Migration loosening and extreme housing valuations show again how solving our low productivity, low wage and low investment problem requires a residential land tax
Thanks Bernard. Not an easy read but you have consolidated in one post my conclusions about tax, housing and the economy. Very supportive of you sharing this.
Agreed: publish. Sad that the Government has so quickly capitulated to National's demand to open the immigration floodgates, depress wages, and restore the competition for homes.
It still has one year to offer a meaningful solution to the increasing divide between rich and poor. Part of that answer must be to move the burden of taxation on to land and its unearned wealth gains, and away from consumption (gst) and worked-for income.
My reading is that Terry means the bleak situation interpretation.
Personally, I love your writing but find it very hard to read also, because it makes it starkly clear how little chance we have of fixing the issues that I care most about (climate change, structural inequality). I'm much better informed when I read it, but also much more frustrated and unhappy about the state of NZ and the world. I'm almost completely weaned off reading news these days for my mental health, but I'm still very happy to pay for your work because I think it's very important to get the information out there.
Bernard - this is an incredibly important issue than NZ needs to address now and you have summarised the issues superbly as always. Open it up - in the vain hope it will spur some constructive debate....
Hi Bernard - there is a far simpler way of sorting the problem that actually makes NZ far wealthier and doesn't cost any one - it is also a concept as old as the Crown vesting ownership rights to land in individuals and them then paying a land tax in return - there is nothing stopping government being the sole provider of mortgages in NZ and using the revenue to offset running expenses - at present much of the value of property in NZ is expropriated by the Australian banks using money magicked into existence through the wonders of fractional reserve banking - and just as Grant Roberston magicked billions into existence during Covid and the US government "invents" trillions of dollars each year to fund it deficit our government could fund property transactions using fictional dollars imposing a prescribed annual charge. In reality that turns a property transaction into a promise to pay the state a certain level of annual land tax for the use of the land.
Having foreign owned banks fund our housing market and agricultural sector bleeds more than $10billion out of the economy annually in profits and interest payments. - That's roughly half of the value from our dairy industry - there is actually no good reason for this other than convention - we don't need it. The banks have been the primary cause of property price inflation as that is a very simple way of "growing the business" by doubling or trebling the "value" of property they have similarly fattened their revenues - at our collective expense.
Yep, bring back the State Advances Corporation which only lends to owner occupiers on 25 year mortgages at 3%. It is funded by bonds and/or loans from the government at 2.8% or thereabouts. No requirement to make a profit.
Another idea is to require a percentage of the banking industry to be NZ owned. NZ owned = 60% of shares owned by NZers, no foreign shareholder having more than 10%, the bank being headquartered in NZ as well as it's backroom (admin, data storage, etc).
And changing the subject; bring back the Ministry of Works.
Be bold Bernard! I'm an old MOW employee - from the good old days when NZ could get things done. I'm tending towards the American Idea now of the US Army Corps of Engineers - we need a stronger military with the way the world is going and what better way to have a good military than to give them a major and productive peacetime role - and you could throw in pest animal control to give them some thing to practice on with their guns, night vision equipment, and helicopters 😊
The reestablishing of the Ministey of Works was an election promise Phil Twyford made prior to the 2017 elections. It fizzled into thin air after the elections. Not sure why. Maybe you can dig and probe about it.
They were world leaders in large concrete structures, they also had a team of structural engineers who signed off all multi-story buildings for councils, they were world leaders in earthquake resistant building design, they had a town planning group that did the big thinking around infrastructure for the government, and got it built, they built entire towns of social housing in months and they trained some of the best engineers and skilled trades people in the world - they got shit done! As a nation we have been wallowing without vision or action in the decades since and wasting billions of dollars in the process.
Thanks darkhorse. Hmm. The state expropriating all land property and nationalising the banks might be...er...politically difficult. But I admire your ambition. The land value tax was recommended by John Key's tax working group in 2009 and NZ used to have one until 1992. Hoping to stay in the politically possible realm.
it is a very old concept - the Crown/State still is the ultimate owner of property - hence its power to issue title - - in this concept nothing is being expropriated other than the means of funding transactions - effectively over the past couple of centuries the banks have expropriated a power that state's traditionally held to collect revenues from land. Putting a tax on land is no different than charging interest for borrowing funds to purchase it. Also if thinking about radical change - which a land tax would be - then best to start with a clean conceptual slate. The sale of our locally owned banks in the 1980s to the Australians was nothing more than an act of economic colonialism on their part - and a witless act of treachery/greed/stupidity by our politicians of the day,
I agree with the diagnosis, but not necessarily the solution (Land Tax). If you want to stop property price inflation, choke the credit for buying existing properties. As Richard Werner says, stop banks creating money for financial transactions. It takes 2 things to increase property prices: 1. More demand than supply. 2. Too much credit. The RBNZ could implement this straight-away using "credit guidance" to banks. If you want to bid the price of an existing property higher, then fine; but do it with your own money. This would be so effective that it would need to be phased in, or property prices would drop like a stone.
I think there is a strong case for prohibiting banks lending money to buy an existing house, other than for occupation by the borrower: restrict such lending to building new houses only, for lifetime rental or for rent-to-own.
