By Geoff Simmons*
Capital gains tax is often put forward as a potential solution to the housing crisis.
However, recent evidence shows that our de facto capital gains tax – the ‘bright line test’ – is not quenching the market.
This accords with overseas evidence that capital gains taxes have little impact on housing speculation, and can even be economically damaging.
This is particularly the case when owner occupied housing is exempt from a capital gains tax. For these reasons the Morgan Foundation has proposed a Comprehensive Capital Income Tax (CCIT) instead. A CCIT would be more effective at both stemming speculation and making sure that as a nation we invested in the most productive assets.
Bright Line Test not deterring speculation
Last weekend’s Q&A revealed that the most common length of time for an Aucklander to hold a property at the moment is less than one year, followed by 2-3 years, then 1-2 years. Under the ‘bright line test’ the Government passed last year, anyone holding a property for less than 2 years has to pay capital gains tax when they sell, though owner-occupiers are exempt.
As was discussed on Q&A this shows that investors are willing to pay tax on their gains instead of waiting for 2 years to cash in. In other words, the bright line test is not deterring speculation in the Auckland housing market. Investors are happy to pay the tax on the stellar capital gains they are seeing.
Capital gains taxes don’t stop speculation
This insight puts pay to the idea that a capital gains tax would end speculation in our housing market. It might make a small dent, but it certainly won’t stop it in its tracks.
This accords well with overseas experience. A capital gains tax has done little to prevent housing bubbles overseas. At best it slows the bubble or prevents it getting bigger than it would. There are three reasons for this; capital gains taxes can be easily avoided, they usually exempt owner-occupiers, and a capital gains tax is just one of the many tax loopholes associated with housing.
Avoiding capital gains
There is one easy way to avoid paying a capital gains tax – or in fact any other tax based on a financial transaction – simply don’t sell.
It is well documented overseas that capital gains taxes distort the market by encouraging people not to sell their houses. In other words if you don’t make the sale, you don’t pay the tax. The trouble is that selling is sometimes the best option – anything that discourages selling means that expensive assets can end up being used in a less than ideal way. Economists have long singled out capital gains taxes and stamp duties as a handbrake to ensuring assets end up in the right hands.
A Comprehensive Capital Income Tax on the other hand doesn’t discourage assets from changing hands. In fact, they encourage all investments to be used in the most efficient way possible, rather than as a way to minimise a tax bill.
Owner-occupier exemption
Most proponents of a capital gains tax want to exclude the family home; an approach that is commonplace overseas. The trouble is that this hugely reduces the effectiveness of a capital gains tax.
Even with the growth in interest from investors in the Auckland housing market, they are still only purchasing 45% of homes. Nationwide some 65% of households own their own home, still the majority of the market. While some people might consider owner occupiers as more ‘worthy’ owners of a property than investors, any tax is going to be far less effective if it excludes the majority of the market. Owner-occupiers – whether buying their first home or moving – are adding to the speculative bubble like every other buyer. When someone makes a capital gain on the family home that is income like any other.
As we have seen overseas, any exemption in a tax makes it far less effective, particularly an exemption this large. Rich people can afford accountants, so they are far better at exploiting exemptions than the average taxpayer. To be effective, a tax system has to be kept simple.
There are other loopholes
Capital gains is just one of the many loopholes associated with land and housing. The ability for owners to write off expenses – even to the extent of making tax losses that reduce their taxable income – is another. However the big tax loophole is imputed rental – the benefit you get from living in a house. This concept is well accepted in economics and is even included in our national GDP accounts. Imputed rental is at least partially taxed in some countries.
To explain the concept try this little mind experiment. Imagine you have $1m and need a place to live. You have a choice – buy a house in Auckland or put the money in the bank and use the interest to pay your rent. If you buy a house you get the shelter and you pay no tax. If you put the money in the bank you pay tax on your interest before you pay your rent.
