Land price & house size jumps: How NZ’s 1989 tax experiment ignored the potential impacts on land values, house sizes and property prices as govt chased a short-term revenue kick but doomed future generations

By Alex Tarrant

Why are land values in New Zealand so high? Why are we building oversized houses? And why has this been happening for so long?

Interest.co.nz last week ran a presentation by economist Shamubeel Eaqub on why housing in New Zealand had become so expensive and change would be so hard. Eaqub railed against failures by successive governments as policy actions (or inaction) over the past 30 years as dooming those following the Baby Boomers into ‘Generation Rent’.

There was a timely follow up this week. It should be mandatory reading for every politician, Treasury boffin (and anybody wanting to enter one of these professions), anyone trying to buy a house, and every homeowner who can’t understand why the young are complaining about not being able to buy property.

Motu economist Andrew Coleman on Wednesday released a paper titled Housing, the ‘Great Income Tax Experiment’ and the intergenerational consequences of the lease.

It focussed on one policy action that might just have contributed most to dooming generations of younger New Zealanders to renting longer and requiring more time to save for a house deposit than their Boomer parents, and being faced with having to pay up to buy oversized houses built by their Boomer parents.

Before we go further, Coleman did point out that the Great Income Tax Experiment of 1989 has been just one of the many drivers of property price rises and house size increases since 1990. He also said that although the outcomes match the theory of what would be expected by the tax change, other changes in 1989 – such as the introduction of the Reserve Bank Act reducing inflation – meant that it cannot be seen in the data which change can be attributed to which factor.

But he warned that in 25 years’ time, when we might have fixed every other problem addressing New Zealand’s residential land supply woes, one change still required will stick out like a sore thumb. It needs to be dealt with, and there are ways to do this. Will our politicians listen and act?

New Zealand’s Great Income Tax Experiment of 1989 – the basic facts

  • New Zealand new house sizes grew faster than in the US and Australia after 1990, without a much bigger rise in incomes. From an average 110sqm in 1974 to about 200sqm today.
  • New Zealand had the largest increase in house prices out of the 24 OECD countries monitored by the Dallas Federal Reserve between 1990 and 2016.
  • From 1975-1990 New Zealand had the third lowest increase in house prices. Now this was partly because 1975 was a peak year for New Zealand. “But we weren’t always the fastest increases in house prices in the world.”
  • Since 1990 we are the biggest – in fact bigger than by about 25% than the second-highest OECD country.
  • Tax changes introduced in 1989 created one of the biggest tax system distortions in the OECD between how property and sanctioned savings schemes were taxed.

Tax system distortion

To start with, here are the slides – they’re a quicker way of going through it all. The below is based on Coleman's Motu Public Policy Seminar in Wellington on Wednesday.

In 1989, the Lange Labour government, based on a review carried out by Don Brash, changed New Zealand’s tax settings. Until then, New Zealand was like most other OECD countries in that it applied an expenditure tax treatment on savings placed in sanctioned savings schemes (ie what KiwiSaver is today). 

The change was that we scrapped NZ’s ‘exempt exempt tax’ system (EET), where income was exempt from tax when earned then saved, exempt when it accumulated and earned interest and dividends, but was taxed at a person’s marginal rate when withdrawn and spent.

We replaced that with income tax treatment, so it would match other forms of savings, except owner-occupied housing. This meant there was a distortion created in our tax settings.

Here are some of the countries that do what New Zealand did up until 1989:

There’s the United States, Canada, Mexico, Japan, South Korea, Austria, Belgium, Finland, France, Germany, Greece, Ireland, Iceland, Norway, Netherlands, Portugal, Poland, Spain, Switzerland, Turkey, the United Kingdom. And Hungary has a very similar way. Furthermore, Denmark, Italy and Sweden exempt tax from when it is saved and put into a retirement savings account.

So we used to be part of the mainstream OECD approach to expenditure taxes. But the Lange government needed revenue, and the change brought forward revenue into the government’s coffers.

An experiment that went horribly wrong

In a new paper titled Housing, the ‘Great Income Tax Experiment’ and the intergenerational consequences of the lease, Economist Andrew Coleman claims that was an experiment that went horribly wrong.

“New Zealand has one of the most distortionary tax environments for housing in the OECD. Most other countries tax all other assets – if they’re in a sanctioned retirement scheme – on an expenditure basis, the same basis as housing. But New Zealand does not.”

If you wanted to close the wedge properly, you would tax everything on an income tax basis. But that’s not what happened. We taxed sanctioned retirement funds on an income tax basis, along with all other assets, but we didn’t change the taxation for owner-occupied housing.

The paper discusses the implications for the size of new houses and the price of land. And there is a fix. Not by raising the taxes on housing, which we’ve been unable to do politically, but by reducing the taxation of retirement savings.