However, I don't think that changes the imperative to shift tax towards the unearned wealth gain of unimproved land value, and away from worked-for income and GST.
I think banks could still lend on housing, but only a capped amount in dollars so that we stop the escalation. This cap needs to apply even for owner-occupiers, because all housing stock is valued at the price the last house sold for.
The beauty is, there would be no more unearned capital gain, because capital gain is stopped at source. What to do with exisitng capital gain locked into properties currently is another matter.
Thanks John. Fair point. But again would mean the RBNZ would have to be stripped of independence to use prudential policy as a social/economic policy tool.
Thanks Cliff. You're right that leverage is the cause of the problem. I agree that progressively reducing leverage by forcing the banks to have a higher and higher capital requirement for each new loan would be the way to crunch the prices down. But that would effectively be using prudential policy for an economic and social aim. You'd have to strip the Reserve Bank of independence to do that and also effectively strip private banks of something they would consider a property right. The other problem is that the credit crunch would make it difficult to incentivise new house builds, given so much of the demand is for a financial asset, which would remain in place. You'd also be picking a fight with the banks. A cabinet minister advised me against that once.
A rent freeze on rentals which are converted existing homes (NOT on purpose built rentals of any age). Over time landlords would sell up to first home buyers. No, this would not create a shortage of rentals, because the rental vacated by the first home buyer would become available to rent.. One less rental balanced by one less family needing to rent.
Great article Bernard, as always. Approx. 1 year ago, 2 senior executives from McQuarie Bank Australia, (Bernard would have the details) said that in light of the GFC, (2008) Covid & climate change, anyone who still believed in shrinking the size of government was delusional. Because of the huge environmental, (South Island floods, etc.) & economic challenges we face, these executives stated that proactive, well resourced governments were our only hope! Bernard's brilliant land tax formula is the only way ahead. People are vaguely aware of this - 65% in a recent poll were against National's proposed $2B tax cuts for the wealthy. Bernard's intelligent solutions are a key part of the public education process we need to turn the ship around while we still can.
To be contrary, I think we will see a new tax but it will be a “disaster support & recovery” tax to give local and central government the money to pay for fixing up the damage caused by climate change extreme events and for ongoing adaptations. It is a much easier sell to the voting public as it is obvious what its purpose is, and it helps soothe the fears that all house owners now have when they read about events like the Nelson and West Coast floods.
Thanks Paul. I can see the politics would work. But I'm not sure people who chose not to build/own in flood-affected and sea-level-rise affected areas, let alone the insurers and banks who spent good time/money assessing the risks, would be happy essentially handing over a big subsidy to home owners who chose badly and also voted against decent climate emissions reductions policies to boot.
If we've learned anything from Nelson, it's the builders, bankers, insurers and councils don't know squat about the risks of where they're building. The worst street you saw in all the pictures was brand new. Some of the red stickered houses - brand new.
I find it unkind to blame the buyers who, as they went about their day jobs as nurses and teachers, thought someone would surely have engineered these new streets and subdivisions.
"There Is No Alternative" (TINA) was the mantra of Thatcher, Reagan, Douglas and their fellow travellers. Whilst they were right that things needed to be shaken up, their execution wasn't their finest hour.
And we see that in increased inequality, the financialisation of companies (where boosting payouts to shareholders is more important than boosting the production of widgets), the use of immigration to lower wage rates, etc.
So, Bernard, please start using rhetoric where your (and others) ideas are The Alternative. A land value charge (not a tax) would be for more infrastructure spending; a ten percent cut to your supermarket bill by scrapping GST and replacing it with a Financial Transaction Tax; tweaking the Income Tax Act to explicitly state that all business profits are taxable as income (oh look, no need for a capital gains tax as there are no longer any capital gains); etc.
Thanks Steve. It was a riff on TINA to get people in the mood, but I was also not a fan of the way TINA was used to frame things. Interesting ideas on other taxes. Trying to focus on one thing at a time. I'm wary of messing with GST, other than cutting the rate. Or a financial transactions tax, which I suspect would be subject to avoidance and gaming, and create some unintended effects. And just trying to keep it simple and not take on too many interest groups at once.
Hi Bernard, also happy to support opening this up and giving people something to think about. Speaking of taxes though, any chance you could shed some light on how the bright line tax is going? Would be curious to hear about the actual numbers. I know part of the usefulness of the tax is to deter / slow down / change behaviour before a purchase / sale, but given it's self reported most of the time and the IRD is still playing catchup with a lot of things, would be interesting to see if there is much compliance happening.
I'd love to know the answer to this, because it is the first toe in the water of a CGT, and it needs to be pushed further and I guess, first of all if it's not being done, collected.
Even though I've "accidentally" become a land baron (developing land we bought from the sale of my old house into an eco community), I'm totally for a land tax to reduce inequity. I was really interested to see the extent of self-employed SMEs in Aotearoa - would you have any idea how many of these are home-based micro-businesses, David? I've been searching for this data but it's really hard to come by... I'd speculate that especially post-COVID, the number of home-based micro businesses would have increased?
