Taxation and Real Estate – turning housing debate on its head

By   /   August 22, 2014  /   6 Comments

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The debate about property prices in New Zealand is disingenuous.

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The debate about property prices in New Zealand is disingenuous. It is clear that there is a global process in which speculators are using massive amounts of unspent and borrowed money to blow bubbles in the world’s major asset markets. The biggest bubbles at present are in real estate in world cities. Auckland does qualify as a minor world city.

While any market has both demand issues and supply issues, we in New Zealand have been too easily fobbed off by the land-supply lobby. And we have been obsessively concerned about ‘foreign’ purchasers of our real estate, when the issue relates to a global upper-middle class. This global upper-middle class includes many New Zealanders, various ethnic Europeans, and many of various Asian nationalities. People of Chinese ethnicity are prominent because 20 percent of the world’s population are Chinese, and because China, through its uneven growth, has been disproportionately adding to the global upper-middle class.

Asian speculators are neither more nor less of a problem than are global speculators with New Zealand passports. Global ‘investors’ wish to claim ever larger shares of the world’s economic cake, without actually consuming their shares. They want to make money for money’s sake. They are the flipside of global debt.

 

London, Hong Kong, Auckland

It was revealing watching a recent BBC Inside Out documentary – London’s Property Gamble (first broadcast 8 March 2014) – about Asian investment and speculation in the London property market. (Actual investment is when something new and good is created. An important London example of the former was the constructive redevelopment of the Battersea Power Station by a consortium of Malaysian investors. On the other hand, speculation is essentially the purchase of some property or claim that already exists, with the intention of reselling at a higher price. Much financial activity is a bit of both.)

Until a few years ago, Hong Kong was a favourite target of property speculators; especially Chinese speculators, given the geographical and political proximity of Hong Kong to China. While housing became prohibitively expensive in Hong Kong, many properties subject to speculation remained unoccupied, save a suitcase or two for use in shopping expeditions.

When Hong Kong introduced a ‘foreigner property tax’, much of the Hong Kong speculation moved to other cities, with London being especially prominent. The result is both a huge turnover of properties in London, and a substantial growth of dwellings left empty. Why bother tenanting apartments when you think you can make large leveraged gains without that responsibility? One commentator read the London market as a property bubble that has about three years to run. (That fits into my view last week that the next global financial crisis will take effect in 2017 or 2018.)

Auckland is a bit player in this very large global game. Auckland’s role is enhanced by views that the exchange rate of the New Zealand dollar is on a long-term upwards trajectory, thanks to both the ‘white gold’ dairy industry and to New Zealand’s internationally accommodating monetary policies. Money flows into New Zealand at a significantly faster rate than interest and profits flow out.

 

Policy Principle

To a large extent, we may have to accept that these global forces are too great for us to fight, and the costs of such a fight may be greater than the benefits. Labour’s proposed capital gains tax may make little difference; worldwide, such taxes are generally ineffective at stemming speculation in property markets. Further, governments should adopt taxes either to gain revenue or to correct a problem, but not to do both at the same time. If we rely on tobacco taxes as a source of revenue, we will be reluctant to eliminate the smoking habit. If we rely on speculation taxes for revenue, we will need to sustain the speculative dynamic. A capital gains tax that seeks to stabilise the property market will be at its most effective if it earns zero revenue.

My proposal is to completely refocus. Whether we like it or not, the act of buying a residential property is almost always a speculative act, while, for some, it is also the acquisition of a dwelling. We should mentally separate the two. The dwelling market is in essence a rental market. (Owner‑occupiers are simultaneously landlords and tenants, and are recognised as landlords in the national accounts; their implicit rental income is part of a country’s gross domestic product [GDP].)

Housing policy should have the aim of ensuring that all New Zealand residents have somewhere affordable, convenient, secure and comfortable to live. That’s all. While getting onto the ‘property ladder’ may be a great thing for many individuals, facilitating the acquisition of financial assets is not really a matter for public policy.

We need a policy that enables the provision of good rental housing (including a housing warrant of fitness), that encourages responsible landlords, and that allows people in rented accommodation to contribute substantially to the formation of stable multi-class multi-cultural communities. The best communities exist, not on the basis of residents’ status as owner or tenant, but on high proportions of residents living close to their places of work or study, and high proportions of residents living in those communities for five years or more.

What undermines communities is landlords realising their capital gains, and obliging their tenants to shift house every couple of years. Landlords should be investors, not speculators. The nationality or ethnicity of the landlord is incidental. Owners’ returns should be principally in the form of rents received, and not unrealised or realised capital gains. Then property values would reflect the rental market, and not seek to drive that market.

 

Empty Property Tax

Rather than adopt a capital gains tax, or a land tax, I propose a tax on empty or underutilised properties. There are pitfalls. A bathroom tax would encourage people to build big houses with a single large bathroom. A window tax would lead to gloom if not doom.

My idea is in essence an empty bedroom tax, but would not be a bedroom tax as such.