“Really, I don’t do much in this paper other than apply standard tax theory.”

Tax distortions created bigger houses, fewer term deposits

If you had a neutral tax system, it wouldn’t make any difference to the size or quality of the house that you choose.

A neutral income tax system, would mean we taxed imputed rent at income tax rates – the implicit rent you pay yourself for living in your home. We would also have an accrual-based capital gains tax system, we’d make an allowance for depreciation (because houses wear out) and for interest payments, and we’d take into account local property taxes.

Incidentally, this is the sort of thing Gareth Morgan’s talking about right now.

So how does this affect house sizes? Suppose you had $10,000, Coleman says. You could either build a bigger bathroom or some extra closet space or a third garage, lend it to the bank (ie a term deposit), or invest it in shares.

“If you lend it to the bank, you get taxed on it. If you put an extra addition to your house, or you buy a bigger house, you’re not taxed on it.”

A neutral income tax system, this decade, would have meant you would require annual benefits from the extra bathroom of $550 a year (5.5%). If you could get more than that by putting the money in the bank, then you’d do that.

But we don’t have a neutral income tax system. Under the current system, because we tax lending (term deposits in the bank) but we don’t have a tax system which is neutral towards imputed rents, you would only need a $460 annual return from the bathroom to make it more worthwhile than putting the money in the bank.

“The current tax system provides an incentive to accept a return from housing that’s about 20% less than under a neutral tax system.”

“And this could lead to an incentive to build houses that are 20% better – 20% bigger – than you would under a neutral system. You don’t need so much return from having that extra closet, that extra bathroom, that extra garage, as you would otherwise, because of the tax system.”

Now, this could be fixed largely by a tax on imputed rents, if the inflation rate was the same as the depreciation rate, which is that’s the case in New Zealand. We don’t have one of those taxes.

Land prices – why are they so high?

Moving on to land prices. New Zealand’s tax system incentivises people to buy better located land when a neutral tax system would not, Coleman says. He introduces the key concept of ‘convenience yield’.

This is the annual benefit from being closer to desirable amenities or jobs. For example, you might be willing to pay $10,000 extra a year to live in Oriental Parade rather than Upper Hutt because the Parade is closer to things you like to do and to your job.

Convenience yield depends on the cost of transport to those amenities. So if there’s a great train line from Upper Hutt into town you might not be willing to pay as much extra to live in Oriental Bay.

How much more you would pay to buy that Oriental Bay section to provide $10,000 of benefits a year is inversely related to interest rates. So if interest rates were 5% you would pay $200,000 to get a $10,000 benefit.

This would be the captialised land value under a neutral tax system. “The problem is, we don’t have a neutral tax system – we don’t have a neutral income tax system.”

With a non-neutral tax system, the value will be capitalised to a different amount. And the amount that we capitalise depends on interest rates, the way we tax things and the expected appreciation of land prices.

“Even if you think that property is going to go up at 1% a year, you will pay approximately twice as much for conveniently located land under our current tax system as you would under a neutral tax system,” Coleman says.

“This premium is going to exist even if we build lots of houses up at Upper Hutt, or in South Auckland. Even if we get rid of current supply problems, our tax system is still going to give an incentive to bid up the price of conveniently located land.”

This could be partially fixed by a capital gains tax, but not by an imputed rent tax, which is inconvenient because it means that the solution is different for houses and land.

On rents, house prices and becoming a landlord

The distorted tax system creates incentives to become a landlord rather than lend money, Coleman says. “We have a distortionary income tax system – even though rent is taxed, capital gains are not.”

And this provides an incentive for landlords to reduce rent-to-price ratios. You can do this either by lowering rents, or bidding up the price of houses; Most of this seems to have occurred by bidding up the price of houses rather than lowering rents.

Fun fact: In 1989 there were 62,000 private sector landlords. There’s now 276,000, which suggests there has been some change in the way people are investing their money.

And that problem can be entirely fixed by an accrual-based capital gains tax on nominal capital gains.

Why should we care?

Future generations will be paying artificially high prices for land. They will be worse off than their parents.

“If you tax land at concessional rates relative to other assets, the price of land is likely to become artificially high. And if you have artificially high land prices, you induce an intergenerational transfer to existing land owners and away from all future generations of land owners,” Coleman says.

“They are paying artificially high prices for land, and that stops them from earning other income from that money or having a good time from that money, if they wanted to.”

What’s worse, the economics show “this is likely to reduce the local ownership of the capital stock and wealth.”

Translation: Ongoing current account deficits. Sound familiar?

Well, “that’s what happens if you have a tax system that causes artificially high land prices.”

What to do?

“I think this is hardly a scheme that you would willingly introduce if you could avoid it,” Coleman says.

The Great Income Tax Experiment has created incentives to create bigger houses and to bid up the price of land. And the biggest beneficiaries were the Baby Boomers (Coleman himself is one of them).