Sorry, I meant between 0-9 employees (or subcontractors) although I wouldn't be surprised if we had a few small businesses running out of residences too (e.g. farms). I'm interested in the distinction from an energy use perspective - if small or micro (or sole trader) businesses run out of their own residence, there's a duel use for business purposes, not all of which may be accounted for when doing demand-side analysis. Anyway, I'm getting into the weeds, just struggled finding good data!
Great ideas Bernard. If only the Greens had this policy. By only supporting Labour they contribute to the two majors being essentially the same, just paying lip service to different groups.
A while ago on their website TOP had a policy of taxing only the equity in property. They must have realised that would have unintended consequences like people leveraging up on the equity to buy more property and avoid the tax.
The opponents of land tax always come up with the “poor widow” argument ever since 1909 when Churchill and Loyd George tried to bring it in in the People’s Budget. (Book of that name by Geoffrey Lee). The House of Lords vetoed the land tax.
The wealthy always use the poor as a human shield re land tax. Offsetting it against a decrease in GST could also be a way of making it acceptable to the median voter.
Just wanting to add my voice to both your points Sally. Intuitively, taxing wealth rather than income seems much fairer to me - overall - but (a big but sadly) it really does run aground on the poor widow issue. I’d love for a better mind than mine to come up with a response to this one key issue.
And to expand on the idea of offsetting the land tax with a reduction in GST - or indeed income tax. I think that is key to getting voter buy in. Wouldn’t we have a much better chance of selling this if it didn’t increase the tax take overall? The size of the total tax take is certainly a problem too, but it should be a separate discussion from this. Let’s put it aside for now and concentrate just on ensuring the tax we do take is fair and incentivises all the “right” things (ie not the property pyramid!)
The deferment system can address the poor widow issue. The tax can be attached to the property to be paid when it is eventually sold which may be after it is inherited. It is likely the problem is greatly exaggerated and very few people would require such assistance.
A related issue is one argument for changing from SIte Value rating to Capital Improved (CIV). Now 71% of councils in NZ use CIV, up from 14% in 1985. The assumption is that the value of the house is a proxy for the wealth and ability to pay of the owner. This is not correct. Research shows that the wealthy tend to live in high value locations even if in an old house. They are likely to have better personal finances that the owner of a mansion in an outlying suburb who has recent construction costs and a recently established mortgage.
I sought information on this for doing a presentation to Christchurch CC when they wanted to address the problem of the still derelict and vacant central city sites 11 years after the earthquake. The Prouctivity Commission and two research papers favoured SV rating.
I expect landbankers prefer CIV and effectively lobby councils while the public are oblivious.
Thanks for the deferment concept Sally - I’ve got a bit to learn about tax! Given how often ‘poor widow’ is raised as an objection to wealth taxes, I wonder if this aspect needs a bit more emphasis.
Interesting idea on GST swap. Key wanted a swap the other way around on income and got it. It could have been a land tax for income tax swap. But ultimately, I still think we will need to lift the tax/gdp rate to keep our commitments on health, education, pensions, housing and climate.
NZ is no place for 10 Million people. The fixation with growing our population so that we can continue to grow our economy overlooks a number of key constraints. Our economy is utterly dependent on agriculture to pay for imports of technology and energy. We have less land area today providing that income then we did when NZ's population was half its present size. We have funded a substantial and sustained deficit in export income by borrowing and selling land and passports. Our immigration policies over the past decades have been little better than a modern form of slavery exploiting the poor and the desperate to work for crappy conditions in return for getting out of what ever disadvantageous situation they were born into. We have also been singularly undiscerning in immigration criteria. A quick trip to Golden Bay or the Coramandel or Queenstown will turn up large numbers of imported "lifestylers" often with unconventional views of society who are living here at our collective expense. The imbalance between house building and population growth has caused one of the most devastating impositions of poverty in the modern history of this nation. I have a friend who migrated to NZ got citizenship then left to live overseas and he uses his NZ passport as a convenience - his children get NZ citizenship by default as will theirs - even though they may never have any intention of living in NZ unless things go terribly wrong in Europe (which may happen sooner rather than later). My child does not have any equivalent opportunity to gain citizenship in his country. So we have lots of people who see NZ citizenship to be a life raft not a privilege. Our government gaily sells passports to rich people who come here and inflate the value of property making it tougher for the rest of us to survive. We also need to make it less attractive for NZer's to leave NZ and more attractive for them to stay. My child is in the process of obtaining a PhD and a very large student loan. Her first job after ten years of specialised education in field that NZ suffers a severe skill shortage will be paid roughly the same as a truck driver earns - and the truck driver wont have decades of student loan payment to look forward to. She will not be able to afford to have children and has stated as such. And why should someone be able to leave NZ work overseas for 4 decades then expect to come back her to retire (competing for housing again) and get free healthcare when the rest of us have hung out here keeping the ship afloat in the meantime. On top of that we live in one of the most disaster prone nations on the planet - our biggest city is smack in the middle of one of most active volcanic fields on the planet, our capital city is the most quake/tsunami prone on the planet, the South Island's primary city is located within the long term river bed of one of the country's biggest rivers and then we have the alpine fault. That going off will make the Tohuku earthquake in Japan look like a squib primarily because Tohoku was 100km offshore where as the AF is on land and the aftershock sequence it will initiate hasn't even been discussed but each of the major aftershocks will be worse the the CHCH earthquakes. And then if we get foot and mouth we will have an economy that look like Cuba on a bad day (or maybe Sri Lanka). As a nation we have taken to the quick fix rather than doing things right. No amount of population growth, particularly if it emphasizes unskilled work, will make NZ any better off than it is today. We also need to recognize that population growth is heavily subsidized by the existing population as they are the ones who pay for the infrastructure and social services that the additional population consume.