These other loopholes are important drivers of the demand for housing, both here and around the world. How we deal with them is at least as important as how we deal with capital gains. Our proposal of a Comprehensive Capital Income Tax closes all these loopholes at the same time, putting housing on an equal footing with other investments.
Ultimately what we want to see is stable house prices. Housing should be seen as a place to live rather than a speculative investment. Instead of getting rich by buying houses off each other, our money should be invested in things that are actually going to earn us a real return in the world. A CCIT is the most effective way to achieve all that.
Geoff Simmons is a senior economist at the Morgan Foundation. This article was first published on the Morgan Foundation blog and is re-published here with permission.
42 Comments
Yeah..nah.
Also from the Q&A:
JONNO And if you look at Auckland, the most common length of time for an Aucklander to hold their property for is less than one year, followed by two to three years, followed by one to two years, and then eight years, which is kind of normal in a market. Eight years is a distant fourth.
I find this really hard to believe from experience, observation and the fact commissions are so high. Are they sure about that?
I agree, Ingerson inserted a complicated and detailed stat into the conversation which doesn't mean what it seems on the surface, and which far too many people misinterpreted and jumped to conclusions over. Firstly, he was talking about Auckland "investors" only, secondly, any of the bands he mentioned are each tiny, so calling one 'the most common' is not the same as 'the majority'. Far from it. It is all quite misleading when repeated by others who miss out the original context and skip other related aspects.
Check below for more about Capial Gain
http://www.nbr.co.nz/article/book-extract-home-truths-–-confronting-new-zealand’s-housing-crisis-183320
Adding "housing" (by which I think you mean house prices) would be a huge mistake.
Firstly houses are not bought and sold as part of the normal person's living expenses. There are 1.8 million private houses in New Zealand, and 94,200 of them sold in the past year. 79,900 were sold in the year before. That means, roughly, people buy a house every 20 years or so.
What is a normal living expense is 'rent' and that is in the CPI. Also, interest on a mortgage is also a normal living expense, and that is also in the CPI. As are Rates, and property maintenance costs.
Buying a house is an infrequent capital purchase and should not be in the CPI. Nor should the price of a car, or the investment in KiwiSaver, or any other big, one-off, infrequent purchase.
Let's not twist the CPI to be a political plaything, adjusted to match a special agenda.
You know what's a real huge mistake? Allowing any nations means of basic exchange (fiat currency) to be speculated on for profit. How does that help anyone other than the likes of JK and his parasitic ilk?
House price inflation IS still inflationary as it devalues our buying power using our fiat currency, thus people are forced to borrow more and more each cycle for in most cases the exact same housing stock David. A road to no where, false economy. Perpetual debt and just plain stupid economics. How did the 2008 gfc come about again? Short memories
Didn't we ? Some of that might be due to the rbnz doing a massive credit default swap with the U.S. Fed. Some of that might be to do with our banks not doing sub primes. But the interesting thing BR is the fact that since 2008 NZ's private debt has continued to balloon along with our government debt. Payback will be required and fly only dependent on keeping our housing and property market booming with foreign capital to back that continued borrowing. When it no longer does.....the illusion of economic growth is over along with the debt binge party
I don't disagree about our ballooning debt - my comment was an observation that New Zealand didn't really suffer the full effects of the GFC - New Zealand went sideways a bit - New Zealand didn't suffer a major collapse like 1987 - by good luck as much as anything else.
whist I agree the house purchase should not be in the CPI, the living expenses related to housing should be reweighted in the CPI to reflect where peoples wages are going.
many many people are spending a lot more than the cpi weighting and it needs to be updated.
after all that is the biggest expense for most people except those of us that are mortgage free which I would expect to be a tiny minority
The CPI is badly put together, it should reflect monthly costs, Which should incude housing, in the form of rent/ lease or mortgage and rates.. .Which.. as you point out are included.. but... These costs are more than 50% of my monthly incoming.. the "housing" is not fairly represented. I have not brought a TV for ten years, should electronics be included in the CPI?