Reforms should allow for an intergenerational transfer, he said. There are three possible solutions:

One, do nothing “and keep a tax system that’s particularly distortionary on housing markets.”

The second is creating a political consensus to tax imputed rents and capital gains on an accrual basis. However, this is “something that seems to be an extremely difficult task. Even if we did introduce it, it’s not clear we could sustain it.”

The third option is to move back to an EET retirement tax system, like the rest of the world. And this is the option Coleman is now throwing his weight behind, due to the political impossibilities of option two.

“This last option isn’t actually easy. But it does have proven international durability – it’s done in 25 countries around the world. I also say, it’s got some intellectual respectability.”

He says it’s time New Zealand reconsidered the Great Income Tax Experiment of 1989, and thought again about whether that wedge between the ways we tax assets inside retirement savings accounts and outside retirement savings accounts was worth doing,

“Because it has inadvertent consequence for the price of land, which may be causing worse problems than the problems that we’re trying to solve.

“Even if we fix up the supply of land, which I would encourage, the tax system is still going to create artificially high land prices, and it’s still going to impose costs on younger people and future generations. We need to fix both problems.”


Footnote: Coleman better not hold his breath.

Interest.co.nz understands that, while the dichotomy between the way property and retirement savings are taxed is something on the government’s radar, Budget 2017 isn’t likely to deal with it (as things stand today).

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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82 Comments

Not sure if this article was reported, but all relevant.

https://www.bloomberg.com/news/articles/2017-04-13/rba-intensifies-alert...

"The Reserve Bank of Australia, in its semiannual Financial Stability Review Thursday, said interest-only loans are rising and now account for almost a quarter of owner-occupier mortgages. It also noted about one-third of mortgage holders have either no buffer or less than one month’s repayments."

Reads like the day of reckoning is almost here.

It's my bug bear. Why haven't interest only mortgages been phased out as they have elsewhere in the world.

New Zealand is different. Only 16.4% of owner-occupied mortgages here are interest only. Although in February, it was slightly higher at 19.5% for new ones incurred in the month.

It seems very unlikely that the buffer or stress would be so high here. The national LVR is actually under 19%. Sure there will be some at the margins, but for the national LVR to be so low, they can only be a few and they certainly won't be a financial stability risk even if they all fell over, even if they ran into trouble all at the same time.

Maybe the Aussie situation is not that relevant here after all.

"New Zealand is Different ... Maybe the Aussie situation is not that relevant here"

Perhaps it also reflects the possibility NZ is a bit slow off the mark ...
Perhaps a little less savvy in a market sense

Maybe

Reminds me of the CFD story
Once upon a time .. in 1998 a successful UK based spread-betting shop called DealForFree.com came to Australia, offering CFD's. A television advertising blitz offering the Deal For Free (no fees) concept got a lot of traction. Problem for DealForFree was their UK model was built around a private customer base that only traded on the long side. And they didnt need to hedge their risk. Here in Australia the trading public were far more savvy with both the long and the short side of the market. DealForFree went broke and their customers cleaned up during the Dot.Com meltdown. Then CMC Markets appeared and picked up the carcass of DealForFree, offering the same "no fees no brokerage". Difference was CMC hedged their NET position at the close of each day. CMC were most successful, taking market share from the prime brokers, and choking the options market. The big end of town then got into the act. They're all offering CFDs now.

Another case of the slows - NZ couple get dudded for $500,000

another example of a frequent refrain of NZers suffering from a case of the slows
http://www.interest.co.nz/property/87077/land-price-house-size-jumps-how...

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11

Excellent article.
Do this vision of politicians have the intelligence, bravery and vision to implement the necessary change?
Nope!

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18

Suburbs with median pricing above 1.5 million dollars. That has more to do with foreign buyers than anything else IMHO

And what about the dirty, illegal and dodgy money also being used.
Planet Key, the perfect place to launder your ill-gotten gains, NO questions ask, and tough shit on the locals who become debt slaves or even worse live on the streets, in cars etc etc.
Yes Planet Key is a great place to be, unless you're one of the 99% of Kiwis.
Wake up Kiwis and change the Government.

Fat Pat you are right
It was the open door immigration policy that tripled my house value !
They should add in their research the simple fact NZ has no land transfer tax and very low property taxes
Combine this with allowing foreign buyers to speculate through their family members residing in NZ with Chinese banks up until recently making loans on NZ homes and that's what boosted my home by 3X its value in a mere number of years.
In my area property was doubling in a year !

Note the Coleman report is lengthy, convoluted and complex, searching for explanations in areas that have little to do with what is called the "psychology of pricing" and surprisingly no mention of the waves of migration into NZ (and their imperatives) rising out of the Rambuka Coup in Fiji, followed by the reversion of Hong Kong to PROC, followed by the Bainimarama coups in Fiji, followed by the exodus of hot money out of China looking for a home, any home, at any cost.