Your daughter won’t qualify for superannuation if she returns in 50 years after being overseas. Totally agree with your sentiments though. Citizenship needs to be valued and difficult to obtain. A country I compare us to regularly is Switzerland. Dependent on lots of expats but offers a high standard of living for all.
Hopefully she wont leave but if she does she probably wont need NZ super at retirement if she were to return as will have been on a decent professional income for four decades and will have super from where ever - instead of overpaying for a pretty average house in NZ - or waiting for me to die like a lot of her generation will have to do 😆😆
Interesting problem. The Productivity Commission has recommended a National Policy Statement on population growth allied to infrastructure spending committments. Neither party want to touch that hot potato with a barge pole. I'm not sure we have a choice about the population thing when a big chunk of the globe in the middle will be uninhabitable within most of our lifetimes and those several billion will need to migrate north or south.
That is an ugly one we wont be able to duck - it is the old "not enough life boats on the Titanic" problem the planet's most dire situations tend to contain populations that have neither the means nor the cultural conditioning to control population growth. It doesn't matter how many refugees Europe accepts from Africa and the Middle East the source populations are growing faster than migration. Europe is already having problems assimilating the present flows and those Europeans most impacted by immigration - the poor - are rapidly becoming intolerant of the imposition. Most of Middle Eastern and African countries have populations that exceed their own ability to provide food and energy so they run on subsidies. Most of these countries under current conditions have virtually infinite populations. We need look no further than the pacific island for both an allegory of the situation facing the planet and to see the problem in action. Culturally big families are the accepted norm, economically adults need large families to provide for them as they age - same problem we have with our aging populations and they live on islands -that is they have an obviously finite realm within which it live - Kiribati as an example has four times as many people on it today as it had in 1950 - it doesn't have a seal level rise problem it has a population problem - Kiribati needs a one child policy - and the whole world needs a one child policy. We need to help by providing the circumstances where human populations are overwhelming the locally available resources. Also Europe is providing a salutary example of how even the most modern of societies are so energy and resource dependent. This winter in Europe and the UK is going to be tough - Putin might have done the planet a big favour by showing just how close to the margins of both food supply and fossil energy that the planet has become - in the first world nations through their dependence on massive fosil energy inputs and the third world on its uncontrolled population growth. Anyone who thinks that humanity will survive uncontrolled migrant flows in the millions let alone the billions is delusional - NZ can't even cope with the existing levels of migration.
That’s an outstandingly lucid exposition of our current National economic situation, in my opinion.
And, an equally rational prescription to remedy the problem.
In my ideal world, the Prime Minister accepts this analysis and resigns prior to next years election for the greater good, allowing Grant Robertson or ?? to campaign on tax reform policies.
Hopefully with sufficient leverage from economic literate minor parties to make it happen.
Thanks Dave. Indeed. I think the retirement of the PM in December or Jan/Feb is a small risk/chance (10-20%). I have no inside knowledge. It would solve a problem for Labour. The caucus would be fine with it and it would reset the landscape.
Bernard, could you explian this part a bit more please? "Those who say our market is just as bad as others who do have capital gains taxes are just plain wrong. The outsized fall in our market since interest rates started rising also shows that." It seems an effective argument aginst capital gains taxes to me that countries with capital gains taxes (e.g., Australia, Canada) still have very unaffordable housing. And of course I would say the common demominator is too much credit for buying exisiting housing in Canada, Australia and NZ.
Thanks Cliff. Our house prices rose even more than theirs because we don't have a capital gains tax. Their house prices would be even worse if they did not have one.
Thanks Bernard. Not an easy read but you have consolidated in one post my conclusions about tax, housing and the economy. Very supportive of you sharing this.
Agreed: publish. Sad that the Government has so quickly capitulated to National's demand to open the immigration floodgates, depress wages, and restore the competition for homes.
It still has one year to offer a meaningful solution to the increasing divide between rich and poor. Part of that answer must be to move the burden of taxation on to land and its unearned wealth gains, and away from consumption (gst) and worked-for income.
Why have they capitulated to National? Labour are the Government and should take ownership for the decision.
Thanks Terry. When you say not easy to read, do you mean difficult to understand? Or just a bleak situation without change?
I had no difficulty reading and understanding it!
For me - its bleak - and makes me sad for my children and grandchild.
My reading is that Terry means the bleak situation interpretation.
Personally, I love your writing but find it very hard to read also, because it makes it starkly clear how little chance we have of fixing the issues that I care most about (climate change, structural inequality). I'm much better informed when I read it, but also much more frustrated and unhappy about the state of NZ and the world. I'm almost completely weaned off reading news these days for my mental health, but I'm still very happy to pay for your work because I think it's very important to get the information out there.
Thanks for your honesty Colin. I guess this band of strugglers find comfort in numbers.
