By Bernard Hickey
Watching the last week's debate over Chinese buyers of Auckland property was like watching a bomb go off inside the politics of our economy.
We all knew this issue was ready to go off and we all hoped it would be a controlled explosion where it was debated with good data and an exchange of considered views that built a measured policy.
Instead, Labour lit the fuse on a jury-rigged device and threw it into a shopping mall of opinions with sadly predictable results. Firstly, the thrower lost a few fingers as party members resigned and supporters understandably accused it of racial profiling and half-baked analysis. The wider damage to race relations and trade relations with China could be significant.
But it didn't have to be this way. The Government's refusal to either acknowledge the weight of non-resident capital flooding into Auckland or try to measure is at least partly to blame for the quality of the debate. It created a vacuum into which first anecdote and now information that is barely more than 'anecdata' has been sucked in.
The negligence and hypocrisy of the Government on the issue is barely believable. For years we have been asking for the Government to address the issue. It denied there was an issue, pointing to equally flawed anecdata from IRD in its defence suggesting just 2.5% of rental properties were owned by non-residents. It then attacked anyone who tried to collect their own data, including the BNZ's Tony Alexander. Yet it knew this was a major issue in overseas markets, including in Melbourne, Sydney, Singapore, Hong Kong, Vancouver and London. Governments there collected the data and have taken policy action in various forms to stem the tide of capital inflating values in their markets, including imposing buyer restrictions, stamp duties and tougher migration rules.
Anyone remotely aware of what has been going on inside parts of Auckland's housing market over the last three years will know something is going on, but until now has not been able to measure it. As flawed and as incomplete as Labour's data and analysis was, it was at least something to start a debate that was badly needed, even though the gusto with which it was thrown and the bag of nails it was wrapped in was not attractive and caused more damage than was necessary.
So now the debate has started, let's come up with some sensible policy options.
The first cab off the rank is the Australian-style restrictions that would force non-residents to buy either brand-new homes or apartments and town-houses off the plan, but not existing homes. It's certainly working to finance apartment building booms in Sydney and Melbourne with 25% of all new homes bought by non-residents in the last year, but widespread non-compliance by buyers of existing homes has forced the Government there to threaten big fines and jail sentences. It may have stemmed the flow somewhat, with Sydney house prices up 'only' 43% in the last three years. Auckland's prices have risen 54% over that time.
But such a nuanced ban may prove difficult to enforce alongside our various trade agreements. They specify that New Zealand has to treat all foreign investors the same, but our CER deal with Australia means Australians have to be allowed to invest freely, which would mean they were preferred over other non-residents. There is debate over this, but it wouldn't be easy.
Another simpler option already used in Singapore and Hong Kong is a stamp duty on non-resident buying of homes. This would apply to all non-residents, including Australians, and doesn't seem to cramp the free-trading style of Singapore and Hong Kong, who have massive trade and investment links with China. Beijing-based macroeconomic adviser Rodney Jones suggested a 20% stamp duty this week, although keeping it in line with the 15% rates used in Hong Kong and Singapore would seem sensible. Treasury made clear in its (albeit heavily redacted) advice to the Government before the Budget that taxation measures covering non-residents were exempted under Free Trade Agreements.
Another way to stem the external and internal tides of capital pushing up prices in Auckland is an 'Auckland Investor Levy', as proposed by Treasury in its frenzy of policy suggestions just before the Budget. It would see a 1% levy imposed on the capital values of rental properties, which would be worth NZ$1.25 billion a year at QV's current valuation of Auckland rental properties of NZ$125 billion. It would also be colour blind.
Treasury suggested it could be collected by Auckland Council, who could retain some of the tax and invest it directly in the infrastructure needed for new housing, including roads, rail, water and public transport. That would at least stun two birds with one stone. Such a tax would also seem an eminently sensible and fair way to suck some of the air out of the rampant demand pushing into a market that the Productivity Commission has estimated will be under-supplied to the tune of 60,000 houses by 2020.
An Auckland investor levy and/or a non-resident stamp duty are perfectly conventional policy options that no one could accuse of being racist or radical. Now that wasn't that hard was it? If only the Government had started collecting some real data three years ago this debate would have been much less painful
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A version of this article has also appeared in the Herald on Sunday. It is here with permission.
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