By Terry McFadgen*
Our political class has a problem, which is that it never wants to talk about new taxes. Those that do tend to have careers that end badly. And to the chagrin of the Productivity Commission, no one wants to talk about productivity either.
But we need to address the tax and productivity issues because New Zealand faces three unattractive options.
It can continue down the present road of never-ending fiscal deficits and high private sector borrowing, much for housing, worsening what is already an unsustainable current account balance.
New Zealand is running an annual deficit with the rest of the world in excess of $25 billion, and total debt now stands at close to $700b (220% of GDP) with housing debt representing close to 45% of that total. This is frighteningly high in terms of our ability to fund the growth we need in the business sector. Buying and selling houses to each other at ever increasing prices simply cannot sustain a thriving economy.
What looms down this track is a credit rating downgrade and probably a large devaluation. We are already on notice from the credit agencies. (Our podcast episode with S&P Global Ratings' Martin Foo on NZ's current account deficit is here).
Or we can cut government services to balance the books, but then fail to meet the needs and aspirations of our citizens in areas like health, education, law enforcement, infrastructure and building climate resilience into our assets. Then, even more of our citizens will likely elect to decamp elsewhere.
Or we can find a better way.
That requires moving capital out of bigger and better housing, and into the productive sectors of our economy.
It is in this context that I would like to introduce you to Victoria’s new vacant land tax, not as a fiscal silver bullet, but a facilitator for rebalancing our nation’s allocation of capital.
The tax is simple-all vacant residential land, anywhere in the State, attracts an annual tax of 1% of its value. But note that “vacant” is defined as land that has not been occupied or tenanted for at least six months in the relevant year. There are two important exemptions-first it does not apply to holiday homes provided the owner lives in the property for at least a month a year and has a permanent home elsewhere, and second, properties under development have a two-year window where the tax does not apply.
The tax was first imposed in Melbourne city areas in 2018, and will apply to all regions as from 2025. In principle, there is much to like about a vacant land tax:
• It discourages long term land banking and encourages the early development of residential land. This should take some pressure off house prices and, in New Zealand, put an end to what has been a tax-free ride for land bankers.
• By encouraging renting, it should ease pressures in the rental market. This would have a deflationary impact on rents and help the RBNZ to reduce interest rates.
• It has no adverse effects on the productive side of the economy as it does not apply to industrial or rural land. On the contrary, it should nudge capital into the productive side.
• It is highly progressive as only the very well off will hold vacant residential land as an asset, or more than one holiday home.
• It does not require a new data base of values. All that data is already there in Councils’ rating data bases.
• Unlike a capital gains tax (or at least a soft CGT that only catches assets acquired after the date the tax is introduced) it produces revenue immediately, not revenue in 5-10 years hence.
• It can easily be flexed and adjusted both in terms of the annual rate, and the time of its introduction. It can also be capped-either permanently or for an introductory period.
Electorally, the tax has been quite well received in Victoria. In New Zealand it would presumably be very well received by renters, who now represent half the population, and by aspiring house buyers.
It should also be welcomed by RBNZ and anyone else wanting to see New Zealand’s capital resources put to more productive use than ever more expensive housing.
By itself it would not close New Zealand’s fiscal gap-that will require action on other fronts probably including a CGT. But think of the vacant land tax not as a quick fiscal fix, but as a facilitator of lower rents, lower land (and therefore house) costs, and a much better use of our country’s capital.
I hope our new government takes a close look at the Victorian experience.
*Terry McFadgen was a founding partner of Simpson Grierson, and a former CEO of Fletcher Building and External Monetary Policy Adviser to the RBNZ. He now resides in Melbourne.
75 Comments
“Our political class has a problem, which is that it never wants to talk about new taxes. Those that do tend to have careers that end badly.” A prescient observation Terry. In a nutshell you have encapsulated our nations handbrake. In my opinion your statement points to the power of the ruling elites in NZ and elsewhere. Through media manipulation and control of the two major political parties this group manage to bypass the normal sense of fair play most kiwis have towards moral issues. Hence we stay where we are and suffer the consequences of an unfair society where a privileged group manage to enrich themselves when their fellow citizens suffer. Especially the young.
lol.. tax, tax, tax... such one dimentional/tunnel vision thinking... think bigger... could disbanding RBNZ reduce inflation hence rents, cost of living, financial/asset speculation, massive inequality and promote happier populous and increased social cohesion? Screaming tax, tax, tax while not seeing the root cause of the problem is massive currency debasement just sounds ragey with envy...