The principal target of the under-occupation tax would be empty properties. Owners of empty properties not undergoing appropriate renovations could be subject to a central government tax equal in value to the rates payable on that property. (This could apply to all idle real estate, noting that land maintained for conservation purposes would be exempted.)

A formula based principally on the floor-space of the property and the size of the section it sits on would determine if a dwelling is equivalent to, say, a four-bedroom house. Such a dwelling would be subject to a partial or full ’empty property tax’ if two or fewer people live there. There could be time exemptions for, for example, recently deceased persons, flatmates leaving, or older children leaving to lead independent lives.

A bit of bureaucracy would be required. But we already need IRD numbers from birth, and we register our addresses with the electoral commission. I would like to see an IRD which deals with all customers strictly as individuals (they should not need to know about our relationships; only Work and Income clients should have to divulge information about partners), but which does maintain a record of clients’ residential addresses. Also, all property owners should be registered as such with IRD, and should declare the number of people who reside at each property, along with their declaration of their incomes. Where no residents are declared, then the entire empty property tax would be levied.

The principal aim of such a tax would not be to raise revenue for the government. Rather it would be to create incentives to use housing efficiently, and to construct smaller comfortable homes and apartments, and fewer mansions. However, given that our richest property owners are often older and live in larger houses, this may be a useful alternative to having a special top rate of income tax at 40 percent (or higher), such as that advocated by the Green Party. Indeed, an under-occupancy tax may create both correct inefficiencies in the rental market, and serve as a modest wealth tax.

(I strongly favour income tax on basic income flat tax principles; it’s much more efficient than having special top rates for the marginal earnings of our highest few percent of income earners.)

 

 

In Summary

It is our social responsibility to provide incentives for the efficient use of our land and housing resources. We don’t need to worry about who owns our properties, and how much they paid for them. But we do want them to look after their properties, or sell them to someone who will. Above all, we want good landlords, good stewards of our land. (Better a good foreign landlord than a bad New Zealand citizen as landlord.)

We can use the tax system to create these incentives. Owners would be allowed to leave their properties empty or under-occupied. Rich retired couples would be able to stay living in their mansions. However they would pay for such privileges, by paying, at most, a second set of rates, this time to the government.

Overseas money would still come into Auckland’s property market, either directly through foreign investors or speculators, or through our banks issuing overseas bonds or borrowing from parent or correspondent banks. But the scale of such speculation would be tempered through the imposition of an under-occupancy tax. Our foreign and not-so-foreign landlords would be tempted to supply stable dwelling services to New Zealand residents in return for a steady rental income, rather than playing the property market as source of expensive thrills.

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6 Comments

  1. Lara says:

    “To a large extent, we may have to accept that these global forces are too great for us to fight, and the costs of such a fight may be greater than the benefits.” I respectfully disagree.

    Land is for living on, growing food, or building your business premises on. If you don’t live in a country then you have no need to buy land here.

    If foreigners want to holiday in NZ there are plenty of accommodation options. They don’t have to buy property here.

    I see zero need to allow non citizens or non residents the ability to purchase, freehold, NZ property.

    Changing the law to ensure only NZ permanent residents or citizens can purchase property, giving non residents and non citizens a short specific time period in which to sell their property, would have an immediate effect on our property market bubble.

    We are a small island nation with a growing population. Selling our property to people who don’t live here and have no intention of living here is just dumb. It makes NZers in our low wage economy compete with an international market with greater wealth. The proportion of our market owned by foreigners does not have to be huge to have an effect on prices.

    I see some merit in a tax on unoccupied property to encourage efficient use. But it would be a bureaucratic nightmare and because of its complexity would probably have unforeseen consequences.

    With the lowering proportion of NZers who own their own homes we need to take a look at our rental market with an aim to provide greater stability for the renting class. If someone purchases a property to rent it out, they’ve made a decision on how that property is used. Its either a rental, or they want capital gains. To allow both is to introduce instability for tenants as you point out. Currently in NZ landlords may give tenants 90 days notice for no reason at all. This means that even if you are a model tenant you end up moving for reasons beyond your control and leads to community instability. This right of landlords needs to be removed, and like Europe we need to only allow eviction if there are grounds.

    One other problem increasingly creeping into the rental market is letting fees. They are almost always passed onto tenants, with no negotiation. I have even heard of them being charged with a fixed term ends and another new fixed term is agreed upon. For poorer people this is a lot of money, and if they want accommodation they have no choice. It is a fee for the property manager who is chosen by the landlord not the tenant, for services to the landlord not the tenant. The relevant legislation says it should be negotiable, but the power lies with the landlord and so it is rarely if ever negotiated. The law needs to be changed so these fees cannot be charged to tenants.

    I live in a small beachside community within a relatively easy drive of Auckland. In winter the place is very quiet. Most properties are empty. The biggest most expensive properties are empty most of the year. While wealthier people in Auckland buy holiday homes, prices here are pushed up. Locals on mostly minimum wages find it much harder to buy the homes they live in. The worst property, “baches” over 50 years old with no insulation, damp and cold, are inhabited permanently. And come summer some locals get given notice so landlords can rent their properties on “book a bach” or the like for exorbitant amounts, or use it themselves. Then they put it back up for rent when summer is over.