Most of my bills are also influenced by "housing" power, water, building materials and maintenance compliance costs, all up up there and another 20% of my incomings.. and just because it has not gone up in the last year, does not mean it is not overpriced... Lets make the CPI up out of those costs and see what it looks like over the last 20 years.
Should be enough left over to keep the car running and buy a pie.. pies are bad for me.. but a deceitful CPI is worse.
Its just a mess and I don't think the solution should have been an increases in tax and bureaucracy (which now seems unavoidable).
In regards to the current CPI/OCR, we have lowered the OCR and got a massive increase in house prices, if we were to raise the OCR, would we now see a corresponding increase in the CPI? In which case we have to...
Seems to me, we may not see the OCR ever (dramatically) increase.
Should definitely do it like Australia add STAMPDUTY to Non Resident buying in the country.
We will have to so why the delay. Why is govt so afraid of Chinese or do they have any secret understanding with them that we arenot aware of otherwise why would each and every memember of government come out in defence, of their overseas friends at the cost of newzealander.
Drfinitely something is not right and opposition is to weak and media is literally does not exesit or too much in awe of goovernment or obliged.
Media should stand up but may see an article here and their but no persistence hard question to the government. Even if they do ask and minister replies even though the ans is not satifactoryor a lie, the journalist does no go after with counter qyestion in fear of upsetting the minister.
Media is the fourth strong pillar of democracy.
Media and opposition should play their role otherwise govt intoxicated with piwer and arrogence will behave the way they sre doing now.
Should definitely do it like Australia add STAMPDUTY to Mon Resident buying in the country.
We will have to so why the delay. Why is govt so afraid of Chinese or do they have any secret understanding with them that we arenot aware of otherwise why would each and every memember of government come out in defence, of their overseas friends at the cost of newzealander.
Drfinitely something is not right and opposition is to weak and media is literally does not exesit or too much in awe of goovernment or obliged.
Media should stand up but may see an article here and their but no persistence hard question to the government. Even if they do ask and minister replies even though the ans is not satifactoryor a lie, the journalist does no go after with counter qyestion in fear of upsetting the minister.
Media is the fourth strong pillar of democracy.
Media and opposition should play their role otherwise govt intoxicated with piwer and arrogence will behave the way they sre doing now.
Too often, those who should know better, those who should do better homework, burst into print with mis-information saying "overseas evidence that capital gains taxes have little impact" with most others saying it doesn't work at all
I disagree with those nay-sayers - it has a very powerful effect on financial decisions
Here is one simple example - and it is only one example
Gina Rinehart and the Hope Downs Trust controlling the families wealth reached its time of vesting to the grand-children of Lang Hancock, the transfer of which would invoke CGT rules which resulted in The celebrated case of a billionaire going to extraordinary and costly lengths to avoid paying capital gains tax
Reported in ABC June 2015
http://www.abc.net.au/news/2013-10-02/rinehart-feud/4994280
Reported in NZ Herald May 2015
$5 billion family dispute revolved around avoidance of Capital Gains Tax
Mrs Rinehart said if the trust, which listed her children as beneficiaries, vested they would become liable to pay capital gains trust and they would become bankrupt
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=114…
The Morgan Foundation ( aka Garath Morgan et al) obviously has too much time on its hands and too much (untaxed) money to play with.
They have been banging away at this subject for years in one form or another and the response has always been the same- a big fat raspberry.
It might have a use as good bed time reading as it will guarantee a sound nights sleep within minutes of ones head hitting the pillow.
How would a CCIT affect the mentality of the guy who flys in from Shanghai and buys 20 houses in a day? It wouldn’t affect them at all. Seriously my friend was at an on site auction a few weeks ago in Swanson. The guy with his ear to the phone ,who incidentally won the auction, was badgering the auctioneer to hurry up. I guess the proxy bidder had lots of other houses to buy that day. The auctioneer got really annoyed and scolded the proxy “I’m here for the vendor and all the bidders not just for you!”.