Because if they were doing it themselves, they would do whatever they want to maximise their profits? They operate in cartel like behaviour now and as a result, generate billions of dollars of profit sent offshore. Giving them more control and less oversight will see this accelerate AND put NZs financial system at risk.
While the tax system could be fairer, the rich will always win since they have far more resources, and far more motivation to pay less tax than the poor. What I think is our main problem is our attitude towards education and academic/business achievement. We barely hear about people who do accomplishments science, and from experiences from helping refugees from third world countries our schooling is below theirs in areas like maths. But the the whole country has a day of morning if the all blacks loose. We need to start valuing things that are actually important if we want prevent New Zealand slipping in a third world country.
The NZ Productivity Commission found that a vacant land tax could have negative impacts on housing supply longer-term. They got this right, even though it is now a misguided and incompetent organisation.
The free market is the best determinant of when land is to be developed, and what should be built on it.
Yeah rite.
For a good example of the free market working to get the best use of land just look to the supermarket duopoly and their tying up of land to stop the free market for everyone but them .
One of the primary concerns of governance is the best use of a countries resources for the benefit of all citizens and that requires regulation and use of taxes.
There is no free market when it comes to supermarkets though. Nobody can just go set up a supermarket anywhere they like, and start competing with Foodstuffs and Woolworths. They have to jump through multiple hoops like getting resource consent and various other bodies' approvals. Even Foodstuffs struggles to open new supermarkets, blocked by things like potential traffic management issues. So why are we surprised when all those regulatory costs are passed on to the consumer via higher prices? Even Costco still cant sort out a location and consent for its Chch store.
People go "oh look, the free market isnt working" when the reality is that there is no "free" market, there are impediments to competition entering the market, and protection of existing players.
In case it's not clear (which it appears to be to you), you've just highlighted a case where private individuals profit entirely as a function of overly restrictive intervention from governments.
The only reason the supermarkets can pursue that strategy, is because we so tightly control where supermarkets can go on district plans, making it very easy for them to place restrictive land covenants/own directly the only potential competitor sites within any given supermarket catchment.
Ensuring we have competitive land markets was highlighted in the ComCom report on supermarkets, and then roundly ignored in the drafting of NBE act
Here is all the proof you need.
Read Adam Smith's Wealth of Nations anything by Alan Evans on Land Economics, Alain Bertauds Order without Desisn, Nz Productivity Commissionreport on housing and the latest Demographia report on affordable housing.
In summary, those countries where supply equals demand ie a true free market, are way more affordable than countries that don't.
And NZ does not have a free market as the evidence shows.
Nope you have misunderstood what he was saying which is not surprising given your bias the resulting ideology of which has resulted in the unaffordable housing we have.
But regardless from Demographia back the evidence is clear in practise as it is in theory.
We don't have a free market but a restrictive one mainly in our land use policies, followed by consenting issues.
Nope you have misunderstood what he was saying which is not surprising given your bias the resulting ideology of which has resulted in the unaffordable housing we have.
But regardless from Demographia back the evidence is clear in practise as it is in theory.
We don't have a free market but a restrictive one mainly in our land use policies, followed by consenting issues.
There isn't actually that much vacant land in NZ cities. Farmland is not vacant land, and urban land with any buildings on is also not vacant.
Besides that, if the owner of a parcel of land chooses to not use it at that time, then that owner has every right to do so, and there is no good reason why he or she should be taxed because of that.
Where do you draw the line between "vacant" and "occupied"?
What gives you the right to determine that is where such a line is?
And why should any government or government agency arbitrarily make such a decision?
We all know that property developers are land banking so that they can block competing property developers from access to those parcels of land. Why not go straight to the nub of the problem and regulate how much land a property development company can own.
Normally I would agree with you, the free market should decide. However I do think land is a special case, we can’t just make more of it and we need to force the free market to make the best of it. For example if some billionaire bought up the land in the entire country then told us all to move out, is that cool? While I am very free market I have to wonder if NZ would actually do better if land was entirely publicly owned and rented from the government, land is such a different asset to anything else.
Possibly. While I have done fairly well from owning my own house, imagine if the government owned all the land and the land rent meant we didn’t have to pay tax. If I had put all the PAYE / GST / fuel excise / alcohol excise / etc I’ve ever paid into an indexed fund I’d be loaded. Not sure if it would work out that way, but I doubt land ownership has done anything positive for 90% of society.
