There are numerous ways the Government could cool the housing market if prices started rocketing up again, including the capital gains taxes we already have, Greg Ninness writes

There are numerous ways the Government could cool the housing market if prices started rocketing up again, including the capital gains taxes we already have, Greg Ninness writes
Image: Pieter Brueghel the Younger, Paying the Tax (The Tax Collector)

Although the Government has ruled out introducing a comprehensive Capital Gains Tax, it still has plenty of weapons in its armoury to battle rampant house price inflation if irrational exuberance once again becomes a hallmark of the residential property market.

Two of its most important tools would be the capital gains taxes we already have, one of which is reasonably comprehensive, although both are known by other names.

Firstly there is the intentions test, under which profits from the sale of a property are taxable, if the property was purchased with the intention of reselling it.

And the family home is not necessarily exempt either.

For example, if someone purchased a home with the intention of doing it up and then reselling it a year or two down the track, any profits from the resale may be taxable, even if they had lived in the house while it was being renovated.

The problem with the intentions test is that it can be difficult to determine if a property was purchased with the intention of reselling it.

One of the things the Inland Revenue Department considers when applying the intentions test is a person’s buying and selling history.

So someone who buys a property and flicks it after a couple of years might escape IRD’s attention. But someone who has done this several times might well find the tax man knocking on their door.

If rampant speculation returned to the housing market, one of the ways the government could combat it would be to tighten the rules around when the intentions test applied.

For example, loss making investment properties, or those that were providing very low rental returns below a specified figure, could automatically be deemed to have been purchased with the intention of making a capital gain on resale, that would then be taxable, because the rental return was so poor.

Such an approach would not be without precedent.

For example the resale of gold bullion and other precious metals is nearly always taxable because they don’t usually provide any income, which means the only way to make money from them is to sell them at a higher price than they were purchased for.

So it would be hard to argue they weren’t purchased with the intention of reselling, unless perhaps you can show that the metal was purchased with the intention of turning it into golden bath taps or door knobs, or to provide new fillings for your teeth and these things had a degree of permanence about them.

The Bright Line Test

The other capital gains tax we already have is the Bright Line Test.

When it was introduced by the previous National-led Government, it made capital gains from the sale of residential properties (apart from the family home) taxable if they were resold within two years of purchase. That time frame was increased to five years by the current Labour-led government.

Another option would be to increase the time limit for the Bright Line Test to 10 years, which would likely capture all transactions within a normal property cycle, and bring it into line with the 10 year time frame used to determine whether profits on properties sold by developers and builders are taxable.

Another tool used to calm the housing market is the loan-to-valuation ratio (LVR) limits imposed by the Reserve Bank on new mortgage lending.

This already has a good deal of flexibility because it allows the Reserve Bank to  adjust mortgage lending limits for different classes of property buyers, such as allowing a higher LVR lending limit for first home buyers while restricting high LVR lending to investors.

And the Reserve Bank has already demonstrated its willingness to adjust LVR limits according to changing market conditions.

However the Government could also consider adding debt-to-income ratio restrictions to the Reserve Bank’s toolkit, which would give it even more flexibility if it felt the need to rein in excessive mortgage borrowing/lending if property prices started tracking up sharply again.

In the period when the Government was considering whether or not to introduce a new Capital Gains Tax, its opponents were vociferously proclaiming the detrimental effect CGT would have on the property market.

Now that a CGT has been emphatically ruled out, it will be interesting to see if this sparks an upturn in property market activity and a corresponding lift in prices.

If it doesn’t, that suggests that the detrimental effects CGT could have had on the property market were probably being overstated by its opponents.

But if the housing market does spike sharply upwards again for whatever reason, there’s plenty the Government and the Reserve Bank can do within the current tax and regulatory framework to cool things down, even though CGT has been consigned to the rubbish bin.

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The problem with these options is that they are a drag on demand and negatively impact the construction of new housing. As we currently have a housing shortage paralleled with high immigration these options shall spiral rental costs and overcrowding.

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In 1998 we had a population of 3,815,000 and 1,440,000 private dwellings according to Stats NZ (377 dwellings per 1000 people)
In 2018 we had a population of 4,758,000 and 1,885,000 private dwellings according to Stats NZ (396 dwellings per 1000 people)

Doesn't look like a shortage of housing/private dwellings due to high immigration. I'm sure there's more to it, like these "ghost houses" I've heard about.

Building composition must play a part in the dwelling to people measure as it doesn’t take into account bedrooms I.e. a studio is a dwelling as is a mansion from my understanding.
I still would think it’s an affordability crisis not a housing shortage.

