Land banking – capitalism’s weeping sore

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Halloween came early for parasitic land bankers. On 30 October, new Housing Minister, Phil Twyford,   issued a bold statement that has barely been reported or commented on: land bankers are firmly in the laser-sights of the new Labour-Green-NZF coalition government.

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At the same time  that Prime Minister Jacinda Ardern announced an impending ban on the  sale of existing homes to foreign investor/speculators – Minister Twyford  issued a clear warning to land bankers that the recently elected Coalition Government would be prepared to seize their land under the Public Works Act;

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“You don’t want to have one land banker holding out a massive new development that’s going to deliver thousands of new homes.”

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Minister Twyford was unequivocal;

“We’ve got a Housing Minister now that accepts there is a housing crisis. You don’t want to have one land banker holding out a massive new development that’s going to deliver thousands of new homes.

…You might want to have it in your back pocket, but you’d use it very, very sparingly.”

He said that the new government recognised the reality of the housing crisis and was  “going to throw everything at it“.

The National Business Review highlighted land banking in 2013, when Leith Van Onselen offered his “less regulation is best” ideological response to over-coming the  problem (I refuse to sugar-coat it by calling it an “issue”). His mantra consisted of freeing up more land; the removal of regulatory constraints on the supply of land, along with more permissive planning policies;

“…land banking – an especially baneful form of rent seeking at the current time – is more prevalent in situations where land supply is constrained and planning approval processes are slow and uncertain. Land banking is also only profitable where the value of land is rising faster than the cost of capital. And in the absence of physical barriers to land supply, land price increases above the level of inflation are driven primarily by policies and regulations that artificially restrict the supply of land.

It stands to reason, then, that the removal of regulatory constraints on the supply of land, along with more permissive planning policies and infrastructure provision, would increase competition amongst both developers and land owners, thereby driving down the cost of land/housing. The existence of high levels of competition would, in turn, make land banking particularly risky, as another nearby owner would always have the opportunity to move to the market ahead of the land banking firm.”

Whilst Van Onselen recognised the “baneful” nature of land banking, his proposed more-market “solution” is not without dire consequences.  In the “absence of physical barriers to land supply” by “the removal of regulatory constraints on the supply of land“, urban sprawl into valuable food-producing rural land creates new problems through unintended consequences. Interviewed on TVNZ’s Q+A on 29 October, Horticulture New Zealand CEO, Mike Chapman warned;

Horticulture New Zealand is calling on the new Government to protect locally-grown food as urban sprawl threatens valuable growing land. Its CEO, Mike Chapman, says the impact is already “quite extreme”.

“If we don’t, we’ll be increasing our imports – fresh, nutritious locally grown food will not be available, and at the moment, we don’t have country of origin labeling, so the consumers won’t know where they’re buying their food from. It could be from anywhere in the world,” says Mr Chapman.

Reliance on the “marketplace” to solve our housing problem can be a dubious proposition.

This is especially the case when commercial firms actively exploit a problem  for greater profits. This property-brochure from Guardian First National Real Estate  in Johnsonville, Wellington, illustrates that (some) companies are not above exploiting a problem for purely personal gain;

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Guardian First National real estate johnsonville wellington

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Note the reference to “Do up, develop or landbank?”

Perhaps one of the worst cases of land banking and profiteering was reported in 2013 by the NZ Herald;

A land banking business with a big piece of residentially zoned real estate on Auckland’s outskirts has made more than $6 million a year for almost two decades – doing nothing.

QV records shows Yi Huang Trading Company owns 39 Flat Bush School Rd, which it bought in 1995 for $890,000.

Now, this 29ha block is listed on the market for $112.6 million, promoted as “the land of opportunity, vacant but close to Barry Curtis Park”.

[…]

The sale has left developers fuming. They say land bankers are ruining the city and that the sale will be tax-free because the company has held the land for so long.

Conversely – and with some justification – land banking is also a necessary tool by those developers who actually intend to build on them.  As one project is completed, and another begins, the developer must ensure a constant supply of readily available land “in the pipeline”.