These coming-ready-or-not events were tangled up in the time of rampant rises and highly doubtful the people concerned were motivated by the taxation schematics outlined by Coleman

I tend to agree with you.. about Colemans assertion.

We sold our house to a young Chinese couple of about 25. It was bought for their parents when they arrive in NZ. We suspect it was for a speculator in China who did want his details with banking and IRD disclosed. It is a way the Chinese get around the rules.

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With unregulated selling practices (Trying to flog everything at auction), non taxed property revenue to the point of utter Government stupidity and allowing Foreign Buyer Speculators to plunder the market. Are you really left wondering why property prices are so high? I would have though that as abundantly clear.

New Zealand is not the only country that is going through this. Auckland is not the only city where house prices rocketed. It is a global phenomenon, just the same as other big cities in the world. Why should we be different? Let the market decide.

Free market… groans... How about we do some stuff to make housing more favourable for owner occupiers, unfavourable for foreign speculators, and slightly less favourable than it currently is for landlords. A few sticks and carrots perhaps.

(stick) Ring fence losses on investment properties (make it so your IR3R can’t be negative)
(stick) Either a total ban on foreign buyers of existing real estate, or a foreign buyer tax.
(carrot) $10,000 or similar first home buyers grant.
(carrot) give owner occupiers a rates and insurance tax credit.

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30

Just because everyone else is ignoring the risks is a very poor reason we should turn a blind eye to them here. When markets are seriously distorted, "leaving it to the market' is inviting a firece correction when it comes. Sensible prevention would be far better than going through an addict's cold-turkey. The cries of "why didn't 'they' do something?' will come loudest from those who don't want 'interference' now.

And yet we voted so strongly for National/John Key over the last 5 years while he denied there was an issue, even though he previously admitted there was an issue. While the issue festered and grew so big there was no turning back. The popular Prime Minister who lead the country astray.

It always makes me question whether the problem we have in this country (a form of greed and delusion) falls with our politicians or with our society - in the end John Key was only so popular because he did what was popular with the voters - and that was to ignore and deny the biggest issue facing our society (housing). So what that means with a reasonably degree of certainty, is that the majority of people in the country appear to be in denial to the time bomb we're sitting on. And are quite content for now to live in that state.

David - it would appear to me that your opinion is bordering on subversion against the state....

Our government has told us repeatedly that there is no issue - nothing to see here. To say that this is in fact wrong, that we're being mislead (not once, but over a period of years), would to me be a serious allegation against the state.

Unless of course our Government has been lying to us - but that would mean were living under a corrupt regime. But that couldn't be true, because we've been voted as one of the least corrupt countries in the world.

So David - do we have a false/distorted market that requires intervention? Or is our Government lying to us saying that there's nothing to see here? Are you and I subverted, or are we being lied to?

"The Emperor's New Clothes" (Danish: Kejserens nye Klæder) is a short tale written by Danish author Hans Christian Andersen, about two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent. When the Emperor parades before his subjects in his new clothes, no one dares to say that they don't see any suit of clothes on him for fear that they will be seen as "unfit for their positions, stupid, or incompetent". Finally, a child cries out, "But he isn't wearing anything at all!" The tale has been translated into over 100 languages

Is the child's name David Chaston? Who are the weavers, who is the emperor and who are the subjects who are too afraid to say that don't see a fine suit of clothes?

Sums up the whole situation - David's the child, babyboomers/investors are the subjects, National/John Key the emperor.

NZ'ers are Sheeples...#HERDMENTALITY #GROUPTHINK

The weavers are the rentiers -the rorting elite, the modern day landed gentry.....

Check this out!

https://medium.com/land-buildings-identity-and-values/rort-of-the-elites...

"The Emperor's new clothes" ends

"But he hasn't got anything on," a little child said.

"Did you ever hear such innocent prattle?" said its father. And one person whispered to another what the child had said, "He hasn't anything on. A child says he hasn't anything on."

"But he hasn't got anything on!" the whole town cried out at last.

The Emperor shivered, for he suspected they were right. But he thought, "This procession has got to go on." So he walked more proudly than ever, as his noblemen held high the train (of cloth) that wasn't there at all.

http://www.andersen.sdu.dk/vaerk/hersholt/TheEmperorsNewClothes_e.html

... so very true , DC ... but we have been hammering this theme since way way back in 2007 or so when the hickeysterical Bernard first claimed that house prices in Auckland were hideously over-priced , and would fall 30 % in the next twelve months ...

But they didn't ... even though his premis was correct ... ...recall the old shorter's maxim : " markets can stay irrational longer than you can stay solvent " ...

10 years later , and we have irrational exuberance squared , in the prices of Kiwi dwellings ....