Great chorus today Bernard. I think you need to open this one up for everyone to read.
Bernard - this is an incredibly important issue than NZ needs to address now and you have summarised the issues superbly as always. Open it up - in the vain hope it will spur some constructive debate....
Thanks Pete. I will do shortly after midday. And then it can be shared widely.
Yup, open this one up. Blast the podcast from a boombox held above your head. I want me some land tax
Ha! Good idea. I'm in Parliament so I could go out the front today and educate the anti-vaxxers.
Would a land tax affect you? Or is it just a marginal amount and you are happy to pass the tax to others who will be paying substantially more?
Yes, I own a house, and am comfortable with those owning more land paying more in tax ¯\_(ツ)_/¯
Hi Bernard - there is a far simpler way of sorting the problem that actually makes NZ far wealthier and doesn't cost any one - it is also a concept as old as the Crown vesting ownership rights to land in individuals and them then paying a land tax in return - there is nothing stopping government being the sole provider of mortgages in NZ and using the revenue to offset running expenses - at present much of the value of property in NZ is expropriated by the Australian banks using money magicked into existence through the wonders of fractional reserve banking - and just as Grant Roberston magicked billions into existence during Covid and the US government "invents" trillions of dollars each year to fund it deficit our government could fund property transactions using fictional dollars imposing a prescribed annual charge. In reality that turns a property transaction into a promise to pay the state a certain level of annual land tax for the use of the land.
Having foreign owned banks fund our housing market and agricultural sector bleeds more than $10billion out of the economy annually in profits and interest payments. - That's roughly half of the value from our dairy industry - there is actually no good reason for this other than convention - we don't need it. The banks have been the primary cause of property price inflation as that is a very simple way of "growing the business" by doubling or trebling the "value" of property they have similarly fattened their revenues - at our collective expense.
Hi D
Yep, bring back the State Advances Corporation which only lends to owner occupiers on 25 year mortgages at 3%. It is funded by bonds and/or loans from the government at 2.8% or thereabouts. No requirement to make a profit.
Another idea is to require a percentage of the banking industry to be NZ owned. NZ owned = 60% of shares owned by NZers, no foreign shareholder having more than 10%, the bank being headquartered in NZ as well as it's backroom (admin, data storage, etc).
And changing the subject; bring back the Ministry of Works.
Thanks Steve. I quite like the Ministry of Works idea. I'm steering clear of nationalising the banks for now...
Be bold Bernard! I'm an old MOW employee - from the good old days when NZ could get things done. I'm tending towards the American Idea now of the US Army Corps of Engineers - we need a stronger military with the way the world is going and what better way to have a good military than to give them a major and productive peacetime role - and you could throw in pest animal control to give them some thing to practice on with their guns, night vision equipment, and helicopters 😊
100% on point.
The reestablishing of the Ministey of Works was an election promise Phil Twyford made prior to the 2017 elections. It fizzled into thin air after the elections. Not sure why. Maybe you can dig and probe about it.
2 points in favour of the Ministry of Works
1. They made permanent repairs to roads, not the patch up jobs done by contractors with no skin in the game
2. They provided jobs for a number of marginally employable people and raised their skill level and employment prospects.
They were world leaders in large concrete structures, they also had a team of structural engineers who signed off all multi-story buildings for councils, they were world leaders in earthquake resistant building design, they had a town planning group that did the big thinking around infrastructure for the government, and got it built, they built entire towns of social housing in months and they trained some of the best engineers and skilled trades people in the world - they got shit done! As a nation we have been wallowing without vision or action in the decades since and wasting billions of dollars in the process.
Thanks darkhorse. Hmm. The state expropriating all land property and nationalising the banks might be...er...politically difficult. But I admire your ambition. The land value tax was recommended by John Key's tax working group in 2009 and NZ used to have one until 1992. Hoping to stay in the politically possible realm.
it is a very old concept - the Crown/State still is the ultimate owner of property - hence its power to issue title - - in this concept nothing is being expropriated other than the means of funding transactions - effectively over the past couple of centuries the banks have expropriated a power that state's traditionally held to collect revenues from land. Putting a tax on land is no different than charging interest for borrowing funds to purchase it. Also if thinking about radical change - which a land tax would be - then best to start with a clean conceptual slate. The sale of our locally owned banks in the 1980s to the Australians was nothing more than an act of economic colonialism on their part - and a witless act of treachery/greed/stupidity by our politicians of the day,
Love your choice of words D, the late 1980's was a time of total outselling of public good.
Thanks and
we need to encourage Bernard to follow a more radical path in his generally most constructive discourse 😆😆 on our little corner of the world.
Yeah, I found myself wondering why we'd pay the $6B per year out to foreign lenders @5% in order to fund $120B of infrastructure (over 30 years).
$6B per year for 30 years is $180B of infrastructure, paid for in cash.
I agree with the diagnosis, but not necessarily the solution (Land Tax). If you want to stop property price inflation, choke the credit for buying existing properties. As Richard Werner says, stop banks creating money for financial transactions. It takes 2 things to increase property prices: 1. More demand than supply. 2. Too much credit. The RBNZ could implement this straight-away using "credit guidance" to banks. If you want to bid the price of an existing property higher, then fine; but do it with your own money. This would be so effective that it would need to be phased in, or property prices would drop like a stone.