It’s all hypothetical anyway, 180 years too late for that idea.
New Zealand's annual tax revenue is roughly $120b. Total landmass is 268,000 square kilometers.
If we chose to fully fund NZ's tax revenue from land only, then a 1/4 acre section would incur roughly $450 per year in tax.
Unfortunately a 100 hectare farm would incur $450k of tax, so you'd have to be mindful of the impacts of scale.
That's why nobody taxes per m2 but rather per land value. The beautiful thing with having a land tax is that it would remove entrenched unproductive landholders and enable people with productive plans for the land to afford it without vast mountains of capital. Farmers would be able to afford to buy their farms, just as people would be able to afford to buy their houses again.
Re ... "Normally I would agree with you, the free market should decide."
Sorry. I didn't read past that sentence.
Look up the "Tragedy of the Commons". And all it's variations of economic thought and argument. Unfettered free markets will see us cook in a few hundred years.
I proposed that a while ago (on these forums), and even a pathway for how to do so:
Give a tax credit for the conversion from freehold to leasehold, equal to 50 years lease. Only usable on lease (but able to be used on any leashold, so transferable to new land, empire expansion, etc.), tied to the person/organisation that had the freehold title, and deleted upon death/dissolution (leasehold title inheritable, but not credit).
Allow Maori land to start at 100% discount off lease, reducing by 1%/year for the next century.
Got called a communist. LOL.
Jimbo we can make more land just like China. Rather than a second Harbour bridge why not a bridge from Maeratai to Waiheke open up all that land over there closer to Auckland only 6ks from memory from the mainland better still since the Waitemata is very shallow just back fill and guess what more land. Singapore would China definitly Netherlands would actually the Netherlands built a dairy farm on a floating platform. But oh no not in NZ look at how much top soil is washed out to sea every time we have a major storm. Look at SH1 north of Kaikoura wereby they reclaimed the land to build the road a way better road now than it use to be.
Well said Jimbo, I think you'll find a Land Value Tax on all land would effectively do the same thing as having all land publicly owned.
Taxing vacant land is better than nothing, but there are loopholes. It also does nothing to encourage utilisation of land, for example, a large plot with a small house pays no tax but a plot one tenth the size next door with no house gets taxed even though the larger plot has more land 'sitting idle'.
I think you're not looking hard enough. Recall the incoming govt wants to zone for 30 years of growth, which means in not too long there's going to be thousands of hectares of land earmarked for housing in the medium future. This tax may well try to hit those farms, so would need to be carved out.
But if you want to see land banking on a city-changing scale look at Russel Properties and what they've done in the Wellington hills. They basically have owned tens of thousands of houses worth of land within city limits for decades and build a new suburb about once a decade, eg. Churton Park.
Getting Councils to switch rates to land value only would provide better productivity benefits than a vacant land tax - it would be a lot harder to avoid. Although LVT is not a panacea, at the margin it would help with NZs unproductive speculative investment in land/ housing crisis problem (as would liberalising zoning and improving infrastructure funding and financing). Shifting the tax burden onto residential land and away from improvements (homes, buildings etc) would incentivise the investment in improvements.
Detroit in the US is attempting this. If the plan passes through the lawmaking process then 97% of households will get a reduction in local govt property tax. The political deal is no residential household will pay more property tax. The extra tax burden is planned to go on abandoned buildings, empty lots, car parks etc.
https://www.niskanencenter.org/detroit-could-be-the-largest-u-s-city-wi…
re ... "Where do you draw the line between "vacant" and "occupied"?
What gives you the right to determine that is where such a line is?"
We have already granted this right to Councils who using zoning controls (that affect the rates you pay) and to central government through the Public Works Act (or whatever it's called now) to forcibly acquire land. And the RMA can be used too in some situations.
Yes, what it also will do is force developers to market even if the market tanked.
The opposite equivalent to a market where one side makes speculative capital gains is not first homebuyers being able to afford housing because other people go bust.
When will the command and control types realise they are the worst in world in making he market function properly so we have affordable housing.
So developers who own large blocks of land who are releasing land as and when demand dictates will have to pay tax on the unsold land, which then gets built into the price of that land, so that the next stages of land release will be ever more expensive than the earlier one. Since all developers are affected, competition will not change anything, all developers will raise the cost of land simultaneously. Even if the developers did release all their land at once, the only thing that will happen is that the buyers will wear the cost of the land tax as it will be impossible to build 20-30 years of housing in just 2 years.