As Van Onselen reported in 2011, quoting from work by Professor Alan Evans, Director of the Centre for Spatial and Real Estate Economics at the University of Reading (United Kingdom);

…as well as causing delay and increasing uncertainty, the process of seeking planning permission lends itself to strategic thinking and behaviour… the lack of certainty created by [such] a system is that it encourages the possession by large developers such as volume house builders of land banks… which can be developed at some future time. A developer such as a volume house builder will seek to ensure continuity in the supply of sites for development so as to ensure that management, equipment and labour can be used efficiently… without being laid off or idle. Commentary on the financial pages of newspapers would suggest that a land bank of at least 3 years supply seems to be regarded as necessary for the financial health of a house builder… not having a site available for development at the right time can mean that a exorbitant price will have to be paid to buy one, in order to keep the firm in business…

Speaking on The Nation on 4 November, Housing Minister Twyford appears to be fully cognisant of this particular problem and showed little reticence to proactively intervene in the “market”;

“Because of capacity problems in the industry, particularly workforce issues, it is going to take us a little while to ramp up. And our modelling has always been based on the idea that in the first three years, we’ll probably deliver about 16,000 homes, and in the third year, we’ll start to hit the average of 10,000 a year. There are three main ways that we’re going to deliver KiwiBuild. So, the first is that we’re going to say and are already saying to the private sector, to developers and builders, if you’re doing a development and you think that some of the properties in that development – might be a set of townhouses, for example, somewhere – would meet the KiwiBuild affordability criteria and design specs, then come to us. We’ll look at them, and we could buy them off the plan, speeding up your development, taking some of the risk out of it, and ensuring that we get a supply of high-quality affordable homes for first home buyers.

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One of the problems at the moment, actually, is that many of the apartment projects that are underway are having real problems with financing. So by the government willing to underwrite or buy units off the plan, that actually takes away some of the risk and uncertainty and will speed up those developments.”

This is precisely the kind of market-intervention which many progressives have been demanding.  Minister Twyford even spelled it out;

“So we’re going to intervene in the market to fix that market failure by building large numbers of affordable homes. That’s the job of government, to do that.”

The alternative? To do nothing as National allowed the free hand of the market to run it’s course, and unsurprisingly our housing crisis worsened. Journalist and commentator, Tim Watkin, painted an increasingly bleak picture of urban life in New Zealand in the early 21st Century;

“… what social service agencies are now reporting is a growing – yes, growing – group of Kiwis living in their cars or renting garages. Social workers in South Auckland to a person say they can’t remember it being this bad. Rents have risen 25 percent in five years and emergency houses are full.

If you can’t afford the rent, there’s nowhere to go. Except your car, or perhaps someone’s garage.

And this isn’t just extended families bunking down in a garage while they wait for a house, as we’ve seen for years. This is a new rental property market; people paying strangers to live for months, even years, in a garage. You won’t see it on TradeMe, but we’re talking about $300 or more a week. One family had been living in a garage for two years and are paying $380/week.

Wesley-Smith was taken to Bruce Pulman Park in Takanini by Manuaku East MP Jenny Salesa, where families and individuals can be found most nights near the public toilets, sleeping in their cars. Salesa says one car-dwelling family a week turns up at her office seeking help; half aren’t engaged with the Ministry of social Development.”

Watkins was merciless in his criticism of the capitalist exploitation of the housing crisis for selfish ends. Firstly with “mum and dad property investors”;

So it’s time for mum and dad property investors to ask themselves a few hard questions. If the cost of your borrowing is forcing people to pay rents they can’t afford, maybe you shouldn’t be in the landlord business. Even if you are only one stone in the mountain, have you borrowed too much to morally justify your investment?

But he reserved his most trenchant ire for parasitic land-bankers;

But even more in the gun are the property developers, especially those who are land banking in this market. It’s time to call out those land bankers and say enough.

Financially, it’s a no-brainer for them. Especially if they’re lucky enough to own land in a Special Housing Area with all the privileges of accelerated consents and greater intensification attached. You’re quids in, the government has put a premium on your land and land values are skyrocketing. So why go to the risk and hassle of actually building?

The answer: Because your land banking is making kids sick. It’s driving families into their cars. It’s increasingly immoral to fiddle while Auckland burns.

