator.
Nah, government and RBNZ are hell bent on keeping property prices high, but private debt low. Private debt is pretty much maxed out at 160% of GDP. That means no significant new building, increased immigration, encouraged foreign buying as much as possible. Lost egalitarianism is just collateral damage.
Re "Similar to New Zealand, property owners in the US can deduct the interest expense on their mortgage from their tax bill. Yet the Demographia report shows that this is a very poor predictor of house price affordability, with the US accounting for some of the most affordable and least affordable cities in the Demographia rankings. If negative gearing was the cause of house price inflation, a stronger trend would be obvious in the affordability rankings."
Completely incorrect, negative gearing for landlords is not allowed in the US. There is a mortgage interest tax break but only for the primary residence, and there is capital gains tax with a small exemption for the primary residence. NZ is unique in having negative gearing and no capital gains tax and no stamp duty.
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