Conversely in the provinces I imagine that a CCIT would cause dramatic reductions in house prices and a lot of financial hardship.. Even just talking about CCIT’s and debt or value to income ratios makes me want to sell my houses in the provinces and buy in Auckland.
What is it with these Morgan Foundation fellows? They do seem a most miserable bunch. These are real fundamental issues that they treat as a sort of intellectual academic competition to promote the answers that support their political beliefs. Their political beliefs being that they are cleverer than those who disagree with them, and should therefore be in charge of everyone and everything. Are they a miserable bunch who want to tell everyone else what to do, or is it just me?
They ignore the subject of immigration of people and money which seems to be the cause of our perpetual current account deficit and reliance on property boom and bust as a business model. They ignore that the world has moved on from their simplistic leftist "them and us" ideas. The discussion isn't about the rich or the poor, it is about what has happened to the middle, the decent core of society. Have the policies we have adopted advanced their lot and the lot of the median member of society, or do we have eternal stagnation based on a fundamentally flawed business model that prioritises wealth transfer over wealth creation?
Capital Tax Gain helps or does not help does it matter as National party is not interested in doing anything for it is in their interst for the bubble to continue. Infact are trying all resorces at their end to deny and delay any measures to curb speculation as they too know when the bubble will burst it will be very hard and with election comming their only hope and agenda is to delay it atleast till next election otherwise whateve little chance they have will be gone but they do not realise more the delay in action more the anguish in people and more chances of being kick out specially when they come out to defend a lie with insesitive rubbish statement being about homeless that they do no want help or statement like people wanting to rent by choice or affordability of housing - arrogency and absolute power in absence of personal accountability has made their thinking total corrupt. What else can you say when the so called leaders are so immune to the feeling of people of NZ in favour of their foreign friends. Question is that do they really feel for Kiwi as a leader or are only good salesmen who are not concerned with overall welfare of Kiwi
Canada's housing 'affordability crisis' fueled by overseas money, Trudeau says Not a statement coming soon from our guy in Wellington, eh?
https://www.theguardian.com/world/2016/jun/17/canada-housing-prices-van…
A True leader will always speak truth unlike ours who hide behind faulty data as it suits them. Any Tom, Harry and even Dick kmows the truth and does not need data to congirm.
U
Not much is needed, you just gave to ho to any open home, auction or just ask any estate agrnt and will vouch that the narket is in bubble because of asian buyers.
If the govt have guts and really want the truth, ask them to get the data of all non resident buyer ( foreign/overseas money) . In fact as now, no one trust government best is to get data under high court judge supervision so that is not manipalatedby the govt with vested interest.
Salute to PM of Canada of teling the truth and feel ashamed of ours for lieng and not listing to the voice of the people of NZ
Remember that this is just not my voice but is the feeling of major kiwis.
Australia has admited and now Canada has accepted, when will our govt stand up and accept. WHY THE DENIAL WHICH IS SO OBIVIOUS AND IN PUBLIC DOMAIN.
Better late than never Mr PM.
Shut everyones mouth Mr PM by bringing fact to the table by a comitee or agency that can be trusted.
Shhame National Government for if our government was proactive in the interest of NewZealanders this situation and question would not have arise.
It is just bad luck of our young generation that they haven been living in time when National Party was in government. Less said the better.
We should all apologise to young generation for voting national party and ruining their future.
To own their own house they will have to leave NZ as wages by workjng in NZ will not support them to buy a house leave aside dream home unless they have reach parents like our member of parliment or prooperty spevulator
Thanks to National Party.
Regardless of the issues of supply, demand and all other side issues, this still does not get past the point that some are enjoying tax free income/profit, and that isn't just. So if you want a society where all people are treated equally and people respect the country's governance, then the tax free gains and loop holes must be addressed.