Auckland desperately needs houses and if you’re a developer sitting on land, then you’re putting your own finances ahead of the need of families to have a roof over their heads.

Watkins pointed out then Housing Minister Nick Smith’s response to land-banking;

Housing Minister Nick Smith denies that land banking is a problem in his Special Housing Areas.

Watkins was on the button; Nick Smith is in full Denial Mode when it comes to land-banking.

On 3 June last year, I lodged a OIA request with Nick Smith, asking;

1. Does the government keep a record of how much land is “landbanked” in New Zealand?

2. If the answer to Question 1 is “yes”, how much land has been landbanked in Auckland, Wellington, Hamilton, Christchurch, and Dunedin?

3. Please provide any Ministerial, Ministry, or Cabinet papers that relate to the issue of landbanking.

After nearly two months and reminders sent to Smith’s office, the Minister finally responded on 20 July. His response to my three questions consisted of  one paragraph;

“The problem with your request is that ‘land banking’ is a loosely used phrase a bit like ‘speculation’ that has no agreed definition. A person or company  may own a section of land and not build on it for some time for all sorts of reasons and there is no definition  of how long this is for it to be deemed land banking. We do keep track of the progress made on developments in Special Housing Areas and I refer you to the publicly available reports  that set out the progress on development of these areas (http://www.mbie.govt.nz/info-services/housing-property/housing-affordability).”

Remarkably, Smith added at the end;

“I can confirm that no information can be found within the scope of your request.”

Smith either has a badly-flawed, John Key-like memory – or he was being economical with the truth. Two years earlier, on 30 November 2014, Housing Minister Nick Smith had referred specifically to land banking, expressing his frustrations at the practice;

“The Government and the Council are determined to release sufficient land supply and we’re not going to allow land price inflation of the sort we’ve seen over the last decade.

I want the land owning development community to realise that the Government is serious with Council about freeing up land supply, and they cannot bank on ongoing high land price appreciation that has encouraged land banking over the last decade.”

As with the previous National government refusing to define and measure poverty, by claiming that “‘land banking’ is a loosely used phrase a bit like ‘speculation’ that has no agreed definition” Smith was clearly hoping/praying that public/media attention on this issue would fade away.

It was a forlorn hope/prayer. Pressure was mounting on Smith.

Indeed, three weeks prior to  writing to me insisting there was “no agreed definition” on land banking and “no information can be found within the scope of your request” –  he was threatening land bankers with seizure;

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Despite insisting he had “no information” or  “definition” of the problem, Smith was considering seizing property from land bankers – something he recognised as running counter to National’s pro-capitalist kaupapa;

“If you look at many of the other governments in other parts of the world that have used those powers, they have worked effectively.

Yes, we are the National Party, but we have responded in a very pragmatic way to the challenges in Christchurch. And that has involved overcoming some of those pure views about property rights.

 We are pragmatic, and pragmatic answers are needed to the housing challenge that New Zealand has.”

Even Wellington’s Dominion Post – not a socialist ‘rag’ by any means – was vocal in it’s criticism of land banking and National’s inability to act. Their editorial on 28 March this year was scathing;

Smith himself once said it was “offensive” that an investor in Auckland could buy land in 1995 for $890,000 and put it on sale in 2016 for $112 million. “The biggest problem is Auckland is the issue of landbanking,” Smith said.

Smith’s approach to the problem was to rely on the special housing areas in Auckland, which allow for faster consents for large housing developments. Developers can face a “use it or lose it” clause which penalises them if they don’t lodge consent applications. His critics, however, argue that this rule doesn’t guarantee house completions.

And that is the problem with land-banking, it seems. It is merely a symptom of a deeper malaise, and fixing it might require radical changes. It remains to be seen what one city council can do by way of encouraging or scaring developers into building more affordable houses.

Some such as economist Arthur Grimes have suggested that the Government should use the Public Works Act to buy land for housing. This is a reasonable suggestion, draconian though it might seem. The housing crisis is so serious that radical measures of this sort have to be considered.

The National-led Government, however, with its deep allegiance to property rights and its natural sympathy for the business class, would never accept such a proposal.

