Gareth Morgan responds to the critics of his five-point plan for housing. Your view?

“favourable tax treatment of housing …should be removed” (OECD Economic Surveys of New Zealand April 2011)

By Gareth Morgan*

My 5 point plan for housing has prompted a fair bit of debate and I’d like to respond to the points people have made.

Let’s start by clearing up one thing about housing as an investment.

I am not anti-housing as an investment, I own several.

How many do I need to buy to make that clear?

Would I own the same number if the tax and finance playing fields were levelled? Yes.

But currently the tax system is not fair – it favours housing.

Now let’s talk about tax.

Independent tax reviews commissioned by New Zealand governments since the 1960s have consistently identified the failure to tax housing as a major problem in the tax system.

That governments have consistently failed to implement this independent advice is an indictment on the over-riding self-interest of our political leaders and the wilful ignorance of the voting public.

New Zealand stands out a mile on this issue, given most countries have some sort of tax on housing.

In its most recent report on New Zealand the OECD said the failure to tax housing needs to be addressed. Sorry, but I don’t agree that we can keep our head in the sand over this issue any longer:

“favourable tax treatment of housing …should be removed” (OECD Economic Surveys of New Zealand April 2011).

What I propose is a wealth tax against which income tax is credited.

This would not see  anyone who already pays their full share of income tax  pay more – structured properly the wealth tax would simply close loopholes wherein some can increment their wealth and not pay tax on that increment, and others can’t. You can find more details of this wealth tax proposal here, which we recommend as part of wider tax and welfare reform.

High density development

What about the potential value of high density development, an issue which seems to truly animate the land-obsessed New Zealand public?

The 2011 Mercer Survey on the best cities to live in, ranked Auckland as third best city in the world. That is a laudable achievement and well-deserved. Of the other cities making up the top ten, only Vancouver had a lower population density (more urban sprawl) than Auckland.

Top ranking Vienna had a population density of 4,000 people per square kilometre which is a mile from the highest density area of Auckland (the North Shore at 1,581 people). Other top-ten cities included Zurich (close to 4,000), Munich (4,280), Geneva (4,101) and Sydney (maxing out at 8,800 people per square kilometre in Sydney East and 7,900 in Sydney West).

You get the picture?

High density cities can be very liveable and attractive indeed.

I think everybody would agree that thus far neither Auckland’s municipal leaders, developers and their bankers nor the residents of Auckland have had to seriously consider the potential of accommodation options other sprawling out and building houses over the hills and far away.

But land prices have now reached a level which should be focusing minds on new solutions.

Inner city living done well has huge potential – as evidenced by the quality of life delivered by European cities like Vienna and Zurich.- and it is a hell of a lot cheaper to service.  We should be thinking about how we can connect that potential to the natural wealth of Auckland and other cities in New Zealand.

The true costs

My comments about making user pays principles apply to new subdivisions is designed to reveal the true price of urban sprawl. If the potential buyers saw the true cost then they wouldn’t be so keen to pay the true price.

By councils masking this in the rates bills for the city, they end up subsidising new buyers who should be paying the true marginal costs – Economics 101.

Anyway the arguments are robust, New Zealand needs to face up to the gross distortion to GDP, incomes and jobs brought about by these policies that favour housing over all other types of investment.

Until we do expect the obvious result from misallocating investment capital, unnecessarily lower incomes and fewer jobs.


Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. This opinion piece was first published on his new blog and is reprinted here with permission.

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I have just finished Michael Hudson's latest book "The Bubble and Beyond" and he makes a strong case for the fact that interest payments to the finacial sector are in essence extractive and contribute poorly to organic production and wealth.
If I read correctly most of the money people are paying banks in interest is simply geared up and relent as more mortgages and so the price of housing is a derivative of lending standards/interest rates. Are we getting richer though?
Unemployment is high, overcapacity is all around and the connection between producers and consumers seems to be dysfunctional. I really see the financial sector as a toll booth on true wealth and growth.
The book goes on to claim there is no real alternate debate to "Chicago" style monetarism and that all countries are creditor favourable to the detriment of whole populations contrary to  early economic thought and debate.
I would be interested in Gareth's opinion on Mr Hudson's thoughts around this issue.