... and the best that any of the main political parties can come up with is to increase housing supply by a tick or two ... a tinker here , a Kiwi Build there , fiddle faddle .... nothing of any long term consequence achieved ...

The upcoming house price collapse is simply the bust we had to have ... 'cos nothing else but a complete melt-down in the property market will teach the pollies a serious lesson , and steel their nerves to take some strong corrective measures ...

... sitting back in my laz-y-boy rocker , with the Big Bag of Gummy Bears .. .. got a ring-side seat on the event horizon of the NZ Property Bubble .... awaiting the entertainment to come ... snorkel slurp ... smack smack ... ahhhhhhhh ..... life is good , my friends !

Cannabis laced Gummy-Bears

GBH - talking to son-in-law yesterday - they are in San Diego - his parents live in Colorado - asked him about the fact that both Colorado and Washington State now have more cannabis retail outlets than MacDonalds and he said yep you can buy anything you like including cannabis laced gummy-bears and snakes and the list went on - an endless list of confections

Well DGZ, you better be careful as we either stop Foreign Buyers by taxing them or the Government is eventually going to have to raid the NZ Boomers housing investment pension pot. Which is starting to happen in those globally effected over inflated property cities.

Take a look for yourself:-

UK new Landlord Buy To Let Tax introduced April 2017: http://www.telegraph.co.uk/investing/buy-to-let/new-buy-to-let-tax-works...

In Vancouver, The Green proposal calls for beefing up the property transfer tax by putting it on a sliding scale from zero per cent on properties under $200,00 up to 12 per cent on those worth more than $3-million.

http://www.cknw.com/2017/04/14/296327/

The supply shortage has exaggerated the price movements but the trend will remain the same. Expensive property and higher percentage of rentals. There has to be greater protection for those renting. Germany and Switzerland have successful housing markets which are based on the majority renting rather than owning.

Unless there is a full scale communist revolution the rich will continue to get richer. They have the surplus income to accumulate yet more assets.

If you do a bit of research Penguin, you'll find that in most in the expensive German cities, they switched from renting to buying property with the ultra low bank mortgage rates in Europe.

Munich at high risk of housing bubble: report
https://www.thelocal.de/20160928/munich-at-high-risk-of-housing-bubble-r...

If the market was FREE then I'd accept your point a BIT.
BUT, the market IS NOT free, AND we have to use LEGAL money to buy houses (if we're Kiwi), plus we have to earn in NZ where salaries are LOW.
Just look at Guernsey, Jersey, Isle of Man for e.g of stopping the wealthy flooding in and crippling the locals.

DubleD I agree
Many foreign cities are suffering the housing ponzi
Just that National refused to acknowledge there was and is a housing ponzi A speculation by foreign $$$
It's the reason my home doubled in $$ in 12 months
No 1989 tax reg change at all
Yes savings being taxed is appalling but let us not be distracted from the current National governments utter
and complete incompetence in dealing with foreign speculation.
Enough words have been written about this

To me what makes it worse, is that John Key openly acknowledged the housing affordability issue back in 07/08. But once realised it would be unpopular to deal with when elected (and difficult), he denied the issue completely. How flawed is our politics and our politicians?

Keerekt

No 1989 tax regulation change at all

I don't see that any tax on capital does anything but slow down the distortion. It isn't like the other OECD countries are absent an asset credit bubble, it is only the size of the bubble being discussed in this article. If you changed the tax, all you do is change the type of asset excess credit flows into. RE just makes it easy because the credit can be backed by collatoral, but the value of that callatoral will one day be found to be wanting.

Excellent article Alex. I would agree that tax exempting retirement savings and investments when the proceeds are being re-invested would be the easiest way to at least partially address the imbalance between investing in land/housing and investing in other activities.

Also to consider events that occurred around 1990 that affected housing.

Since 1990 local governments have progressively moved away from unimproved capital value rating systems (land tax) to capital value rating systems.

The RMA came in 1991 -which has been gamed by Nimbys to slow up housing supply (both up and out) -thus making it hard to increase the supply of desirable houses like in Orient Parade.

The Ministry of Works was abolished in 1988. In particular over night NZ stopped investmenting in acquiring land corridors for public right of ways and other infrastructures (3 waters). Because land was not acquired when it was cheap greenfield land and work was not planned counter cyclically -infrastructure provision for our fastest growing cities (Auckland in particular) is more expensive and less provided than would have been the case if NZ had a well resourced public infrastructure providing institution, working for the last 30 years.

More conceptually -in the 1990s NZ attempted to free up the economy -but it paid too little attention to rent seeking behaviour, which has prevented the benefits of the reforms being more widely beneficial -especially to future generations. Phil Hayward has an excellent article published this week -discussing economic rent -"Rocket scientists do not forget about gravity so why do planners forget about economic rent?" https://medium.com/land-buildings-identity-and-values/rocket-scientists-...