Nick Smith’s  heresy to the most basic capitalist tenet – the supremacy of property rights – did not go unnoticed by Anthony Robins. Blogging on The Standard on 4 July last year, he astutely pointed out;

“I don’t often agree with the Nats, but I think there are (rare) circumstances where land bankers could be paid off, moved on, and the land put to use. But – the extinguishing of private property rights? Seizure of land? Just imagine if Labour had proposed it. There would have been an instant orgy of political and media outrage. Because it’s National though, there will be barely a whisper.

Robins’ comment had a prescient quality to it. A Labour Minister – Phil Twiford – has now threatened to do precisely what Nick Smith threatened (but never had the guts to actually follow through on).

By brandishing the Public Works Act as a ‘stick’, Twyford has put land bankers on notice. Either develop the land or have it seized by the State to house the homeless.

In a civilised society, for land bankers to sit on empty, buildable land whilst families are packed in over-crowded houses; in garages, or survive in vans and cars – is an affront to any notion of fairness and decency.

It would be like someone hoarding food in times of famine, to get a better price later.

And if Minister Twyford invokes the Public Works Act to seize land, the National Party should think twice before screaming in outrage. It would be sheer hypocrisy on their part.

For one thing,  former Housing Minister Nick Smith threatened precisely the same thing.

Secondly, the housing crisis is a legacy of the previous National government.  It’s their mess we’re cleaning up.

Use it or lose it, land bankers. The party is over.

Minister Twyford – let’s do this.

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Postscript: Speaking of “legacies”

Meanwhile, National persists in it’s exercise in futility, maintaining their fantasy-charade of the “great gains made over the past 9 years“;

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National’s denial is partly to blame why our horrendous housing crisis spiralled out of control.

During it’s nine years in office, National continued to point-blank deny  the social problems it faced. This continuing denial will ensure they remain in opposition for the coming decade.

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References

Mediaworks:  Government prepared to seize land for housing projects

Radio NZ:  Foreign home buyers to be banned – PM

NBR: Auckland – the land bankers paradise

TVNZ: Q+A – Horticulture New Zealand CEO, Mike Chapman

NZ Herald:  Land bought in 1995 for $890,000 – owner will sell for $112m

Macrobusiness:  Why developers land bank

Scoop media:  The Nation – Lisa Owen interviews Phil Twyford

Interest.co.nz:  Bernard Hickey argues the Government and Auckland Council should ramp up their attempts to change the expectations of land bankers about constantly rising prices

NZ Herald:  Bennett slammed over child poverty claim

NZ Herald:  Government look at hardline measure to seize property for development

Dominion Post:  Editorial – Landbanking is a big part of the housing crisis

Twitter: National – “great gains made over the past 9 years

Additional

NZ Herald: Key admits underclass still growing

NewstalkZB: Demand for food banks, emergency housing much higher than before recession

Morgan Foundation:  How Minister Smith Could Deal with Land Banking

Morgan Foundation:  Would it be Crazy to Reduce House Prices by 40%?

Other Blogs

The Pundit: How Special Housing Areas are failing & the immorality of land bankers

The Standard:  National to seize privately owned land

The Standard: So there was a housing crisis after all

The Daily Blog: On calling out the excesses of capitalism

Previous related blogposts

Can we do it? Bloody oath we can!

Another ‘Claytons’ Solution to our Housing Problem? When will NZers ever learn?

National’s blatant lies on Housing NZ dividends – The truth uncovered!

National continues to panic on housing crisis as election day looms

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16 COMMENTS

  1. Excellent article Frank. It is really upsetting to think this situation helped John Key to sell his home for a very bloated price.

    Nick Smith has been a dreadful Minister in every way. He should stand
    down.

    Personally I think buying the land back would be ideal. Price paid plus inflation would be fair.

    The government providing cheap loans for a fifth of a development would assist builders/developers as well.

    Getting a loan could be on a needs list by ballot until we dent the numbers.

    Plans pre approved by council could give a choice of 5 to 10 types of basic unit, townhouse, to speed consents.

    These could be modern prefab with insulation and solar panels.