Agree...funny how the property ponzists are all so hugely opposed...

Good to get a reply to the feedback - but he hasnt addressed the elephant in the room.
(aka the wookie attached to his lip)

If I recall, Gareth, you said some time ago that the (then) tax treatment on rental property (noting that since depreciation amendments have been made) were the "crumbs" thrown to the poor mugs that are PAYE tax payers.
Which I took to mean that, for those whose earnings were largely as wage and salary workers, they only had what are/were poor at best 'opportunities' to minimise their tax bill. Poor in the sense that unless unrealised capital gains continued at then present rates - the 'opportunity' of owning a few rentals was marginal if not loss making - and of course there is always the risk associated with highly leveraged borrowing if used to take advantage of this 'opportunity'.
I largely agreed with these observations - if that was the point you were making.
So, in terms of the wealth tax proposed which will capture all these PAYE subject income earners who have attempted (perhaps in vain) to improve their tax situation, as well as all the other PAYE subject earners - what is offered as a means to give them the break you implied they deserved?
Point I'm making is - that if such a 'wealth tax' were introduced WITHOUT the corresponding GMI (or some similar tax free threshold type measure) as proposed in the BK - would it not be likely that the worst affected by such a wealth tax would be the least wealthy - that is those PAYE payers having the one "crumb" removed?

Morgan is out of touch with reality.
The suggested Comprehensive Capital Tax is unworkable - to be fair someone who had money invested in an on call bank account (at 1.5%) would potential pay more tax on it than the income they derived from it!  (ie you get penalised for holding money in an account - cash in the mattress may be the way to go!).  So in reality the CCT could not really be higher the going term deposit rate (say 4.0% at present) - and even our Ponsonby and Mt Eden villas return a lot more than that even compared to current super high market values.
Property investors who own high yielding properties would not be disadvantaged at all, and the utter complexity of calculating the true capital value of a property and taxing on that basis would be inconceivable and incomprehensible for the tax department.  Let alone the terrible unfairness on the elderly and low income earners who've lived on their land for years.
In reality it would make not one iota of difference to my main rental properties.  The only properties it would penalise would be the likes of the small coastal native forest block I own which only has a botanical (conservation) purpose (for me) and has no productive use - but if such a tax existed, I never ever intend selling it (as I paid virtually nothing for it but the value is now high) but if there was a punitive tax I might simply be forced to sell it in which case it would be cleared for grazing or turned into a lifestyle block.  And this is meant to transform our economy??  How??  By destroying the environment ... great work!
Morgan has failed to explain how property has some amazing tax free status.  It is absolutely no different to passively invested shares.
The simple solutions to make taxation on property fairer (if there is a perception of unfairness) is simply to tighten the current rules.
1.  Already if a property is rezoned and that rezoning substantially increases the value, then the gain is taxable.  Why not just enforce the current law!  Landbankers' capital gains are taxable if the zoning changes.  If the zoning doesn't change then there isn't any likely increase in value, so people aren't going to hold land just hoping for the market to move and not receive any income - if they wanted just normal market growth they would buy income producing property!
2.  The big issue in NZ is that people buy a property for a short period then sell hoping for a quick capital gain.  If it was made clear in tax law what period a property could be held for then people wouldn't trade so readily knowing their tax liabilities.  If say capital gain in the first year was taxed at higher rate, then after each subsequent year diminshed until after say 5 years no CGT was payable, it would completely slow the momentum of the quick flickers and buy sellers, and the only people participating in that activity would be paying their fair share of tax.  Long term owners (who we need to provide rental housing) would not be penalised and there wouldn't be the huge complications of monitoring what people paid and spent on properties over long time frames.  This is a simple solution without any huge costs involved in implementation.
Morgan completly confuses the issue of subdivision costs (as Hugh P would say confusers are losers!)  He doesn't understand that the council receiving a perpetual inflation adjusted income stream from a new rate payer (of say $2500PA) is easily equivalent to $50k plus capital contribution!  On top of that, the developer probably pays a cash development contribution of something like $30k.  Existing properties would never have contributed that much of their value to capital costs - they probably haven't even contributed that much to the provision of services in the buildings lifetime!  To suggest that existing properties somehow have some additional entitlement is ludicrous - on that basis we should demand immigrants pay back taxes for the years they were not in the country!  (And seriously perhaps they should pay something - but not $15k per working year of their life (ie $450k for a 50 year old) because that is the type of amount Morgan thinks councils should be asking for - the full cost of what would have been provided in rates for an existing property - perhaps $60-100k Gareth?  Right?
On the densification, what a waste of resources it is if densifying means demolishing thousands of perfectly good homes.
We need solutions, not stupidity.
Someone clearly drained the brains out of Morgan's think tank...

