BNZ's Tony Alexander says a capital gains tax imposed on NZ's under-supplied property market would cause house prices to rise

By Alex Tarrant

A capital gains tax imposed on the New Zealand housing market at present would put upward pressure on prices as owners held onto properties and developers were less likely to build, exacerbating the current housing shortage, BNZ chief economist Tony Alexander says.

Alexander’s comments are at odds with warnings from Prime Minster John Key, and the theoretical argument from the Tax Working Group last year that the imposition of a capital gains tax on property would cause prices to fall as houses were sold off, and demand for purchases of investment housing declined.

A capital gains tax would mean fewer investors would put property on the market for sale, opting to hold the asset for longer, Alexander told interest.co.nz

“I think people will a) be disinclined to move out of that asset, but b) mainly, and I’m talking the long-term here, mainly the decreased incentive [would be] for investors to build properties for renting out,” he said.

Alexander estimates a shortage at the moment of about 45,000 dwellings in New Zealand, which would take years to rectify.

“Each month it gets roughly a thousand worse – we’re not getting as many consents issued as historical trends would suggest [were needed],” Alexander said.

A housing shortage was an incentive for property developers to build houses for renting out or selling.

“That incentive was there, before the capital gains tax change announcement. After [if a CGT were imposed], the shortage is the same, but the incentive for the investors to build is less,” Alexander said.

“At the margin for some investors a capital gains tax certainly doesn’t increase the incentive to build - it decreases the incentive to build. So it would lead to some immeasurable decrease in the number of properties likely to be supplied to the market,” he said.