I think there is a strong case for prohibiting banks lending money to buy an existing house, other than for occupation by the borrower: restrict such lending to building new houses only, for lifetime rental or for rent-to-own.
However, I don't think that changes the imperative to shift tax towards the unearned wealth gain of unimproved land value, and away from worked-for income and GST.
I think banks could still lend on housing, but only a capped amount in dollars so that we stop the escalation. This cap needs to apply even for owner-occupiers, because all housing stock is valued at the price the last house sold for.
The beauty is, there would be no more unearned capital gain, because capital gain is stopped at source. What to do with exisitng capital gain locked into properties currently is another matter.
Thanks Cliff. That is a good point about not taxing the already-unearned capital gains. I'd keep it simple.
Wait but taxing the already-unearned capital gain is exactly what you're talking about...? Or does the timer start now?
Thanks John. Fair point. But again would mean the RBNZ would have to be stripped of independence to use prudential policy as a social/economic policy tool.
Thanks Cliff. You're right that leverage is the cause of the problem. I agree that progressively reducing leverage by forcing the banks to have a higher and higher capital requirement for each new loan would be the way to crunch the prices down. But that would effectively be using prudential policy for an economic and social aim. You'd have to strip the Reserve Bank of independence to do that and also effectively strip private banks of something they would consider a property right. The other problem is that the credit crunch would make it difficult to incentivise new house builds, given so much of the demand is for a financial asset, which would remain in place. You'd also be picking a fight with the banks. A cabinet minister advised me against that once.
Why would you have to strip independence? Could we just change their remit?
A rent freeze on rentals which are converted existing homes (NOT on purpose built rentals of any age). Over time landlords would sell up to first home buyers. No, this would not create a shortage of rentals, because the rental vacated by the first home buyer would become available to rent.. One less rental balanced by one less family needing to rent.
Great article Bernard, as always. Approx. 1 year ago, 2 senior executives from McQuarie Bank Australia, (Bernard would have the details) said that in light of the GFC, (2008) Covid & climate change, anyone who still believed in shrinking the size of government was delusional. Because of the huge environmental, (South Island floods, etc.) & economic challenges we face, these executives stated that proactive, well resourced governments were our only hope! Bernard's brilliant land tax formula is the only way ahead. People are vaguely aware of this - 65% in a recent poll were against National's proposed $2B tax cuts for the wealthy. Bernard's intelligent solutions are a key part of the public education process we need to turn the ship around while we still can.
Thanks Dean. I've yet to hear a centre-right politician argue that. The Macquarie bankers should have a word in their ears... :)
Agreed! The Macquarie bankers can't be accused of being wild eyed socialists, lol
Thanks for the insights Bernard
To be contrary, I think we will see a new tax but it will be a “disaster support & recovery” tax to give local and central government the money to pay for fixing up the damage caused by climate change extreme events and for ongoing adaptations. It is a much easier sell to the voting public as it is obvious what its purpose is, and it helps soothe the fears that all house owners now have when they read about events like the Nelson and West Coast floods.
Thanks Paul. I can see the politics would work. But I'm not sure people who chose not to build/own in flood-affected and sea-level-rise affected areas, let alone the insurers and banks who spent good time/money assessing the risks, would be happy essentially handing over a big subsidy to home owners who chose badly and also voted against decent climate emissions reductions policies to boot.
If we've learned anything from Nelson, it's the builders, bankers, insurers and councils don't know squat about the risks of where they're building. The worst street you saw in all the pictures was brand new. Some of the red stickered houses - brand new.
I find it unkind to blame the buyers who, as they went about their day jobs as nurses and teachers, thought someone would surely have engineered these new streets and subdivisions.
Yes, but what if the basis for this tax is the land value?
Disaster capitalism
"There Is No Alternative" (TINA) was the mantra of Thatcher, Reagan, Douglas and their fellow travellers. Whilst they were right that things needed to be shaken up, their execution wasn't their finest hour.
And we see that in increased inequality, the financialisation of companies (where boosting payouts to shareholders is more important than boosting the production of widgets), the use of immigration to lower wage rates, etc.
So, Bernard, please start using rhetoric where your (and others) ideas are The Alternative. A land value charge (not a tax) would be for more infrastructure spending; a ten percent cut to your supermarket bill by scrapping GST and replacing it with a Financial Transaction Tax; tweaking the Income Tax Act to explicitly state that all business profits are taxable as income (oh look, no need for a capital gains tax as there are no longer any capital gains); etc.
I could go on.
Thanks Steve. It was a riff on TINA to get people in the mood, but I was also not a fan of the way TINA was used to frame things. Interesting ideas on other taxes. Trying to focus on one thing at a time. I'm wary of messing with GST, other than cutting the rate. Or a financial transactions tax, which I suspect would be subject to avoidance and gaming, and create some unintended effects. And just trying to keep it simple and not take on too many interest groups at once.
