Geoff Simmons outlines the options public policy officials have in tackling the speculative pressures building in Auckland's housing markets

Geoff Simmons outlines the options public policy officials have in tackling the speculative pressures building in Auckland's housing markets

By Geoff Simmons*

The average price of a house in Auckland is predicted to pass $1 mln when official figures are released next week.

In an interview on TV3’s The Nation over the weekend the Housing Minister Nick Smith (dubbed by Paddy Gower as the “Million Dollar Minister”) pointed out that the Government doesn’t control house prices, and claimed that all they could do was get the incentives right to build more houses.

The Housing Minister appears to have abandoned his previous housing affordability goals. He wants to see housing prices return to single digit inflation and not fall. This means that the only way to return housing to affordable levels is for incomes to grow faster than house prices. Realistically this will take decades to happen; few of us will see affordable housing in our lifetime.

When questioned on the persistent issue of land banking he claimed he was doing all he could within the law. The fact is that the Government, and even Auckland’s mayoral candidates have powers that they could use to reduce land banking, if they chose to use them.

What is land banking?

To calm house price inflation the Government’s focus is on getting more houses built. However some of their Special Housing Areas are still lying empty and undeveloped. Minister Smith pointed out the Government can’t force a land-owner to invest in a housing development. In other words they are powerless against a practice known as land banking.

If the price of land is increasing quickly, it can be more profitable to not develop it. Instead the owners just hold on to the land and wait until the price of the land rises further; a practice known as land banking. If there is demand for development and enough people hold on to their land then the price of the land is certain to rise.

The only way to break this cycle is to stop the price of land increasing quickly. One way to do this is to allow more development on a given parcel of land, which has been achieved in some areas through the Unitary Plan. But there are other ways.

Comprehensive Capital Income Tax

A Capital Gains Tax might help reduce land banking a little bit, but not much. The current bright line test hasn’t stopped people flipping houses quickly; they are still making a profit the only difference is now they are paying a bit of tax on it. We have seen similar results with Capital Gains Taxes overseas failing to prevent housing bubbles.

Instead the Morgan Foundation has proposed a Comprehensive Capital Income Tax (CCIT). This would treat all investments in the same way as a bank deposit. For investments that aren’t generating a taxable return, e.g. vacant land, the investor would be taxed the same amount as if they had the value of that asset in a bank deposit. Paying a CCIT would reduce land banking by providing an incentive to make the most efficient use of that land immediately, rather than hold onto it waiting for untaxed capital gain.

A land tax would have a similar impact as the CCIT on land banking. But why should we only require land to be used efficiently? Don’t we want the same for all assets owned by New Zealanders?

Compulsory land acquisition

Economist Arthur Grimes recently recommended using the Public Works Act to acquire land for housing development as part of his. In fact he suggested using the difference between the price paid in compensation and the eventual market price of the land to pay for the infrastructure needed to develop the land.

This would be an extreme measure, an erosion of private property rights that would be certain to raise the hackles of the ACT Party and upset core National supporters. A tax as described above would be less disruptive in that respect, but compulsory land acquisition is an option nevertheless. We use compulsory land acquisition for key infrastructure like roading, so why not housing? The question we have to ask ourselves is whether housing is a right, a fundamental part of our infrastructure, or is it an investment to make money off?

Auckland’s Mayoral candidates could act also

Even Auckland’s mayoral candidates could help nudge land bankers to develop their land, but only one candidate has a policy that would achieve this. The youngest candidate Chlöe Swarbrick proposes shifting the rates calculation formula entirely over to land value. This would mean that a patch of empty land would pay the same rates as the house next door, providing a strong incentive to develop the land.

In short, the Housing Minister has plenty of tools at his disposal to deal to land banking. His Government just chooses not to use them.


Geoff Simmons is an economist working at the Morgan Foundation. This article is here with permission and first appeared here.

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43 Comments

Another option is take away the zoning that allows development, so that the land reverts to rural or whatever the previous zone was. This is partly why the Auckland SHAs have failed, as the land was also upzoned through the Unitary Plan process, removing the incentive to develop for (affordable) housing. Difficult to remove zoning at the moment, probably would require RMA amendment.

Ultimately what other countries have found -Japan after there 1980's property boom, Texas/Southern US and Germany is that moving from zoning where residences can be built (which restrict building up and out) they move to a plan which dictates where residences can never be built (thus protecting future infrastructure corridors and important ecological environments) and everything else is fair game. The competition from freedom of entry eliminates the hoarding land banking business plan.