The average dwelling size was 157m2 in 1998, and 175m2 in 2018 (halfway down the below link).
https://www.oneroof.co.nz/news/boomers-v-millennials-which-generation-ha...

It likely is an affordability crisis but I don't think it's solely due to migration given the aggregate population vs dwelling numbers. Either we have many more people today with surplus properties (holiday homes/temporary dwellings), or there are still a good number of properties with non-residing (foreign) owners leaving them empty.

Or AirBnBs. Met someone who boasted she had 3 large AirBnB houses on the North Shore.

Speculative demand not only offsets regular supply, but it actually tightens supply as homes are kept off market and unrented. It's very easy to flip and sell unrented properties in an 'up' market.

The proper solution is to bring back a comprehensive central government land value tax, and use the proceeds to reduce GST and income taxes. That would get us out of the productivity stagnation. And enable the creation of affordable properties.

Ah yes, the 'land value tax' which overlooks the fact that Govts strangle the supply of land and also have not been able to make any meaningful impact in the art of consenting or building properties, even with the might of the state behind them.

I don't agree with the idea of reducing GST, the shadow economy in NZ is estimated to be $1 billion, for those business owners dealing in cash they are at least currently paying tax via GST of 15%

Reduce or remove GST and replace it with a financial transaction tax. If someone wants to risk transacting purely with cash then sweet as. As soon as they make a bank deposit kaching. Will even capture those pesky profit shifting multi nationals.

Transaction taxes are a nightmare. How would it relate to GST?

Joe buys four tickets to the Warriors for $100 (on his credit card). A tax is charged (and immediately passed on from the ticket retailer to Joe) for the transaction.
Joe's 3 mates then pay him $25 (+ their share of the original tax) each, all charged for the transaction. Three separate taxes. Do the 3 friends pay the tax? or does Joe?
One of Joe's mates accidentally puts in $50. So Joe has to calculate a refund and pay it back, yep another transaction tax I also use calculate as he has to factor in the taxes to workout what the friend should get back. Again who pays?
Joe then pays off his credit card, oh look another tax.

End result is that the one legitimate transaction gets taxed 6 times. As opposed to GST which is charged once.

It is the quickest way to a cash only economy.

That’ll teach Joe and his mates for buying tickets to the Warriors game.

Have a heart - They wanted to see the opposition play, but couldn't afford the trip to Oz.

But what if, despite being taxed 6 times the overall tax paid in that transaction equates to only 10% instead of 15% due to a FTT being able to cast a wider net and capture a lot of business transactions designed to negate tax liabilities?

The maths would be very complex to work out to ensure parity with GST.
A transaction tax sounds simple in theory, but the reality is far from..

For example
Salary and wages (and relevant deductions e.g. PAYE and Kiwisaver)
Paying a mortgage
Paying rent
Transferring to a different account (i.e. paying the credit card, savings)
Setting up a Term Deposit
Paying fines
Paying tax, or getting a refund
Prizes
Benefits/child support/student allowances/super
ACC payments
Holding transactions. Such as House deposits, Studylink, bonds, etc... or other payments that are held in trust.
Granny putting $10 in the grandkids account for christmas.
Insurance payouts (life, loss of income, etc...)

None of the above incur GST, but would attract a transaction tax.

Also,
Who pays the tax, the payer or the payee? Can you net them off?
How is it administered? Does the bank collect it, are you liable at the end of the year?
How do you manage international payments?
What about small payments, i.e. parking meter, vending machine, micro payments, etc...
Do you really want to be chasing up $0.01 on a $1.00 payment?
If you put in a threshold? say $x. Will everything be paid in installments of less than $x

You put forward some great points about the complexities of the idea. Yes the list of GST exempt transactions you list would incur a transaction tax, however this transaction tax would be offset by a reduction/removal in GST and/or a reduction in Income Tax.

E.g. You get a loss of Income pay out of $100k. Let's say 5% transaction tax applies leaving you with $95k, but GST is now 10% instead of 15%.
Granny putting in $10 into the grandchild's bank account may need to pay 50 cents, 10 cents whatever? for the transaction but her pension net weekly rate has gone up due to a reduction in income taxes.

Who pays the tax? The sender.
Who collects the tax? The banks.
Can you offset it? No why?
Who will be chasing up $0.01 on a $1.00 payment? It'll be taken out of the sender's bank account just like any other bank transaction fee, just like tax is deducted at source for PAYE.
No thresholds, a flat tax.
International Payments? Well incoming money is to be welcomed, however outgoing payments will be taxed at the source bank account.
Micropayments? That too will be taxed at source. I pay for $1 parking using my debit card, my card is billed $1.01 by the bank.