    There is so much wrong with our property market in NZ.

  2. Stuart Munro says:

    The bedroom tax is presently failing in the UK.

    Healthy economies are not overly dependent on property, but the unwise policies of neo-liberals governments have made it the preferred path to wealth. Those policies’ effects are still in play and need to be checked.

    Multiple property ownership could reasonably be regulated, and rent control would go along way towards making the slumlord business plan less desirable.

    But NZ home ownership has declined from 80% to 50% in a single generation. This is catastrophic in terms of equality and stability, and weak partial measures like bedroom taxes aren’t much of a solution.

    What would Savage do? That’s probably the right thing.

  3. Housing_Blog says:

    Keith: I largely agree with your analysis. There are however tax incentives for foreign owners that are exacerbating the issue of rising house prices, but leaving the market to domestic speculators would only marginally change the picture. I totally agree that the form of tenure does not matter at all, as long as there is tenure security and quality standards.
    I disagree on the solution, though.

    The bedroom tax, as others pointed out, is indeed failing in the UK. In Aotearoa, the additional concern would be that it is not enforceable. It is too easy to declare occupants that do not actually live at a certain place.

    I truly believe that the universal human right to housing should not be left to the markets to fulfil. We need government to be an active player – not only to build and flip-off houses as Labour proposes, but to hold on to property, thereby taking it out of speculation spirals. And we need a strengthening of other not-for-profit housing providers, particularly housing co-operatives, through targeted, enabling legislation.
    Berlin is, without a doubt, a global city. In Berlin, right in the city centre, you can rent a good standard, 3-bedroom apartment with excellent tenure security for less than $230 per week, as an effect of these measures. There are even significantly cheaper options available, but those are restricted to low-income earners. Housing should not be left to speculation. We need the equivalent of the single-buyer option proposed as a solution for the power crisis. And we need to keep housing created with public funds in public ownership. Exclusive use rights are fine, and will not make a difference to freehold title for most “owners”. After all, most houses currently are in fact owned by the banks.

  4. Nick Taylor says:

    Take a look at the UK to see how well a bedroom tax works.

    Disaster.

    We need two things I think.

    1) a land value tax on non-primary-residences to replace income tax.

    Really, taxes on “creating value” or consumption are counter-economic. Tax should only be on unearned income, eg: usury, rent, resource extraction, licensing and externalised costs – eg: the health costs of drinking/smoking/pollution etc.

    2) a home should be free.

    I mean seriously? We can’t organise ourselves in such a way that we’re not all essentially debt-slaves (rent is a type of debt-slavery) our entire lives? Having to pay someone for the right to exist, when all they have really done is drawn a circle on some land and said “nobody can be here without paying me”?

    That’s ridiculous. It’s a chronic injustice – especially as all land ownership stems from right-of-war. It was all taken by force, then sold on. Any transition needs to be seemless… we can’t be stripping people of their homes etc, but we need to end the property market – and a good way of doing that, is to provide people with a way of living such that they’re not forced to participate in it, either as a mortgagee or renter.

    • Dennis Dorney says:

      Nick, I agree with a lot of what you say. I find it frustrating that a lot of the right solutions are not even new, and so many of the new ‘solutions” dont work.
      “A land value tax on non-primary-residences to replace income tax”. This is basically the Henry George solution from the 19th C except that the tax was payable on all land, not just secondary dwellings. I would like the tax to replace Rates, not income tax.
      “A home should be free”. I cant go this far but I certainly believe that the land should be ‘free’ in the sense that it should not be a part of the cost of buying a house. It is the land value that is pushed up by speculation, not the house price. A second-hand home has got no more speculative value than a second-hand car. If the State ‘owned’ all land on behalf of the people, so land could only be leased (using the land tax), the buyer is purchasing only the improvements on the land. This means that there could never be a shortage of land, so long as there was a cap on the total population of NZ , and the various levels of Government could work together to plan much better cities instead of leaving it in the hands of developers, whose only interest is profit. If adopted, speculation on housing is impossible.
      The last piece of the jigsaw is to stop the private banks from creating our money supply because it is their greed that is pushing up the price of housing. Minimally the incoming government should use the Reserve Bank to create low interest loans for state housing as happened successfully in 1935. This is an old idea too (Social Credit, not Labour policy, despite what many Labour supporters would have you believe) and it worked.

  5. Dirk says:

    “I truly believe that the universal human right to housing should not be left to the markets to fulfill.” Agreed.

    Housing should not be subject to speculation. State owned rental housing, a small percentage privately owned rental housing and owner occupied should be the only options. Foreign onwership should be discouraged.

    As things are we trap people into mortgage slavery, sometimes across generations. Enact the capital gains tax. Assess rates only for what is required to deliver services. Landlords will only be investors when speculation is not so profitable.

    Strange that this author can be for both a flat tax as it is simple and a bedroom tax which will be a morass of complexity. Their only common characteristic is that neither is fair.