So in reality the CCT could not really be higher the going term deposit rate (say 4.0% at present) - and even our Ponsonby and Mt Eden villas return a lot more than that even compared to current super high market values.
The recommendation is 1.8% pa:

That's 1.8% tax, based on taxing a 6% return.
The problem is that savings in ALL capital should be taxable under this policy, so if you choose to invest term deposits and receive a 4% return then you will be paying 45% tax on your investment.  If you choose property and it's return is 6% (as most do except for prime central Auckland real estate) then you actually pay less tax.  If you buy shares then the capital there should be taxed too, so even if GMI made you an investment loss, then you still need to pay tax - good luck trying to get anybody to invest in NZ in those circumstances.
This is one utterly stupid policy.  Are gold bars taxable then?  So then too your jewellery and art?  What about your car and furniture?  How the heck is the value determined.
All unworkable, unfair and stupid.
The fact is that the market woud simply adjust, and all it creates is a period of unfairness until the market puts all returns above that 6% level - which is not difficult - rents just need to rise another 20% in Central Auckland and job done - most other places returns are above 6% anyway (and when you consider Government Valuations are always on the low side and behind the times, then there is no tax advantage to this stupid policy at all, except a whole lot of red tape and bureaucracy.
Stupid people with stupid ideas.  Only a lot of luck and self promotion got the Morgan loony tune where he is now. 

 rents just need to rise another 20% in Central Auckland and job done
What?  So those are the type of operational losses and/or low ROIs that rental investors are prepared to accept on the 'bet' that capital gains will continue?  Or have I misinterpreted that?

Sort of misinterpreted ...
What I mean is that this kind of policy would have the effect of pushing up rents and nothing much else.
Look what removal of depreciation has done to rents...
Some Christchurch rents are up 50% on 2 years ago and that's not just because of the quake.  Auckland is up too.

Whilst I agree that Gareth seems to have a screw loosening somewhere I think his rant about tax advantages of housing is a politically correct way of saying that a house owner pays no tax on the benefit in kind of ownership.
If a house is 100% owned then there is benefit in kind equal to the going rent for that property. In theory that is taxable but in practise it is not. So a home owner gets a tax free income whereas a business owner does not. If you own shares you are a business owner. In my book if you own a house you are a house business owner so I think his logic is sound but his grasp of politics is a little less.
Maybe that's what he means anyway, but his arguments are a bit tortuous and needlessly radical. I too grew up the seventies and love a radical solution, they are just so appealling. It's just that I now look for a less radical one that is more likely to work exactly because it is less disruptive. Death or glory is all very well but it means you have let things slip if that's your only option.

If you get rid of FRB daisy chining without the end the problem may be easier to fix......