Hi Bernard, also happy to support opening this up and giving people something to think about. Speaking of taxes though, any chance you could shed some light on how the bright line tax is going? Would be curious to hear about the actual numbers. I know part of the usefulness of the tax is to deter / slow down / change behaviour before a purchase / sale, but given it's self reported most of the time and the IRD is still playing catchup with a lot of things, would be interesting to see if there is much compliance happening.
Great question Luke. I'll do a bit of digging.
I'd love to know the answer to this, because it is the first toe in the water of a CGT, and it needs to be pushed further and I guess, first of all if it's not being done, collected.
Even though I've "accidentally" become a land baron (developing land we bought from the sale of my old house into an eco community), I'm totally for a land tax to reduce inequity. I was really interested to see the extent of self-employed SMEs in Aotearoa - would you have any idea how many of these are home-based micro-businesses, David? I've been searching for this data but it's really hard to come by... I'd speculate that especially post-COVID, the number of home-based micro businesses would have increased?
Thanks Dr Sea. Tomarto Tomato. Self-employed or micro-business. Vast majority self-employed. I'll look for more/better data though.
Sorry, I meant between 0-9 employees (or subcontractors) although I wouldn't be surprised if we had a few small businesses running out of residences too (e.g. farms). I'm interested in the distinction from an energy use perspective - if small or micro (or sole trader) businesses run out of their own residence, there's a duel use for business purposes, not all of which may be accounted for when doing demand-side analysis. Anyway, I'm getting into the weeds, just struggled finding good data!
Great ideas Bernard. If only the Greens had this policy. By only supporting Labour they contribute to the two majors being essentially the same, just paying lip service to different groups.
A while ago on their website TOP had a policy of taxing only the equity in property. They must have realised that would have unintended consequences like people leveraging up on the equity to buy more property and avoid the tax.
The opponents of land tax always come up with the “poor widow” argument ever since 1909 when Churchill and Loyd George tried to bring it in in the People’s Budget. (Book of that name by Geoffrey Lee). The House of Lords vetoed the land tax.
The wealthy always use the poor as a human shield re land tax. Offsetting it against a decrease in GST could also be a way of making it acceptable to the median voter.
Just wanting to add my voice to both your points Sally. Intuitively, taxing wealth rather than income seems much fairer to me - overall - but (a big but sadly) it really does run aground on the poor widow issue. I’d love for a better mind than mine to come up with a response to this one key issue.
And to expand on the idea of offsetting the land tax with a reduction in GST - or indeed income tax. I think that is key to getting voter buy in. Wouldn’t we have a much better chance of selling this if it didn’t increase the tax take overall? The size of the total tax take is certainly a problem too, but it should be a separate discussion from this. Let’s put it aside for now and concentrate just on ensuring the tax we do take is fair and incentivises all the “right” things (ie not the property pyramid!)
Fair point Simon. I agree biting off more than can be chewed is an issue here in a political economy sense.
The deferment system can address the poor widow issue. The tax can be attached to the property to be paid when it is eventually sold which may be after it is inherited. It is likely the problem is greatly exaggerated and very few people would require such assistance.
A related issue is one argument for changing from SIte Value rating to Capital Improved (CIV). Now 71% of councils in NZ use CIV, up from 14% in 1985. The assumption is that the value of the house is a proxy for the wealth and ability to pay of the owner. This is not correct. Research shows that the wealthy tend to live in high value locations even if in an old house. They are likely to have better personal finances that the owner of a mansion in an outlying suburb who has recent construction costs and a recently established mortgage.
I sought information on this for doing a presentation to Christchurch CC when they wanted to address the problem of the still derelict and vacant central city sites 11 years after the earthquake. The Prouctivity Commission and two research papers favoured SV rating.
I expect landbankers prefer CIV and effectively lobby councils while the public are oblivious.
Thanks for the deferment concept Sally - I’ve got a bit to learn about tax! Given how often ‘poor widow’ is raised as an objection to wealth taxes, I wonder if this aspect needs a bit more emphasis.
Interesting idea on GST swap. Key wanted a swap the other way around on income and got it. It could have been a land tax for income tax swap. But ultimately, I still think we will need to lift the tax/gdp rate to keep our commitments on health, education, pensions, housing and climate.