That only works if you have enough foresight to plan where future infrastructure should go. Something NZ has shown a very poor history of.

Correct in recent history. But our major cities all expanded on the back of publicly planned and funded transport infrastructure like trams. Wellington, in particular, benefited from forward thinking on development following train lines. And lest we forget lots of today's Auckland grew out of the activities of the Ministry of Works and Development (dec. 1988) both in building big roads then building lots of houses next to the roads.

Very true, a lot was achieved back in the day. Pity those with vision now are routinely dismissed as crackpot dreamers.

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The fact that houses have become a mayor part of our economic system is worry-some to say the least!
Houses are an abode over and above everything else, but to become an integral part of economic policy is an indictment to the sad state of affairs our economic system is in.

Houses are a productively created good.
They, like anything of that nature are the core of any economic system. You cannot disentangle the two.

The fault is not with the good, itself.
The fault lies within the division of labour to produce the good.

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*Yawn*

Minister Smith doesn't want to deal with landbanking. National does not see any problem with housing. End of story.

The Nats aren't dumb - they know there are big issues with housing and immigration but their whole economic plan is based on immigrants building houses for immigrants. To change anything this late in the day after they have maintained there is no crisis would show all of NZ how inadequate they have been all along.
All you will get is the next "end of the day we will consider all options but do nothing" speech either by the naked emperor or agent smith or perhaps a hint of small insignificant changes that might or might not be implemented after the election.

One fundamental flaw undermines all three proposals: who decides the value of the land?

We all know that we ignore public valuations of property when buying and selling. That's because public valuations are pretty rough and ready; fit for purpose but you wouldn't want anything important to depend on them. You can be sure that courts and tribunals would get clogged with disputes over valuations if income tax or land tax were calculated directly off the assessed value of land or a property.

Respect to Ms Swarbrick but she needs to learn more about rates before taking on the mayoralty. The CV of an Auckland residential property currently comprises at least 60-70% land value anyway; the structures on top make a lesser difference to the final value. The rates invoice is actually made up of lots of little ratelets like water, sewer, roads, parks, pools, museums. Some properties attract all of the ratelets, some don't. In particular undeveloped land may or may not attract a water ratelet or a community services (libraries etc) ratelet. Basically switching to LV might not push up the rates on undeveloped land all that much and it's hard to think that when land values are rising by tens of thousands a year for a few hundred square metres, a developer will be overly concerned by an extra few hundred on the rates bill.

What if a capital gains tax on land only were paid in a provisional manner based on the RV rising. So when one comes to sell their property their tax balance is worked out and they're either refunded tax or must cough up.

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You know, ban foreign buyers, that would be a great start.

#John Key for Prison 2016

Prison is a bit harsh, however if he pissed off to live in Hawaii I think New Zealand would be better off for it. The social damage of his reign is going to be massive.

The rules changed when the buyers just wanted to put their money into a country that was safe. Then they started to compete with each other leaving the locals far behind. We are now in a position where we need to stop the political game playing ,wipe Nick Smith's smile off his face (3% Plus 30% students and companies JOKE) and put restrictions in on overseas buyers , force land bankers to develop and open up more land by changing restrictions. This is a National Catastrophe .It is changing New Zealand for the worst and we are sitting back just watching. Come on Winston, this is your time.

He's got my vote

Will you change your handle to "Decided_voter", then?

Not until election day

If the government agrees to the RBNZ using loan/income ratios, land prices will follow property prices down .The issue of 'landbanking' would become irrelevant.

I disagree; without limits on foreign ownership and revision of immigration, this will penalise. In the medium term, prices will recover.
Loan/income ratios only impact domestically sourced financing.
A good way to incentivise more foreign ownership, though.

Cowpat, can you please explain how loan/income ration limits would reduce land banking ? Thanks

lol, a very good question :)
Yes Cowpat enlighten us please !!

Loan to income limits can certainly help with land banking as you need income to borrow. The land doesn't have any rental return.

Mostly land banking refers to old land been bought and dusted not NEW land acquisition ... Banks lend only 25% on land purchases anyway nowadays ( if they lend at all)

That is incorrect

Yeah, I don't why we keep going over this issue with "smith could do this, key could do that, english might do this....Jezz it's getting old. THEY have made it quite clear they are not willing to do a damn thing to really change the situation. So can we have articles promoting actual 'doer's' than focusing on inept 'do nothing' types?