Good in theory but of course they don't release land as demand dictates because demand has been sky high the past 10-20 years and those with valuable land continue to drip feed the market. That's of course in their collective best interests balancing their holding costs against future profits and the need to make maximum money. Adding a vacant tax just rebalances the sell now vs sell later calculation and maybe leads some to either sell now or at least make their land habited by eg. tiny home communities. The net societal benefit of encouraging them to use their resource sooner should be there.
Whether the cost of folding the tax into the land at sale ends up being more than the appreciation of the land held longer is the question. These guys are in competition against the developers who knock stuff down and intensify, so in a way the greenfields land does have competition keeping sale prices in check. If enough large landholders decide to get out to avoid a tax, then the cartel folds and landbanking ceases to be a good business to be in.
The price however in a competitive environment is dictated by supply and demand. The point of the policy is to get them to sell it quicker. When councils change rural land to urban for housing, thus increasing the rates on that land, it incentives those people to sell and they need to have the income to pay that tax.
But 'vacant' is not the same as 'underutilized'. This is also a core component of our 'productivity problem'.
I.e. an old house on a large inner city property. There are lots and lots of land-bankers in NZ doing exactly that. It's a reason why our cities sprawl.
An LVT works far better. We have them already (rates) albeit the current model actually rewards land-bankers.
And as you say, Terry, a LVT too can be "easily be flexed and adjusted both in terms of the annual rate, and the time of its introduction". (TOP and the Greens and TPM take note. Tone them down BUT GET THEM IN.)
Can anyone remember what life was like before GST? I can. And GST IMO made things better and (initially anyway) fairer.
(Oh, and GST was implemented by a fearless Labour government. Where have they gone? They need to think about why people like me didn't vote for them ... for the first time ever.)
No. We don't. Vested interests ensure we don't.
That said, it can be approximated as follows:
1. properties in and around CBDs and local hubs
2. owned by people or trusts, or companies involved in development
3. rented
4. owned for many years, or passed between landlords (see 2)
5. larger sections, 400sqm+ in close, 500sqm+ further out
6. little or no development apart from maintenance i.e. building consents for replacement
7. infill development at minimal cost
8. general state & upkeep at a minimum acceptable standard, or in commercial zones obviously underinvested
9. non-heritage zone or otherwise encumbered
I've done this analysis on quite a few locations in Auckland for various projects. And if the project looks viable, some door-knocking is done for confirmations. The results are staggering.
My own house's street, about 400m from a CBD & beach, I'd say 80-90% are rented and have been for many years. It's a scruffy street and the owner-occupier houses stand out as they are cared for. Surrounding streets are similar.
At the peak, land was going for $3,500-$4,500 per sqm.
Auckland is awash with excellent brown fields sites.
A well designed land value tax would sort this nonsense out in no time. (By well designed I'd recommend one rate of LVT for owner-occupiers and another for land bwankers.
>>A well designed land value tax would sort this nonsense out in no time. (By well designed I'd recommend one rate of LVT for owner-occupiers and another for land bwankers.
Might I recommend 1% base LVT, 1.5% for landlords, and 2% for landbanks. About time we did something to encourage homeownership and discourage landlording and landbanking.
For an LVT on all land you don't need to bother with 'the numbers', just logic.
It's a tax on underutilising a finite resource (land), so will encourage owners at the margin to do something more than they are currently doing (build/develop/rent/or sell to someone that will). There are other benefits on the tax front which I've explained at length to you previously too, such as non-resident overseas owners contributing to the tax take.
It's actually farmland that is being land banked by property developers. Farmland that has since been re-zoned by the council but still valid to be used for farming, and so a developer buys the farm and leases it back to the farmer. They do this in order to makle sure they have a supply of land that they can use for their property development activities, and that other property developers cannot use.
Labour, bless them, did quite a bit housing-wise. The MDRS, done with Judith and National, got people chattering a huge amount of nonsense.
But what you suggest, was done under the NPS-UD (National Policy Statement - Urban Development).
It requires the Councils of major cities to zone land within 800m(?) of CBDs and/or transport hubs for 6-8 stories. The NPS-UD specifies a timeline and Auckland Council is complying. (Auckland had a major head start as the Council did much of the work in 2016 when they did new Unitary Plan.) I'm a bit out of touch but I think it's called Plan Change 78.
I think it's okay for it to be either...either you do something to make better use the land, or, you have self-selected to pay for the betterment of society in other ways via paying more tax that could be used for education spending etc.
