A capital gains tax would be almost ‘irrelevant’ with house price growth unlikely to continue at pre-pandemic pace, former finance minister Bill English says

Former finance minister Bill English says there would be little point in expanding New Zealand’s capital gains tax as the era of fast house price growth has ended.

During an NZ Initiative webinar on Kāinga Ora, English revealed he had “seriously considered” a capital gains tax as part of National’s 2010 reforms but it didn’t find favour with his colleagues. 

“I think every finance minister has a look at it, and they seem to come up with the same answer. In fact, Michael Cullen told me that at the time, he said, I'd go through it and then IRD will tell me that it's actually not that worth it,” he said. 

“So no, there was no constituency for it in the cabinet, that's for sure”. 

In 2010, the National Government raised GST from 12.5% to 15% and cut personal and company income tax rates, including lowering the top rate from 38% to 33%. The package was designed to be broadly revenue-neutral, with higher benefits and tax credits to offset the GST rise.

The Labour Party is preparing to announce a tax policy before the end of the year, which some have speculated will be a minor expansion of capital gains tax aimed at property investors. However, it could be a wealth tax or something else entirely. 

English said there would be little point in taxes targeting property today as house price growth had slowed and was unlikely to resume the steady increase from the early 1990s until the pandemic peak in 2021.

“I now think capital gains tax is not quite irrelevant, but it would be a complexity that doesn't collect much revenue because the days of guaranteed capital gains in the housing market are over,” he said. 

Investors will now have to be much smarter at adding value by choosing quality houses in good locations that provide for the right part of the market. They cannot just expect any given house to significantly increase in value over time. 

He gave an example of a conversation he’d had with an owner who hadn’t been able to sell his property. Sales were happening in the first-home buyer market and on the high-end market, where cashed up buyers aren’t going into retirement villages.

But there was nothing happening and no interest in the mid-market, which in this case was somewhere between $1 million and $1.5 million, English said.  

“And they were scratching their head, asking, Okay, so what's actually going to happen with this? Is it automatically going to go up in value? To which I said, Well, I don't think so. You might have to rent it out, and that's one reason rents are going down in some of our urban areas”. 

NZ’s biggest land banker

The webinar was to discuss NZ Initiative's new report which argues Kāinga Ora had over-extended itself trying to own, develop, and manage social housing nationwide. It recommended selling more state-homes to community providers and freeing up undeveloped land for the private sector to build on. 

English said Kāinga Ora was the “largest and worst” land banker in the country with more land underutilised than any other entity. 

“If you want to build a new supermarket in any urban area in New Zealand, there is one owner who's got enough land for you to do it, and that's Kāinga Ora,” he said. 

English said New Zealand would soon start to see the benefits of government reforms to make it easier and cheaper to build homes. This included relaxed restrictions on which building products could be imported and “radical zoning decisions”. 

“It’s not all perfect, but at least the large political parties are behind it. So I think there's a sort of semi-bipartisan support that no one's promising to unwind it.”

Younger people might start to see owning housing as affordable again, the government would benefit through less fiscal exposure to the property market, which costs the Crown $4 billion a year in housing costs. 

Having large amounts of property on the balance sheet also exposed taxpayers to falls in market value, with many housing assets yet to be re-valued after the pandemic crash. Which would have a significant impact on the government's net worth soon. 

“So, the zoning thing works politically, it works for the economy, and it works for the government's books,” he said. 

“And if they could combine that with freeing up the latent value, all this under-utilised and land-banked land in every single urban community [it could have] a significant positive impact on the economy and, more importantly, on households' ability to service their housing costs.”