GST would have to be zero. Otherwise you have the tax on a tax issue (or in the case of fuel, tax on a tax, on a levy) that is always unpalatable to the masses.

Reduction in income taxes? now it's getting even more complex.

Sender pays (While logical) creates all sorts of purchasing issues for consumers, and this is where I think it really falls down. The price on the tag is not what you actually pay. Our laws are relatively clear on this. The price must be the price (including additional charges) how would consumers and retailers react to this.
I have $10 in my account, buy $10 in petrol - but it cost me $10.50.
Then to add insult to injury I am charged an overdraft fee, which I then get taxed on when I pay it.

Sender pays will be a nightmare for numerous pass throughs. e.g. I pay $1k rental bond (which is held by tenancy services) Costs me $10.00 to do it. I then get it back at the end. If I get $1K back then the Tenancy services is out $10? how do they recover it? Charge me $10, which actually costs me $10.10, or do they have to do some netting off calculations and I only get $990.09 back. How does that fit in with the current laws?

Now take it up to corporate/B2B bonds you could be talking millions/billions. Does the trust account pay the tax?

Another example.
I buy a house, I pay a $15k + TT deposit to the REA. Then on settlement a further $150k deposit + TT. Then the bank pays a $500k mortgage (I assume the TT is then added to the mortgage.)
Now each payment I make against that mortgage is then charged a TT. I am now paying the TT on the TT. How do you sell that as an Idea.

Re offsetting I mean
Company A pays Company B $1.5mil (+ TT) on an invoice.
Invoice is later found to be wrong. Company B refunds $110k (+TT).
Does Company A get a refund on the TT they paid on the first transaction. If so how?

I maintain, a transaction tax is simple in theory. But when looking at the minutiae it is a true nightmare. You would have to have thresholds, exclusions, and it couldn't be limited to just the Sender.

TLA's have had this capability for the last coupla decades. Read the Rating Act 2002 and note the possible bases: annual value, land value, capital value etc. Not to mention differentials (area, size, colour of letterbox).

So what stops the fabled Land Value Tax? A toxic combination of:

  • Lack of vertebrae and cojones amongst TLA pollies
  • A complete cluelessness about anything Economic in TLA intellectual heritage: no economists until last week historically speaking, no cost/benefits, no time value of Munny concept, no opportunity cost concept - a long and sorry list
  • A short electoral cycle which means that only the middle year of 3 is productive: year 1 is getting into the seat, year 3 is retaining it, for Councillors - the only link between ratepayers and policy
  • A complete reliance on a single CEO (Council's only Employee) for such trifles as TLA staffing, culture, capability and continuity. This means that changing the CEO is the only way of changing Council staff culture if that's gone to the dogs.
  • Staff regards Coucnillors as a set of interchangeable buffoons around a very distant table. So they are free to pursue the fad-du-jour, with lashings of OPM and zero accountability. This is exacerbated if clueless Gubmints allow generous Powers to TLA's. Hence the profusion of Events, Social and Cultural soft spends, and rates inflation
  • The OPM is derived from what can easily be characterised as a Mass Obfuscation Exercise: rates, differentials, uniform charges, special rating areas, fees for services, and Modest Contributions to such as water, sewer and amenities. Getting a consolidated handle on this financing is beyond most Councillors, certainly beyond all but a fraction of a percent of Ratepayers, and so it metastasizes, year after year. The litmus test for Councillors:
    can I get re-elected if I Vote for this?

Hey ho....

"However the Government could also consider adding debt-to-income ratio restrictions to the Reserve Bank’s toolkit"

You can really only implement a DTI after a housing crash or a long period of rising wages and flat house prices otherwise doing so now would immediately lock a significant amount of the population out of the market.

Imagine setting a DTI at 5 or 6 in Auckland right now.....

The free market is the answer. With the exception of meaningful reductions in immigration, government intervention to try and reduce demand through tax and LVR limits is just going to stuff things up, primarily in the form higher rents.

Property is just a scarce product in a market like any other. Imagine someone saying that butter is too expensive so we should tax it until it is cheap. That's not how it works.

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Making it cheap is not a reason to tax land. Milton Friedman's arguments for taxing land are better.

The other thing we urgently need to do is to stop subsidising property through the Accommodation Supplement, Working for Families, and the First Home Buyers grant. All distorting measures that are unnecessary subsidies to investors.

BLSH, by free market I hope you’re not ignoring that central banks have been keeping interest rates at historic lows for 10 years, encouraging asset prices up. That’s not a free market.

It's all been created by government really.

The run up in home prices in the US was 'made' by Alan Greenspan. They had the tech bust of 2000, so he reduced interest rates drastically... the housing bust followed 7 years later.