Monetary Policy Regimes: a fragile consensus:

Gareth Morgan hasn't so much responded to the critics as simply repeated his claims and skirted around the arguments against his position.
For one thing, he hasn't even touched on urban land limits and how they distort the housing market.  He has also repeated his claim that fringe housing developments are "subsidised" despite numerous arguments to the contrary. 
Fringe sections around Auckland typically sell for a minimum of $200,000-$300,000.  I very much doubt it costs even close to that much per section to build the associated infrastructure, unless the roads and footpaths are made of gold perhaps.  Even if there was some subsidisation of infrastructure costs, this would be completely overwhelmed by the inflated cost of land.
Again Gareth has made Auckland out to be a low-density city but as I said previously, he's not comparing apples with apples.  The cities he mentions are all from Europe, which have centuries-old urban cores that are historically very dense but are seeing most of their growth in the suburbs.  It would be more appropriate to compare Auckland to cities in newer countries such as Australia, Canada and the US.
According to Demographia's world urban areas survey, discussed at the Transport Blog (, Auckland's urban area is denser than Sydney, New York and Vancouver, more than twice as dense as Brisbane and more than three times as dense as Atlanta.  The only city in the US denser than Auckland is Los Angeles.
Despite being less dense, Vancouver has even higher house prices than Auckland (Sydney does also).  It's not so much the density of the city that matters as the responsiveness of land supply.  A key point that Gareth misses is that keeping land prices at the fringe low actually works in favour of increased density in the CBD because it means land prices in the central city are also lower.  Witness Houston which has a number of massive skyscrapers.

Kleefer: It's called sleight of hand. Or, you could call it dishonesty. Or you could go further and call it "intellectual dishonesty". Here is a list of the top 50 densest cities in the world, and of the cities used by Gareth Morgan as benchmoarks, not one of them appear in the list.

Iconoclast: just to clarify, that list refers to "cities proper" whereas the Demographia survey I mentioned looks at urban areas.  For instance, New York city is extremely dense but is surrounded by thousands of square kilometres of sprawling suburbs.  However, I not that apart from Paris, the list is almost entirely made up of hellholes. 

Yeah, I saw that, but couldn't be bothered going any further into it ... because .. the slippery nature of Morgans treatise is that he refers specifically to "liveable cities" not "urban areas", and that is a subjective comparison anyway. That's what I meant by sleight of hand. And also why I posted the comment below about auckland being a frightening place. One contradicts the other. Morgan's articles are back-of-the-envelope thought-bubbles that lack intellectual rigour.

About 10 years ago I met a world traveller, a guy with the same physical characteristics and build and height as Bernard Hickey, and he said of all the cities in the world he has travelled to, Auckland was the one place he was scared shitless, (walking up Greys Avenue), menaced by a group of about 15 street kids.

A key point that Gareth misses is that keeping land prices at the fringe low actually works in favour of increased density in the CBD because it means land prices in the central city are also lower.
That doesn't make sense.  If land was more expensive then it is more likely that high rise buildings will be put on it to spread the cost of land, not the opposite as you claim.

It's not that simple.  PhilBest would probably explain this better than me, but what happens is that as land becomes more expensive it becomes harder to build apartments, office buildings etc at a profit.  In cities with very constrained land supplies the density increases can end up happening on the outskirts of the city where land costs are still high but much lower than in the CBD.  

Hi Andrew R – it does make sense because there is a direct correlation between the price of land on the fringe and the price of land in the centre. If you want cheaper land (relative) in the centre, then make it cheaper on the fringe.
Irrespective of the land value, if the amenity demand is there for high density housing, then build it, and now it can also be cheaper. That’s what the issue should be about, making all housing more affordable, not whether we should be high density or low density. The problem with the smart growth ideology is that in trying to force people into higher density by restrictive land policies, it forces up the price of land on the fringe which in turn forces up exponentially the price of all land back into the centre, making it more difficult for those that would like to live closer in to do so.

