A new way to fix our housing bubble
Susan St John says the Government's Tax Working Group will not find real answers for the housing market, and a new kind of tax on our net housing equity is needed.
To say that New Zealand has been in the grips of an extraordinary speculative housing bubble is hardly news – we have been the new Ireland for quite some time now.
But what we don’t often hear is the fact there is actually an ample supply of housing overall, but it is poorly distributed in terms of size and price. The already-wealthy have been accruing increasingly large gains in house values, while the poor suffer excessive rents or lose access to housing altogether.
And what does this means for our children? Well, the inevitable divide between young ones who thrive, and those who don’t, is now strikingly along housing lines.
Taking the balance sheet approach required by a social capital lens suggests a grave deficit especially from the child’s perceptive. The Child Poverty Action Group believes the lack of a principle-based approach to the taxation of housing has been a prime driver of the now precipitous state of our housing market, which has in turn perpetuated rising inequality and deep child poverty.
Our latest analysis – Will children get the help they need? – shows families who are on full core benefits, paying typical rents in Auckland and getting the maximum accommodation assistance, fall well below, not just the 60 percent poverty line, nor the 50 percent nor even the impossibly low 40 percent, but they fall below the 30 percent line. At these subsistence levels, with no housing security and nothing in reserve, families drift to the outer margins of society.
In the meantime, the median housing price has risen to over $2 million in several suburbs and mansions of $5 -$20 million plus are becoming more common.
A radical rethink of the taxation of housing is needed if the situation is not to devolve into irreversible calamity in the next 10 years. Is the Tax Working Group up to it?
In our submission we argue that horse has bolted, and it is too late for capital gains tax. In any case, the history of taskforces trying to design a capital gains tax suggests the 2018 Tax Working Group too will revisit all the old arguments and problems. In the end, the government will walk away from it, as happened 1990, 2000 and 2010. It is simply too hard.
In the meantime, the wealth accumulation of the wealthiest households continues exponentially, and the accruing income is untaxed, apart from easy-to-avoid bright line rules around truly speculative property investment. This growing imbalance will worsen poverty and further undermine the efficiency of the economy and social stability.
Currently landlords can deduct costs, including full nominal mortgage interest costs, against other income for tax purposes. The present government’s proposal to ring-fence losses from rental property investment is a very partial and inadequate response. Losses from one property can still be offset against others that make profits, or carried forward and written off eventually. While the five year ‘bright line’ test might capture short-term capital gains, it is not enough on its own.
The CPAG is urging development of a net housing equity tax.
A person would be assessed on total housing owned, less registered mortgages. This net equity would be treated as if it had been put into a deposit at the bank at, say, three to four percent. This deemed income would be added to other income and taxed at the person’s marginal tax rate.
The present government has taken the owner-occupied home off the Tax Working Group’s table. The danger is elaborate owner-occupied housing becomes even more attractive as a result. It would be better to allow a generous exemption for a home, say up to say $1 million net equity per person, but to still include owner-occupied housing in the tax net. The young with high mortgages on their own home are protected, modest freehold owner-occupied homes fall outside this net, but the very high value, owner-occupied mansions are captured.
A net equity housing tax is simpler than the current messy tax situation for landlords. Under the net equity approach any incentive for landlords and property investors to engage in intricate tax avoidance is removed. Moreover, as past capital gains are captured in the net equity base as they accrue with each new valuation, the wealth gap may narrow at last rather than continue to grow exponentially.
Landlords will no longer be subsidised through tax concessions to invest for capital gains, and some may withdraw from this market. While that would leave more houses for genuine first home buyers, a price correction cannot be avoided if the biggest housing bubble in the western world is to be contained. The best to hope for is gradual adjustment, not a precipitous fall such as experienced in Ireland after their strong bubble 10 years ago.
A high degree of political and public acceptability can be expected because of the widespread concern over growing intergenerational housing inequity and an appreciation of the need for radical action. The Tax Working Group should delegate the fine details to an expert subgroup, including a plan for immediate implementation post-election 2020.