  2. We are still and are likely to remain, a basically capitalist society. Albeit capitalism needs reigning in. But it is forlorn to appeal to the capitalist’s sense of social equity to refrain from a safe and profitable investment opportunity , and thus pass the opportunity on to the next capitalist waiting in line to exploit it. The capitalist might well have a social conscience, but understand , like Garath Morgan does, that the empty houses he is sitting on are a major part of the problem he is campaigning to remedy, but under the existing structure it will happen whether he takes advantage or not. Only government and market fluctuations can change the nature of the most advantageous investment.
    Twyford’s threat to use the public works act presumably won’t materially disenfranchise the land bankers. The act doesn’t confiscate land without reasonable market level compensation.
    Some of the compensation money will presumably recycle to buy up the available houses from the balloted new owners. And leave them empty since it is a nuisance and a potential liability to have tenants in them and the price is still going up. There will be off the record deals to get around the 6 years clawback of CG, as well as rent to buy tenants needing to capitalise the equity they have accumulated in the house.
    The new government needs to make most of their housing development rental only if they are to address the problem of homelessness. People don’t need to own the house they live in to be better off than living in a car. And the government can then ensure that the initiative continues to serve the purpose it purports to address. The rent to buy is targeting near the top end of the housing issue not the bottom end where the real problem lies. But at least it won’t upset the market denizens and doubtless fits better within the fiscal responsibility rules.
    What is Twyford doing about these empty speculator’s houses that we aren’t allowed to know the number of. Surely this is the first thing to address. It has to be addressed to prevent almost all new housing finishing up in the same situation. I’m sure a new house is more attractive to a “house banker” than a grubby old one that the last tenants might have smoked meth in.
    D J S

  3. And why now has the MSM come out in support of Labour policies.

    This from Heather DPA in this mornings herald…

    “Foreign buyers should have been banned years ago. Ignore the data that suggests it wasn’t a problem. It was.

    The data goes nowhere near capturing what was really happening in the housing market, especially Auckland’s, where some foreign buyers were snapping up houses sight unseen.

    The fact is, if we put this country on sale to the world, our citizens will end up being outbid by foreigners every time because we don’t have their kind of cash.”

  4. Another issue that hasn’t been widely reported is “buying off the plans”. Many apartment developments pre-sell based on the plans with the buyers paying a deposit upfront and the balance on completion. These contracts usually have clauses that allow the developer to:

    1. Modify the design and charge the buyer any increased amount to build. If they can’t pay the increase then they have their deposit returned with similar conditions to #2 below.
    2. Cancel the development altogether and simply return the deposit, certainly without any interest and often with “administration” charges deducted.

    Because the land value has been going up so much in recent years the moment the developer sells they apartment they are not getting the upside, the buyer is, so they often don’t want the project to proceed. Or they are just testing the market and raise some cash which they might use for other short term activity before returning it, keeping any interest if they reinvested it, and deducting those admin charges.

    Disgraceful unregulated behaviour.

  5. Sorry Frank, but your dreams of the govt seizing land through the Public Works Act will come with a very large price tag. Any attempt to take private property without adequate compensation is doomed to failure. Building houses would not be seen under the act as a legitimate use. The government would find itself being tied up in court by patient land bankers.

    • Building houses would not be seen under the act as a legitimate use.

      Says who, Michael?

      According to Land Information New Zealand, the following is covered by the Public Works Act:

      Public Works Act acquisition process

      The Public Works Act provides the Crown with the statutory authority to acquire land for a public work. The Crown has the power to acquire or take land for a wide variety of purposes and may negotiate for the land in the same way as a private purchaser. While the Crown’s powers are wide, it can only acquire land, whether by negotiation or compulsorily, in accordance with the Act.

      […]

      Where voluntary agreement cannot be reached on the purchase of land for a public work, the Public Works Act provides for compulsory acquisition by the Crown through the Minister of Lands. This power will be exercised only after an acquiring authority (through an accredited supplier) has made all reasonable endeavours to negotiate in good faith the sale and purchase of your land, without reaching an agreement.

      If the Crown intends to take your land and you object, you have the right to have your objection heard by the Environment Court. However, your right to object relates only to the taking of the land, not to the amount of compensation payable.

      If you and the Crown cannot agree on the amount of compensation to be paid, the Act enables you to give notice to the Crown requesting that the issue of compensation be determined by the Land Valuation Tribunal.