Capital Gians may or may not affect prices. However, at good chunk of cap gain is due to infrastructure the home is connected to. Thus why should the seller pocket all of this gain, surely some should be paid off to local councils in recognition that council infrastructure servicing said property is a major part in this value increase?
None of the commentary talks about OOs "Owner-occupiers – whether buying their first home or moving – are adding to the speculative bubble like every other buyer. When someone makes a capital gain on the family home that is income like any other." Young people getting into a home use any gain to finance a bigger and better home as their family grows. This is a model where the forced fiscal discipline that owning a home requires supports family growth and security. The "rent" that is paid is the mortgage, rates insurance and maintenance. Any CGT effectively discourages this occurring. However there are young people getting on the investment/speculation bandwagon and the brightline test should deal that effectively, although i personally believe the threshold should be 10 years, not 2. So generally not in favour of CGT on owner occupiers where they live in the property for a significant period of time.
What Geoff has to say to author of the below article. Check link
http://www.nbr.co.nz/article/book-extract-home-truths-–-confronting-new-zealand’s-housing-crisis-183320
Partly correct that no one measure could stop the housing bubble. It has to be combination of measure required to tackle the house bubble more speculation but where is the will on the part of the government.
Total Denial means that the government is not interested in solving the Housing Crisis and less said the better about the current government.
Atleast in other developed countries everywhere, the leaders have accepted that the buuble is the result of overseas Chinese Money - not even saying overseas money but are being direct and if one wants to save the economy has to diagnose and accept.
More the denial more the national party is being exposed to the nation.
Any Govt intervention which causes the value of my property to decline will certainly be met with our family voting against the Govt who invokes it. We will not be the only ones in this position either.
A CGT with an exemption on the family home will allow us to continue to purchase, do up and sell the family home, therefore that proposal receives our vote of approval.
Hi Geoff, One of my friend just raised a very valid point and am asking a question to all experts. Why has no journalist or anyone in opposition and media have asked for review of the overseas data as the National Party action or inaction on Housing Bubble is based on the that overseas data (3% Overseas buyer) that was released earlier and by the agencies own admission that data was faulty.
If the data is not correct and faulty than the national party policy which is based on that faulty data will also be faulty. So how come no one has ever raised the issue of getting the correct data as am sure Housing Crisis is a major concern to all economically as well as socially and getting the correct information from the buyers should not be much of a task.
Only because it suits the national party to hide behind the faulty data and justify their inaction, should not be acceptable to any journalist and kiwi. In future if the data is collected without manipulation and truth is out and otherwise (which will be) National party instead of being sorry will be themself and blame the agency for the fault as blames lies everywhere except them and their foreign friends.
Please raise issue for the correct data on overseas/Non Resident Buyer and that too without bias as we the New Zealanders have a right to know the truth.
If that data is wrong, The policy of national party to tackle the housing Crisis is wrong.
The question is more relevant now after the admission of Australia and Canada and also has to be something for the banks to take action.
Don't punish NZ'ers with extra taxes, to solve a problem caused by selling NZ property on the world market.
It won't solve the problem, it will make it worse.
Solve the problem by ending foreign sales.
John Keys Government has a sell out agenda. Step up opposition parties, show some leadership. Talk to the people.
Targeted Stamp duty on investors and foreign persons. Follow Australia and UK and target Investors.
Give first home buyers and owner occupiers an advantage over investors and temp residents. Have the stamp duty high enough to reduce their demand (10%). Imagine investors having to pay 100k tax on an average priced auckland house. Watch them bolt. Demand supply crisis finished. Make new homes exempt to encourage supply.
Job done right.
Toma the data was OK. It showed foreign persons bought 39% of property.
4% foreign person based offshore
35% foreign persons were temp workers on visas and and students foreign.
Nothing wrong with the data it is just how the media reported it.
Media are happy when it's biggest advertisers are happy.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.