That said, in terms of housing affordability, other variables such as immigration will blow any 'reduction in house prices' out of the water.
The reason for doing it is to make housing more affordable, if it's not for that it is only making housing more unaffordable and the money taken can be used only any bureaucracy they like and the whole thing is a shame.
Also if you have the right land use policies and a sensible immigration policy, then immigration does not add to an increase as the evidence shows in jurisdictions where this happens.
I think it will make housing more affordable, but I could live with either housing more affordable or tax burden shifted onto land holders (so housing might stay the same but you'd effectively be getting a reduction in taxation elsewhere). Therefore overall, more disposable income for the average person. I don't see the need for housing to be more affordable for the policy to have been a 'win' for the average person (even though I think it will do that). That said, I'm for a wider LVT than one on just vacant land.
True, it would be nice to have balance with affordable houses and I have sympathy for your land use posts - like LVT I see them as part of a long-term solution to making NZ livable for the average person. I don't think we're close to a sensible immigration policy - not even sure why we're trying to grow the population at this point. Until immigration is reduced to what we can physically cope with in the present, it remains a larger driver here (and probably Aussie too) than any land tax at 1% will accomplish.
That's right. It won't make a difference and that was the question I asked in my first comment about the Aussies doing it ie 'show me the evidence.'
But it was slightly rhetorical in that I know the answer is that it does not make a difference and to think some people might get some of it back in some other form is a con.
In effect they take your money and maybe give some of it back after deducting their bureaucratic fee.
The irony about finding a solution is to go and learn off those jurisdictions that have affordable housing, not hang out and compare notes with other housing losers like Australia that don't.
Actually the highest rate of child abuse in NZ was from church groups and medical institutions who pay little to no tax and seek to avoid future taxes. 250000+ children and counting. Just look at the number Gloriavale affects on a daily basis compared with the rest of the country. The Royal Commission on Abuse in care has some absolutely tragic reading including children sold for rape, electroshocking childrens genitals, churches moving pedophiles around to avoid scrutiny and expose them to more children, teeth removed without pain relief to make force feeding easier, death from neglect and denial of medical care etc. But hey lets not use the hundreds of thousands untold suffering of children for a poorly reasoned baseless argument.
Nope, there is a whole chain of human thinking from child rearing to tax policies that are principally reactive and immediately reaches for the stick rather than the carrot to solve a problem.
The author of the article has come up with a punitive tax as a first response to a problem which there is no evidence to show it works http://www.demographia.com/dhi.pdf page 9.
It's this, 'they do what makes them feel good' or what is built into their ideological DNA, rather than what the evidence shows that is the problem.
You didn't put any evidence forward. You just said a blanket statement that equated people who smack children being the same as those that want to change the tax system. Then doubled down on that with more logical fallacies and given us a document that describes the medium multiple. Form a logical argument without resorting to emotional drama and relying on fallacious arguments and we might get somewhere?
No I didn't. A change in the tax system could have been to reduce land tax, or not to change it at all. The point is that some people's reaction to a problem is always a punitive response.
And it's not my problem you cannot read the evidence, but let me break it down for you. The Demograhia report shows that house prices are less affordable in Victoria compared to most states, even though the wage differential is not that different, which then gives a difference in the median multiple ratios. If the vacant land tax worked, you would expect it to help make housing more affordable, which it clearly is not.
Further, if you look at the Texan median multiple, it is one of the most affordable in the world, and they don't have a vacant land tax.
So where is the evidence that a vacant land tax makes housing more affordable? The evidence would suggest it makes no difference, or makes it worse.
Add AirBNB and Vacant Home Taxes to the list. But the question should be why these taxes including Vacant Land Tax not already exist, considering all the land banking that goes on. Real Estate agents even advertise a small residential section in a new subdivision as a possible land banking opportunity. That just is not right when we have a shortage of houses, and that land should be used to build a new house on it as soon as possible due to the housing crisis
vacant tax does reduce vacancies, I suppose that's the argument. except vacancies are constant and normal in all economies, of all things. now if you tax vacant house, why not tax vacant offices too? then tax vacant live stock as they should be on the table, and so on.
You see the problem? tax vacancy will reduce vacancy, and one day vacancy will disappear, then what?
By the way, when was last time you see someone intentionally get their house vacant for vacancy's sake?
again, since when does this country fix all problems by taxing it? you have a short of rentals, you tax landlords more, if you short of roads, you tax petrol more. I suppose if you tax bulls for unpregnancy, you get more calves?
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