Quite frankly the talk about affordable housing is a fools game, the premise totally flawed from the outset. The only reason anyone gets into the land development game is to make a profit, completely counter to the concept of affordability. If you want affordability then you have to take the profit right out of it. All Phil, Hugh and Co are talking about is degrees of profit, who get it and how much.

Reduce waste costs like restrictive zoning, and council consenting proceedures and costs. This also reduce risks, less profit % but still enough to incentivise developers to build.
Equals more affordable housing.

No, it equals less expensive housing. I wouldn't call it affordable by any definition, so a fine but significant difference.
Less council costs just mean more profits for developers. Not that I am opposed to less bureacracy as the purchaser has better ability to negotiate with the developer than a council.

‘My comments about making user pays principles apply to new subdivisions is designed to reveal the true price of urban sprawl. If the potential buyers saw the true cost then they wouldn’t be so keen to pay the true price.’
Well Gareth, so far you have had two chances to reveal the true price of urban sprawl as quoted, but have failed to do so. Please name and quantify them. Enlighten us so we may not be so keen.

"But currently the tax system is not fair – it favours housing"
And Google, And Apple, And Microsoft, And the 1%.............................

Taxing all houses has the same effect as GST, spread the tax more so the poorest pay more.

Worse than that. ..  Impose a "wealth tax" tax right across the entire nation ... because Auckland has a housing problem .. now, why does auckland have a housing problem?

So Gareth , here's a question ... if we remove the Tax incentives for private investment in housing rental stock , who is going to house all the new immigrants  who cannot afford to buy an overpriced New Zealand home  when they arrive at Auckland Airport ?
The already over-indebted Government ?  Housing New Zealand ? I dont see this happening .
We know that buying a second house in Auckland as an investment is almost always cashflow  negative unless you stump up 50 %. With most Kiwi's not saving few if any have that kind of liquiditiy or spare cash lying around.
The truth is New Zealand needs a major structural reform to include a comprehensive package dealing  with immigration , housing affordability, land availability,   tax on property and related issues .
To tweek just one of the elements is looking for trouble and will have unintended consequences
To continue to pack immigrants from Asia into a place ( Auckland )  with nowhere to live is a recipe for disaster in the long run  .

Tax Incentives.
The easiest and simplest thing to do is to quarantine or ring-fence all investment rental property profits and losses.

Sorry but the tax incentives do nothing to increase investment in housing for immigrants or anyone else.  I have never met a landlord who built a new house as a rental, the logical assumption that tennants won't take good enough care of brand new builds dominates.

Even if landlords did start building new homes removing the tax incentives would simply produce a "one off" adjustment in house prices.  After this event there would be no change in the motivation to invest in property because the reduced values would result in an increased rental yield which would now compensate landlords for the loss of the tax incentives.

" the over-riding self-interest of our political leaders and the wilful ignorance of the voting public." who expects matters to change!...I don't.
It would take a complete collapse of the credit stuffed property farce that is the NZ economy before any polly in power bothered to advance an end to the farce....fat chance.

Consistently on the money there Wolly.

Gareth, go to Thursday's top ten and read #2 (bonus) and stop winging about the ordinary kiwi trying to make a living

"A Featherston man who owes Inland Revenue more than $170,000 has been ordered to repay just a fraction of his debt." herald much for the rise for judges looks on the cards now.

I think Gareth is getting nervous. Two articles in a few days. He really doesn't want houses to be easier and cheaper to build!
Whether that is because he doesn't want his existing housing assets to devalue. Or because he wants some other response from the government. Maybe a change in monetary policy would benefit his investments more.
Clearly this issue is coming to a head, if Auckland and Christchurch did not have rising house prices the Reserve Bank would have cut interest rates, in reponse to the high dollar and unemployment rate. 

Gareth, you seem to like telling everybody what what to do about everything.
How about you start telling us how you are going to fix the poorly performed Phoenix football team. 

the thing is you'd never listen to word this man said if his son had been more interested in dentistry than computer programming...good on him for making his fortune but the he talks so much bull pucky