That link is most excellent Brendon, thanks for that.

My only comment that I would add is to be careful when it comes to possible solutions, it is all to easy to see magic bullets that turn out to be as bad as the disease. People are highly adaptable. For instance, capital gains taxes were in place in all the countries that had housing wrecks in the last crisis. They set up a particularly nasty mechanism whereby the tax authority (eg the state of California, Ireland, or Greece) starts to get significant extra income, which the politicians and bureaucrats see as due to their cleverness, which then leads to subtle changes that feed the monster. Planning and credit standards are reduced and you get an epic building and price bubble. Not good.

A similar situation has ocurred in New Zealand. During the last housing boom, everyone thought they were very clever and Helen and Michael were more than happy to take credit. National have repeated the same policy with the same result. They too think they are very clever because house prices have gone up on their watch. In reality, in each case householders just borrowed an extra $100 billion or so and spent some of it.

My personal preference is to target the current account deficit and instruct the RBNZ, Treasury and the Productivity Commission to report back with recommendations on how to run a current account surplus in the medium term. My sense is that the housing price bubble is caused by too much money chasing too few items. The part that is being willfully ignored is the destructive nature of excess capital flowing in, see my earlier post here:
http://www.interest.co.nz/opinion/87053/david-hargreaves-would-seen-any-...

I think Roger a consensus is forming that NZ Inc's business model is not working as well as it should. There will be different ways of explaining that. Experts are coming from different angles and as you allude to -the solution is not a silver bullet -it is cohesive series of reforms. Tax reform will be part of it. So will urban planning reform, infrastructure reform....

Evrryone forgets that the only ecenomy working and supporting other ecenomy in NZ and that is housing....bubble (denied by national)created by politicans more so by national by making it a play ground for everyone in the world. Anyone looking for speculation and/ or to park their money offical or unoffical in tax free country ( simply manipulate some loopholes created by govt) can do so in NZ.

This has been given a boost by national government who is working for the same and encouraging everyone with overseas money to come to NZ to support their ponzi scheme - without it their is no ecenomy in NZ. Most tourist comming to NZ is from country that NZ will soon be a colony of if not already.

Policy - come as a trader and investor to slowly take over the country.

Election not far away. Vote sensibly

Yes, but who do you vote for? This dynamic has been set up by both Labour and National since 1973. Both parties are equally culpable and both profess to know what to do (as do the earnest Greens and dear Winston, bless him), yet none of them seem to have a coherent plan.

Agree. But whilst Labour's policy is insufficient, it's still a big improvement on National's, IMHO

National have proven themselves reasonably competent in difficult times, despite my frustration with their inability to sort out housing. The other parties are completely unproven. Usually you only boot out the incumbents when they stuff up big time. We are still in the late boom phase, so my guess is National are likely to cling on a while longer.

Roger I think they have been reasonably competent on everything but housing. The problem is they have been hopeless on housing and the resulting socio-economic fallout and building economic risks have effects that are very great and grave. Their planning reform has been far too slow, and they have ignored all the good expert advice on tax reform over the past 10 years. Theyhave also failed to address the issue of domestic and foreign speculation.
I think their failure is a result of both ideology (the market will solve everything) and a cynical desire to see the bubble continuing to inflate because it benefits them politically.

Quite right. Leaders only have one job, and that is to deal with the issues of the day, not ignore them.

And given that housing is right up there with food and water in importance in people's lives, a fail in that is pretty much a complete fail

I think the true socio-economic problems created, will take time to show, and may lag 5 to 10 years. So while it might be possible to claim they haven't 'stuffed up big time' I believe, that sentiment is fairly myopic, or perhaps sight sighted...

Agree but voting labour or other party may or may not help BUT voting national will not help at all for they have made it very clear with their policies, words on whom they represent. Also 9 years is too long for them to be in power.

Should be vote for change or will see more arrogant government and be prepared for...........can go on and on.......

I like the idea of a land tax - a proper one - very much.
I would like to see this introduced and business and income taxes reduced. So there is much more emphasis on productive work and investment rather than the speculative frenzy of an economy we have.
A great read is Henry George's classic 'Progress and Poverty'.

Successive govts have ridden off the popularity boosting effects of housing booms. It's undeniable. And cynical and short sighted.
As long as the housing keeps booming, they are happy.
But it's a risky strategy. Any number of events could turn the boom to bust, then there's trouble

Just imagine what will happen if the housing market turns for any reason may be internal or external.

That is possible if one believes in theory that house price will never fall and only goes up.

Despite national government trying everything, me personally has doubt that it is a one way street.

But it's a survival need, people fight for what they want. This suggest it is a one way street...