It’s hardly a free competitive investment market if property is taxed lower than other investments is it?
And I’m not sure your butter example is that great. Unlike property, if you sell butter for a profit then you must pay tax. And if you hold onto butter it is unlikely to go up in value as the supply isnt constrained.
How about comparing to copper. Let’s say the government for some reason decided you could sell copper without paying tax. And then loads of investors decided that copper was a comparatively good investment because of the tax break. The level of “investment” made copper prices increase so much that regular people could no longer afford to buy copper for plumbing etc. isn’t that a similar scenario?

They could indeed, but it seems highly unlikely that the property market will start rocketing up again, without some serious help from the RBNZ. That would really be something, if the NZ market kept rocketing up as the Australian market corrects. That factor alone would drive a lot of people out of NZ to go and live in Australia, causing our (supposed) housing shortage to disappear.

While the property market over the past 30 years has been characterised by cycles, the boom (for Auckland) between 2010 and 2017 (and slightly later for the regions) was more sustained and consequently signifcant.
The main driver for this was historically low interest rates of about a half or what had been the norm for the past 30 years. These low rates now seem set for the medium and longer term at least.
It would seem that the market has reached an equilibrium with the new interest rates (along with LVRs) and I don't think that we will see a similar significant and sustained boom in our life times. Property cycles; yes - but not to the same extent.
Another driver of the boom was the historically very high levels of immigration; however there has been no government intervention here to date. The FFB was probably more about a lesser issue as there has been booms in regions where FB were never a presence.
Currently, I think the market, along with RBNZ LVRs and OCRs tools, will provide sufficient stability to a market with some acceptable fluctuations and cycles similar to that prior to 2010.

P8, I agree with most of that, except I don’t think “the market has reached an equilibrium”. It’s way overvalued. It’s one of the most severely unaffordable in the world by international measures, and becoming more so than Australia now. It will correct down, that seems obvious. It will still come as a great shock to many people though.

It looks like it will come to a great shock to you when property prices don't come down. If prices are overvalued as you claim, why don't you buy a piece of land and build on it to save hundreds of thousands buying an overvalued house? Because you cannot.

Yvil, if prices don’t come down I’ll be pleasantly (very) surprised. One of the things I have is a piece of land, with a dump of an old house on it, ready to be demolished and rebuild when the building boom is over. No hurry. I’m expecting to take a hit on the land value for a long while, but took really decent profit on a previous sale to account for that. I won’t sell, or build yet. I probably should sell if it were just a short to medium term money decision, but the site has a fantastic view I can’t part with.

That can't be done because a) The land price is very high - i.e. same as house prices. And b) Because things like materials and labour are in short supply right now.

If things turn pear shaped, then land will be able to be bought much more cheaply and materials/labour will become much more affordable.

Yvil thinks that the cost of building materials and land primarily underpin house prices, not that building materials/land have responded to market price signals after over a decade of speculation into existing houses.

As you say, if things turn pear shaped and the materials manufacturers start seeing a huge reduction in their forward orders what will happen to prices? The margin in $30 sheets of Gib are no good to Winstones if nobody is buying them.

ahem .. how much did building materials prices drop in US circa 2008 ? how much have building materials and construction prices have come down in Australia over the last couple of years ?

It's the overall construction labour costs that will tend to come down from where they are now. During the boom there is great demand and prices rise. NZ is very expensive to build right now.

Significantly for lumber:

http://iforce.co.nz/i/c2kpozqt.mpg.png

Davo36, yes indeed, land will come down a lot in value, and so few people will be building in the decline that labour costs will come down (sorry construction people). Ask an architect how costly it is to build right now compared to when there was no boom.

Not to forget interest taken by Chinesse and overseas buyer (NZ was promoted as Tax free country) and money Laundering.

Now with Ban on foreign buyers and anti money laundering act, things will change for how many FHB can afford to buy Million dollar Plus House.

Example a house in Halfmoon Bay 3 Wells Road with a CV (In 2014) of 780000 was purchased in 2015 for 1306000 (Just Imagine) and now 2017 CV is 1180000 so will it go for 1.4 or 1.5 million (Properties in the area are now mostly going 10% to 25% below CV with some expection like weatherboard free standing house in Gills road area going for early to mid 800 which have a similar or lower CV and may be in high 700, if it is a do up house)

The national median house price hit a record high in March 2019, so what effect has the possibility of a CGT had at a national level of which Auckland is but one part.
Last weeks Barfoot auctions suggest there was no immediate rush to purchase in Auckland now that the possible CGT has been removed

'Last weeks Barfoot auctions suggest there was no immediate rush to purchase in Auckland now that the possible CGT has been removed'

That's an interesting point. Almost perversely maybe the market will weaken even more now that a CGT has been ruled out. As long as it was a realistic prospect, there might have been a bit of market activity created by investors looking to buy now to beat the potential introduction of a CGT.