      Ref: https://www.linz.govt.nz/crown-property/acquisition-and-disposal-land/land-involved-public-works/landowners-rights-when-crown

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      The government would find itself being tied up in court by patient land bankers

      Easily solved.

      Parliament is sovereign and the highest Court in the land. I’ll leave the rest to you.

      But I can tell you for free that in any battle between speculating land bankers and the Crown, I know who I’d be betting on.

      • Fair argument, but what about using Crown land for KiwiBuild, and then selling homes, I presume with the land under it, to private first home buyers (who can later on sell it), seems like asset sales by stealth.

        • “seems like asset sales by stealth”

          That’s a far stretch, Marc. What else do you suggest Labour build houses on? Empty air.

          Come on, let’s not find silly “hurdles” to put in front what remains a serious housing crisis. If people are going to come up with “what ifs” and artificial barriers, then that’s a recipe to do nothing.

          Doing nothing is not an option.

          Oh, and I’m guessing people who criticise the Labour coalition do so from the privilege of living in their own warm, dry homes??

  6. Don’t be taken in by city slicker Twyford. I remember this guy from the last third way Labour outfit. A real tricky dicky, dyed in the wool Blairite. His market jargon spots are still plain to see. The ‘affordable housing’ catch phrase is almost as laughable as English’s ‘social investment’ mantra.

  7. Righties LOVE this discourse that it is scarcity of land that is the housing problem. Read any righty from the US and they will come out with this one. Unfortunately the left has gone with it and now seemingly supporting relaxed zoning standards, urban sprawl, quick consenting, and seizure of private land. None of which seems particularly democratic.

    It’s a croc. RMA for example, 99% of consents go through, already. You can propose any lying polluting developing at the detriment of the community and you will get it through the RMA. Its a rubber stamping exercise for business to railroad through developments and non fit for purpose consents.

    Relaxed zoning. Remember the SHA – only a few houses ever built – it’s not the land that’s the issue it’s building the fuckers and all the charges from COO’s for a start and why build affordable housing when the money is for expensive housing to those that have money. And that is not generally Kiwis on local wages.

    In the old days, family homes of 3 bedrooms, 1 bathroom circa 100m2 and decent garden were the norm, now it’s 4 bedrooms, 2 bathrooms and double garage at 200m2. Houses have doubled in size that’s the issue.

    Post war, veterans did a lot of the building of state houses, no 8 wire get in and do it mentality, nowadays it’s dozens of firms billing each other with more complexity, everyone expecting a healthy profit and the cost and time frames reflects that. Gone are the days of a builder just building, now everyone is a specialist that only knows one skill and supervises unskilled labour ‘helping; and the flow has gone as has the quality.

    The building boom in Auckland consists of knocking down formally affordable houses like state houses and building larger less affordable houses and the lefties have not really stopped to think about it. At the same time, housing has doubled in price, go figure as the size of the house doubles.

    There’s plenty of land about nobody mentions the mistakes like John Banks selling social housing years ago, the Natz have sold the state houses and now Kiwi tax payers pay $1000 per week for the former occupants to live in hotels.

    70,000 new migrants per year, plus 180,000 work permits issued, 0% tax havens, no taxes on offshore developers and non residents, and surprise surprise a housing crisis has developed as there is a shortage. It’s deliberate and it works. The lefties run about supporting the righties discourses and the public gets angry.

    Auckland council ratepayers are funding Westfield developers to build malls but can’t afford to mow the berms or run libraries.. WTF??

    It’s a crazy world. Watch the left discourse because the righties are winning this war as the lefties are unwittingly helping their agenda by supporting their ideas.

  8. How many different examples do we need to see of people making money by doing *nothing*, even preventing others doing something useful like building houses, before we start taxing capital gains, at least on real estate?

    • Indeed, Danyl. I’ve said before that a capital gains tax on property sales should be at the business rate of 28% (not at the gst rate of 15%).

      The rationale is simple; buying and selling property is a business. Ergo it should be treated no differently to any other taxable business activity in this country.

      The Right should welcome this. After all, they’re the ones that promote a “level playing field” in free market economics.

Comments are closed.