While acknowledging all the other factors set out in the article and comments, I suggest the RBNZ should not let off the hook for allowing credit growth to be in excess of incomes as a result of lax regulation of banks.
In the last five years the increase in household financial liabilities relative to incremental household disposable income has been over 290%. Bank lending has been applied to unproductive uses, mainly as a result of the RBNZ's extremely low risk-weights to housing loans.
House prices could not have risen to the extent they have if credit creation had been kept in line with income growth.

As long as people are willing to pay $1 for something thats worth 75c then we will always have a housing boom.
Car makers do the same thing by bringing out many models of the same car.

Key quote from that article:
Millar said she and her husband felt like "suckers" and in hindsight wished they had used a real estate agent.
I have absolutely no sympathy for those sellers. They should be happy the buyers made money.

Yes they should be happy for the Chinese buyers who were able to make some capital gain. I believe the old couple have made heaps themselves with $1.95m.

Yes, they probably made a million bucks and can still help their daughter. Also RE agents can be helpful!

Exactly. No-one is to blame here. If I were the new buyer for $2.48m, I should be free to sell it for $3m the following week if there is a willing buyer out there. I don't expect to get the blame and a public outcry from the young Chinese couple who sold it to me for $500k less.

I strongly suspect in a number of these cases that the first buyer is actually acting as a kind of agent for the final purchaser, in which case I would say 100% tax on the profit as it is basically a rort. It would not surprise me if the final buyer is totally aware of what has gone on, after all they could have bought from the first seller. I expect this has happened many times.

We're on to something ngakonui gold. Another example is Nike. The auctal cost to make it and the price people willing to pay for it.

And here is something, over valued and transparently, over stocked. It does not help that they seem to relish the fact.. Maybe that is one of the reasons they are "In an amalgamated pickle"

http://www.nzherald.co.nz/super-city/news/article.cfm?c_id=1501110&objec...

Fantastic article. I can't believe in all the house price article I have read over the last 10 years that I have never read of a possible part link to a 1989 tax reform. Was great to learn something new.

Even if I had to scroll way down past the 'single issue' comments denying the even part relevance of this other issue to be able to post this comment. Probably why I've not read of this before .......

The remedy would seem the easiest and least political capital sapping action. It's even a tax cut, hint hint Bill.

Nonsense...house prices would even be higher if they were taxed.

How do you figure that ? If there are better less taxed options wouldn't people tend to put their money into those as investors ? Isnt that why there has been the huge increase in the numbers speculating in housing ?

Name me something that is cheaper when it is taxed?

I think this is a pretty naive view.
Here is your example:
Taxing smoking made smoking less attractive
Health care costs will go down
Net profit

In case you can't see it, speculating is smoking, that becomes more expensive.

Finity53 - what landlords/speculators don't understand is that if something has to do with them and housing, it always needs to be a have your cake and eat it to situation.

So if you suggest taxes, the landlord/speculators default positions is: 'well they're not mine, I'm not paying them - they're going directly to the renter or the next buyer'.

There's some warped sense of entitlement and greedy expectation that property investment is a one way street to riches without any responsbility. All take, no give.

Ahh...yes very good example, cigarettes. You do know that the reduction in smoking costs the government more in future pension payments than a short illness with cancer or a sudden and fatal heart Attack. I think your example actually highlights the unintended consequences of any policy.

The cigarettes tax is a Bit of a weak argument IMO

Here's one keywest - my savings account for a house is cheaper because it is taxed.

Don't follow?

It was a joke/dig at the concept of renters/savers being taxed (interest) while attempting to save for a house - while landlords operating under a quasi business model look for/receive tax breaks.

Bit outside the limited landlord wins at all cost paradigm that you view the world through

The article (or rather the suggested action) is about the removal of a form of taxation. So, what on earth is the point you are trying to make?

Read the article it talks about capital gains many times during it for land and houses...

I'm amazed that is the main issue you took away from this article.

Agree that tax policy started this issue. The petrol was poured on when Cullen upped the tax rate with his envy tax. At the time the way to bypass it was to leverage up stupidly on property debt with rentals. Petrol on the fire indeed. Well done Cully. On your finer moments, Toll still piss their pants laughing at what you commited the Averageman tax payer to buy back NZ Rail. PS hows that Knighthood sitting...?

End of the day the only way to stop domestic specuvesting is to do away with the interest on debt deduction on personal income.

But who will house the poor will scream the specuvestors. Simple, make the tax fiddle an option on new construction only. Will kill speculation on existing stock, and leave do ups for first home buyers.

But who will build the tax offset new properties will scream the specuvestors, easy, make apprentices partly tax deductable for the building trade. Watch the youth get fought over by existing tradies.

What about the overseas buyers, not fair will scream the specuvestor. Simple, put a line through non citizen ownership. Add an annual land tax for the exist owners that declare no income tax in NZ.