NZ is no place for 10 Million people. The fixation with growing our population so that we can continue to grow our economy overlooks a number of key constraints. Our economy is utterly dependent on agriculture to pay for imports of technology and energy. We have less land area today providing that income then we did when NZ's population was half its present size. We have funded a substantial and sustained deficit in export income by borrowing and selling land and passports. Our immigration policies over the past decades have been little better than a modern form of slavery exploiting the poor and the desperate to work for crappy conditions in return for getting out of what ever disadvantageous situation they were born into. We have also been singularly undiscerning in immigration criteria. A quick trip to Golden Bay or the Coramandel or Queenstown will turn up large numbers of imported "lifestylers" often with unconventional views of society who are living here at our collective expense. The imbalance between house building and population growth has caused one of the most devastating impositions of poverty in the modern history of this nation. I have a friend who migrated to NZ got citizenship then left to live overseas and he uses his NZ passport as a convenience - his children get NZ citizenship by default as will theirs - even though they may never have any intention of living in NZ unless things go terribly wrong in Europe (which may happen sooner rather than later). My child does not have any equivalent opportunity to gain citizenship in his country. So we have lots of people who see NZ citizenship to be a life raft not a privilege. Our government gaily sells passports to rich people who come here and inflate the value of property making it tougher for the rest of us to survive. We also need to make it less attractive for NZer's to leave NZ and more attractive for them to stay. My child is in the process of obtaining a PhD and a very large student loan. Her first job after ten years of specialised education in field that NZ suffers a severe skill shortage will be paid roughly the same as a truck driver earns - and the truck driver wont have decades of student loan payment to look forward to. She will not be able to afford to have children and has stated as such. And why should someone be able to leave NZ work overseas for 4 decades then expect to come back her to retire (competing for housing again) and get free healthcare when the rest of us have hung out here keeping the ship afloat in the meantime. On top of that we live in one of the most disaster prone nations on the planet - our biggest city is smack in the middle of one of most active volcanic fields on the planet, our capital city is the most quake/tsunami prone on the planet, the South Island's primary city is located within the long term river bed of one of the country's biggest rivers and then we have the alpine fault. That going off will make the Tohuku earthquake in Japan look like a squib primarily because Tohoku was 100km offshore where as the AF is on land and the aftershock sequence it will initiate hasn't even been discussed but each of the major aftershocks will be worse the the CHCH earthquakes. And then if we get foot and mouth we will have an economy that look like Cuba on a bad day (or maybe Sri Lanka). As a nation we have taken to the quick fix rather than doing things right. No amount of population growth, particularly if it emphasizes unskilled work, will make NZ any better off than it is today. We also need to recognize that population growth is heavily subsidized by the existing population as they are the ones who pay for the infrastructure and social services that the additional population consume.
Your daughter won’t qualify for superannuation if she returns in 50 years after being overseas. Totally agree with your sentiments though. Citizenship needs to be valued and difficult to obtain. A country I compare us to regularly is Switzerland. Dependent on lots of expats but offers a high standard of living for all.
Hopefully she wont leave but if she does she probably wont need NZ super at retirement if she were to return as will have been on a decent professional income for four decades and will have super from where ever - instead of overpaying for a pretty average house in NZ - or waiting for me to die like a lot of her generation will have to do 😆😆
Interesting problem. The Productivity Commission has recommended a National Policy Statement on population growth allied to infrastructure spending committments. Neither party want to touch that hot potato with a barge pole. I'm not sure we have a choice about the population thing when a big chunk of the globe in the middle will be uninhabitable within most of our lifetimes and those several billion will need to migrate north or south.
That is an ugly one we wont be able to duck - it is the old "not enough life boats on the Titanic" problem the planet's most dire situations tend to contain populations that have neither the means nor the cultural conditioning to control population growth. It doesn't matter how many refugees Europe accepts from Africa and the Middle East the source populations are growing faster than migration. Europe is already having problems assimilating the present flows and those Europeans most impacted by immigration - the poor - are rapidly becoming intolerant of the imposition. Most of Middle Eastern and African countries have populations that exceed their own ability to provide food and energy so they run on subsidies. Most of these countries under current conditions have virtually infinite populations. We need look no further than the pacific island for both an allegory of the situation facing the planet and to see the problem in action. Culturally big families are the accepted norm, economically adults need large families to provide for them as they age - same problem we have with our aging populations and they live on islands -that is they have an obviously finite realm within which it live - Kiribati as an example has four times as many people on it today as it had in 1950 - it doesn't have a seal level rise problem it has a population problem - Kiribati needs a one child policy - and the whole world needs a one child policy. We need to help by providing the circumstances where human populations are overwhelming the locally available resources. Also Europe is providing a salutary example of how even the most modern of societies are so energy and resource dependent. This winter in Europe and the UK is going to be tough - Putin might have done the planet a big favour by showing just how close to the margins of both food supply and fossil energy that the planet has become - in the first world nations through their dependence on massive fosil energy inputs and the third world on its uncontrolled population growth. Anyone who thinks that humanity will survive uncontrolled migrant flows in the millions let alone the billions is delusional - NZ can't even cope with the existing levels of migration.
Thanks again Bernard.
That’s an outstandingly lucid exposition of our current National economic situation, in my opinion.
And, an equally rational prescription to remedy the problem.
In my ideal world, the Prime Minister accepts this analysis and resigns prior to next years election for the greater good, allowing Grant Robertson or ?? to campaign on tax reform policies.
Hopefully with sufficient leverage from economic literate minor parties to make it happen.
Thanks Dave. Indeed. I think the retirement of the PM in December or Jan/Feb is a small risk/chance (10-20%). I have no inside knowledge. It would solve a problem for Labour. The caucus would be fine with it and it would reset the landscape.
Bernard, could you explian this part a bit more please? "Those who say our market is just as bad as others who do have capital gains taxes are just plain wrong. The outsized fall in our market since interest rates started rising also shows that." It seems an effective argument aginst capital gains taxes to me that countries with capital gains taxes (e.g., Australia, Canada) still have very unaffordable housing. And of course I would say the common demominator is too much credit for buying exisiting housing in Canada, Australia and NZ.
Thanks Cliff. Our house prices rose even more than theirs because we don't have a capital gains tax. Their house prices would be even worse if they did not have one.
Hmmm. Causation vs. Correlation