It has a been a while since GM mouthpiece was away from this site, he would have been etching hard to get into the light spot again with the same stupid land taxes ... some just don't get it ... but you cannot but admire the persistence of attention seekers ...
So we are lead to think it would be ok for any "Authority" whoever might be, to force private landowners to build or dispose off or sell their land in the name of the new dirty word "Landbanking" ??

So everything that this country has fought for to gain its freedom, dignity, and its place in the OECD including private ownership can be slammed against the wall because few idiots think it is feasible and can be done by twisting or undusting few rules ?? ... So that is the NZ that Phil Twyford and the like will be proud to be living in !!!!!!!
a country of thieves !!!

Let the bubble burst !! if you think you are right ...let the market crash !!..... then everything will come down .. isn't that what everybody wants ?? ... let's do it ...
Nick Smith will do it for us .. Why is everyone trying to stop him ?? ... we can all celebrate then show the world how proud we are !!... Oh, everyone including the new immigrants' party in Mt Roskill !! lol

Here's something that's too delicious for words and you know the same would happen here if only we had the same guts in regard to tax as the Canadians: Vancouver Real Estate Bubble Has Burst and Home Owners Are Panic Sellinghttp://canadianinvestor.com/2016/08/29/vancouver-real-estate-bubble-has-...

http://www.huffingtonpost.ca/2016/09/02/vancouver-detached-home-price-cr...

Be gone foreign investor!!!

Vancouver tax is the medicine the auckland housing market needs

15% purchase tax on existing properties by foreign (including temp + stud) buyers. AND INVESTORS

Zero tax on new builds.

Worst case scenario it fails to halt price rises yet earns millions in revenue from taxing foreign buyers to pay for infrastructure

Best case it reduces demand and decreases prices and helps improve nz home ownership rates.

Loan to income ratioa also 4.5 to 1 like the uk

Vancouver tax is the medicine the auckland housing market needs

15% purchase tax on existing properties by foreign (including temp + stud) buyers. AND INVESTORS

Zero tax on new builds.

Worst case scenario it fails to halt price rises yet earns millions in revenue from taxing foreign buyers to pay for infrastructure

Best case it reduces demand and decreases prices and helps improve nz home ownership rates.

Loan to income ratioa also 4.5 to 1 like the uk

My Goodness !!,,, is this why we are not getting anywhere??
Did you guys read the link you posted well ?

It says : "Greater Vancouver home sales have fallen 85% in the first half of August to a mere 87, down from 597 homes over the same time last year."

it says SALES not prices, there is no mention of any price drop !! and OVER LAST YEAR !!

Don't you see that dropping sales numbers means prices will HOLD?? common sense ! .. lol, but you guys just want to cheer up about any number eh?

Haha, here is another bit for the cheerleaders:
"He goes as far to suggest selling any real estate assets in Canada you have, including your home, because you’ll be able to buy that same property back cheaper in three to five years." ... Now ...That is Great Advice !! Don't you think? --

Here is something to cheer you up and make your weekend - need a cold one with this interview :\
http://www.newstalkzb.co.nz/on-air/leighton-smith-show/john-key-in-studi...

This is incorrect

@ Eco Bird: Oh good grief! You must be an absolute idiot (Or and Estate Agent) not to realise that falling sales leads to falling prices!! Once demand drops then so do house prices!

You must have missed the other link I posted, so here's the recent article for the Huffington Post again that clearly states that the average price of a detached Greater Vancouver home fell by 16.7 per cent last month, representing the biggest single-month drop it has seen in 39 years, according to a graph provided by the Real Estate Board of Greater Vancouver (REBGV).

An average-priced detached home throughout Greater Vancouver now costs $1,470,265, compared to $1,764,682 in July.

Vancouver Average Detached Home Prices See Worst Slide In 39 Years!!!

http://www.huffingtonpost.ca/2016/09/02/vancouver-detached-home-price-cr...

Oh and thanks for posting the interview with John Key. Wow he really shot himself in the foot with that one. Telling our young generations of Kiwis that the most they can hope for is to own a shoebox apartment or perhaps a rabbit hutch.

You may be still in denial but I can assure you that the rest of New Zealand is starting to wake up.

