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What happened without a foreign ban and CGT

Opponents of the foreign buyers ban and a capital gains tax say they haven't worked in Australia. But Bernard Hickey shows their absence here actually helped our prices outperform Australia's dramatically since 2002.

The planned imposition of a foreign buyers ban and the election debate about a capital gains tax often throws up the straw man of Australian house prices.

It seemed like the perfect counter-factual to argue that a ban on foreign buyers and a capital gains tax would not make any difference here. After all, it was argued, Australia has both rules in place and their prices are even crazier than New Zealand's.

But is that true?

This Economist measure below of house prices globally shows that New Zealand house prices vastly outperformed those of Australia, Canada, Britain and Australia since 1980. Australian house prices may be higher than New Zealand in some places, but the relative performance of our houses when compared with Australia's is much, much better, particularly in recent years.

Australia put in place its ban on foreigners in the 1970s and ramped up enforcement in 2015. Victoria and New South Wales introduced a land tax for foreign buyers in mid 2016 and Victoria increased its stamp duty surcharge for foreign buyers to seven percent from three percent in mid 2016. Australia also removed the exemption from its capital gains tax for the main home for overseas investors in this year's budget.

New Zealand's house prices, and Auckland's in particular, have vastly outperformed Australia's in the last three years in particular as Australia ramped up its attempts to slow down the flow of capital coming in from overseas.

In particular, Australia's house price performance underperformed through early to mid 2016 as its banks stopped lending to overseas investors because of concerns about the validity of income documentation. The New Zealand units of those same Australian banks also reduced lending to overseas investors through late 2016, which also coincided with a slowdown in the New Zealand property market.

The relative performances of the New Zealand and Australian property markets since the early 2000s show that the absence of foreign buyers' bans and a capital gains tax have been significant factors in helping New Zealand perform much better. The effect is most pronounced after the significant rise in net migration in the early 2000s and the arrival of capital from overseas in subsequent waves of migration.

The ability for rental property investors to borrow easily and heavily from banks to win highly-leveraged and tax free capital gains also helped super-power our prices, at least until late 2016 when the Reserve Bank forced such investors to have 40 percent deposits. Australian investors must pay a capital gains tax, which helped limit the extent of their appetite for such leveraged gains, although there was plenty of that investment too in Australia over the period -- again until the Australian Prudential Regulator forced the banks their to limit their lending to rental property investors.

New Zealand's outperformance of Australian prices significantly accelerated from 2002 to 2007 and from 2013 onwards. New Zealand had the same problems as Australia with very fast lending growth from banks and with restrictions on growing housing supply, particularly in Sydney, so the main difference is the lack of a capital gains tax and foreign buyers ban.

If anything, New Zealand's outperformance of Australia is even more remarkable given the relative performances of our economies over that period. Australia's wage advantage over New Zealand grew sharply to around 30 percent between the early 1990s and now, which should have helped Australian house prices do much better than ours. Instead it was the other way around.

Hardly any foreign buyers?

Another argument used against a foreign buyers' ban is to say that foreign buyers are actually a small part of the market and therefore banning foreign buyers won't make a difference. The implication is it's not needed at all.

Most of those using this argument point to the Land Information New Zealand series of data on non resident buying since 2015.

Land Information New Zealand created a data set in 2015 measuring the number and percentage of property transfers involving non-residents for tax purposes. This was done after the Government announced a withholding tax on non-resident buyers of rental properties that forces buyers to declare whether they are residents for tax purposes.

That's not necessarily the same as people who are non residents. People with temporary work or student visas often register to pay income and other tax, but are not permanent residents. People also often buy properties through corporate or business entities, where the ultimate residency of the beneficial owner is not declared.

LINZ reported that five percent of buyers of 12,951 Auckland properties in the June quarter were not New Zealand tax residents, while 20 percent of properties were bought by 2,637 corporate or business entities. All but six of those entities stated they were resident in New Zealand for tax purposes, but no information was given on the ultimate residency status of the owners of those New Zealand companies or trust.

So the actual percentage of properties that could involve people without permanent residency could range between five percent and 20 percent. The data itself is therefore not useful in determining the actual scale of the foreign buying.

The simple answer is that no one knows exactly how much overseas capital has flowed into Auckland and how much of an impact it has had on prices, alongside the pressures of record high net migration and the lowest house building rate in history. It could be a lot or it could be not much.

But it's clear that the difference in New Zealand's policies with Australia have been a factor in New Zealand prices outperforming Australia's.

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