They will fiddle the system scream the specuvestors with sly accountants and lawyers. Simple, make it compulsory for NZ owners to show that they have have made/paid tax on any money that buys land NZ. Anyone caught fiddling the system gets land seized by the crown to be onsold, and sly lawyers and accountants get fined or do jail or some sort of community service, Iraqi minefield clearance comes to mind.

But I will loose everything cry the stupidly in debt specuvestors. Yup you just might but its time to burn the ponzi down. Topically - just imagine a world with the Islamic money lending policy recently profiled by SBW ...

Key message - stop selling out the averageman working class taxpayer in NZ.

Houses I don't think have grown by that much since the 1970s. Back then, houses were built with external garaging that didn't come into the floor size calculations. These days a double garage is usually integral to the house, adding anywhere from about 20 to 40 square metres to a house's floor plan.

A 160 square metre house (excluding garaging) is still considered quite a large house, despite being below the average size built today.

In the main, in the 1970's, group houses, the house du jour, they were "house and land packages" and they came without a garage. Standard houses were single level, 110 sqm, 3 bdrm, 1 toilet. Never heard of ensuites. No two-storied stuff. No footpaths, no landscaping, no fences. You wanted a garage that was extra. You did all that stuff with your mates on weekends with working bees and slabs of beer and BBQ's.

You'll never be able to have a separate garage now with sections down to the size of a bedsheet.

Agree with much of this. Our tax system is very biased toward investing in non productive assets, but I think that taxing the family home is a step too far and I think that any government who did it would be soundly thrown out, never to return for a very long time. In any tax changes, I suggest that inflation needs to be considered because even in a balanced and neutral market inflation will pay off the mortgage and it represents a wealth transfer from savers to borrowers. It encourages one and discourages the other. Mortgage interest should not be tax deductible for the inflation portion and interest received not taxable for the inflation portion. Profit on a house sale taxable on the profit over the naturally inflation adjusted value, regardless of the period owned.
With reference to land values. These are totally artificially high because of the arbitrary city boundaries. Release a lot more land and this goes away. However I would capture most of the gain that occurs when the boundaries change and give it to the councils, because the value change represents the value of being included in the city and all the services that go with that. The councils can use this money to provide these services to the newly zoned land. (would solve a big part of Auckland City Councils problem)

Re building houses that are too large. This would be a case nanny state telling us how to live. Why should people be forced to live in miserable little shoe boxes like battery hens. The fact is that the marginal cost of building a house larger, is very modest even with our grossly over inflated building costs. Look at these two examples.
http://www.a1homes.co.nz/plans/4/EH100 a 100m2 house costs $186,296
http://www.a1homes.co.nz/plans/4/EH159 a 159m2 house costs $240,193
The first house costs $1863/m2 to build, but you can add another 59m2 at a marginal cost of $913/m2
Why be miserable?

I have some problems with this article:

So how does this affect house sizes? Suppose you had $10,000, Coleman says. You could either build a bigger bathroom or some extra closet space or a third garage, lend it to the bank (ie a term deposit), or invest it in shares.

Well if you build extra closet space or a third garage that is consumption - just the same as if you bought a boat with the money. However, if you put the third garage or closet space in a rental property you would attract more rental and then pay more tax. In the same way living closer is a consumption issue. If you were paying tax on this should people who drive further pay tax on their petrol?

The problem has been that property prices have in the past ten years gone up faster than inflation (replacement cost of the house) which has created all these anomalies - or at least these anomalies in Auckland. If we could get back to a model where houses went up in price at the same rate as replacement cost (minus depreciation) then this debate would disappear.

I think houses grew in size because we moved to two income families who chose to 'consume' a larger house as part of a more affluent life-style.

they didn't use a real estate agent...... they just signed a sale and purchase agreement?

This article assumes (without any discussion) that owner-occupied housing is a form of savings.
People buy owner-occupied houses to live in (by definition). If someone has a choice between spending $100k more on a bigger house, or buying a smaller house and investing that $100k into a term deposit for example, are you trying to tell me that the top reason for choosing the bigger house is because otherwise they would pay tax on the interest from the term deposit?
RUBBISH.
Why would you invest anything at any time if you had this attitude. "No I don't want a return on my capital, because I don't want to pay tax. I'd rather keep adding to my house and get no return at all."

And there is no return on an owner-occupied house! An owner-occupied house is a personal asset.

"He introduces the key concept of ‘convenience yield’."

So close, so wrong.

Any 'convenience yield' should make apartments appreciate much faster than land. Then you get way more apartments built. Self solving problem, as young people get an over abundance of apartments to choose from and lower relative rents.

Our "non-neutral" taxation policy naturally creates an epic oversupply of apartments. During the 2000s we were building apartments faster than most of Australasia.

However nowadays we build apartments slower than everywhere.

What happened?