National Bird
Puzzled by your posting on VAN prices -is there 2 or 3 of you at National Central spinning it 24/7 and one of you haven't read the previous shifts posts- here is the EB afternoon shift post on Friday.....

"I will post this link which BigDaddy posted in another thread, it gives you a better Vancouver picture .... Note that prices have been heading down since March but the 15% just triggered an avalanche .. do not judge very quickly ,,, Understand what is happening over there ( besides the 15%) and wait for the results, they could be heading for a disaster ...
http://globalnews.ca/news/2887766/data-is-the-metro-vancouver-real-estat..."

Post was at the following Interest site
http://www.interest.co.nz/opinion/83391/hayden-glass-need-be-nicer-hitti...

Embarassing - one of 'you' is saying that prices are stable and the other 'you' is saying there is an avalanche in prices.

Dear leader must be so upset. Suggest you do proper handovers between shifts.......

Interest.co.nz - is it correct to allow Political Parties to spin on your site?

The price of Vancouver detached housing dropped 17% in August. This handy chart illustrates the state of affairs.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2016...

The Auckland housing market very likely has the same chink in it's armour.

Accidental play on words there in the last sentence............?

Yes very much agree with you xelnaga: We all know that foreign investors are massively pushing up house prices in Auckland, even John Key admitted that our average house price for Auckland is at the million mark now (Remember only four years ago it was half that).

And here's the proof: From Oct 2015 to Jan 2016, Auckland property prices dropped by almost -10%.

Why did this happen; Foreign Buyers were required to be IRD registered, and the time it took to sort out the paper work, which put them on hold in the spending pattern, was enough to cause Auckland's property prices to fall!

Still in denial over the influence of foreign investors Eco Bird???

Exactly. In that video National Bird so conveniently posted Key and his sycophant agreed that AKL was in the same boat as Vancouver and a host of other cities (where foreigners and penniless foreign students are corrupting the normal pricing.) Therefore a 15% tax would have the same effect here as in VAN obviously.

Thanks, John, Leighton, National Bird. Its always been about demand.

lol... you guys are marvelous ! .... don't know the difference between sales numbers and house prices ... don't know that when only few houses are sold in a distressed market than average prices become meaningless because the property sold are so few to make a meaningful average ... you have to wait at least 6 months to get the market to stabilise ...then we will see

I am not wishing that prices continue going up either here or in CA, and I dont comment under any political affiliation light ....

Let me tell you what my family members in Toronto ( and currently in Vancouver) were saying this morning ( and I quote) :

" Yes Vancouver sales are down, not sure about prices, it's unclear yet . Ontario is probably going to follow suit. Either the same way or maybe as a flipping tax..not clear yet "
" It just doesn't make sense..economy is crappie, inflation is through the roof, the $ is 30% devalued, wages are stagnating at best and yet there is a bidding war on houses."
"The for sale sign goes up on a tues or wed., open house on sat. n sun. And boom SOLD OVER ASKING PRICE sign goes up."
"Part of is there is not a lot of houses for sale. And that is the case in all of Toronto. Very big demand for the available supply, At some point there was a surplus and a slowdown in condo building but lately condo prices are ridiculous. A closet size of condo is no less than 400K" ....

Oh, BTW personal attack on myself or anyone else here just proves the shallowness of the participant and reflects the true image of that person ... it is very unfortunate that some of you guys can only see through right and left Glasses and have both eyes and ears patched ... Just don't cry when it all turns to custard !

Whatever but still puzzled National Bird - re VAN "one of 'you' is saying that prices are stable and the other 'you' is saying there is an avalanche in prices." Which shift is on at the moment?

@ Eco Bird: For a start you attacked first - we're just pointing out the facts about how Vancouver's current property prices are headed in a very downward direction and for the long term. And any very basic marketing strategy will tell you that if you cut off demand then both prices and to a certain extent supply will drop.

Or in certain cases it could prompt a panic sale, which is quite likely when most of the property investors are overseas and want to bail out of a falling market.

At least the majority of the Vancouver citizens have everything to gain and the ones who are likley to loose the most are the Investors who have over invested.

Land price goes up, because there is a shortage of land where people want to buy and there are only two solutions:
- open up more land.
- reduce demand.

Only one of those is sustainable.

Or option 3 - increase density.

Preferred would be option 4 - all of the above.