Welfare ay! That old socialist trick that distorts just about everything in the end. Buggar!
As long as we continue to pay people to a) do nothing b) fail c) breed in their teenage years & d) need a home, and, oh, can I have an accommodation supplement with that(?) then you will always have the makings of central governmental distortion on an epic scale. That part alone costs you & me almost $10 billion every year in one form or another. However, as you know, it is commonplace throughout the West. It underwrites our lives, which is why everyone wants to come & live here, but is also very quickly becoming unaffordable. It is madness on a global scale & from what I have been able to understand, not even Donald Trump can stop it, so what chance NZ Inc?
We have become too lazy, too rich, too selfish (as seen through the lousy birth rates of the educated classes) which along with far too much poor leadership/management a) of ourselves as individuals b) in our homes & families c) in our communities & neighbourhoods d) in our towns & cities & e) in our nation generally, that we fail to recognise the slow decline of all the above mentioned, as witnessed in the way we (mis) treat one another, or in other words, in our daily relationships generally. If we are unable to reverse that one ingredient then we are all in for a rough ride. My advice is to belt yourself in.

What's your solution then? Remove benefits?
There would be carnage.
It's very very complex and systemic, and defies simple 'solutions' (from the left or right).

The solution is to bring back the jobs.

You take people's jobs away and you take away their whole meaning in life, structure to their days etc.

So then they sit around the place drinking, taking P etc.

With the exception of the last quarter unemployment has been trending down, employment rate is ~4.5% higher than it was a decade ago. Is there really a shortage of jobs?

So much has been written about this. The heart of the problem is that it’s a problem that most of the voting public doesn’t want to fix. People like to have puffed up house values at the expense of future generations. It a cultural problem. If a government were to fix this problem they would get voted out so they just pretend, bluff and lie and as we know from Labour and National, ... do nothing.

Another way would be for the govt to build a lot more housing. Affordable, as well as social.
It needs to be done anyway, but it could help limit the damage of another potential'boom' ( not that I think we will see another boom anytime soon)

Are you kidding ??? Did you not hear, the government is building 100'000 affordable homes as we speak

aha!
I see in the herald tonight that they have done their ratings of Minister performance. It's behind a paywall, but they tease by saying three ministers with big portfolios are lowly rated. I assume Twyford is one of them.
I'd score him a 3 out of 10. Only gets to 3 because he 100% says the right things! (which is a start). But his performance on delivering......
I'll be interested to see what they give Parker. Haven't been that impressed by him either. A 4, or 5 at best.

Don't worry, apparently the herald put the security on the client side, somebody will have a chrome plugin up a few days that will unlock the "premium" content. If you are putting a paywall up, don't leave the keys on the outside :)

HA ha
I see big Phil got a 4. Very generous
Couldn't believe Ardern getting a 9 either. Great leaderhsip with the ChCh tragedy, for sure, but...
I'd give her a 6

When talking abour CGT, why go to extreme as a result have to rule it out though have BLT but who cares and how many speculators have paid tax under BLT.

A collleague of mine, who is from India was saying that in India have a Short Term capital gain Tax, if sold within 2 years and long Term capial gain if sold after 2 years and can have Short Term tax of 30% and Long Term of 15% (Duration and percentage can change to suit each country requirement). Also CGT is adjusted against infation and certain percentage of expenditure to maintain the house can be deducted.

Why think of CGT at highest Tax level of 33% or 37% or..... Is something not better than anything and also fair as our PM but who is serious as vested interested.

I suspect the RBNZ changes to capital requirements will have a bigger impact than anything else. Internal models allowed the big four to massively understate the risks and capital required for issuing residential home loans.

Will the big four be happy to reduce dividends or accept lower profits? Will they be willing to try and raise large amounts of capital? Or will they just stop aggressively extending credit to higher risk borrowers. Early evidence suggests the later.

As with Australia it will soon become apparent how much of house values have been driven by bank lending practices.

Anyone who bought in l

Anyone who bought in last few years need Capital Loss but for future need some sort of tax which can be implimented unlike BLT.

Another house bought last year for 1180000 sold for 1150000 so lose $60000 plus 1/10 Britannia place, half moon bay (CV 1.3 Million).

Can see many houses in market as of now are those houses that have been bought on or after 2015 and most probably if they sell will be at loss so positive for them not to worry about CGT or BLT