by frog
Russel Norman has taken the courageous step of publically supporting a capital gains tax. It is established Green Party policy while it is also the political ground where Labour and National fear to tread despite the good it can do for our economy.
A major plus is how it can keep us out of another housing bubble. Here is Russel’s letter to Bill English that lays out the case for Capital Gains and other steps that can stop the housing bubble rearing its ugly head every again…
17th August 2009
Dear Bill
I was very pleased to hear your recent remarks regarding your concerns about the possibility of another housing asset bubble developing in New Zealand.
I share those concerns.
The housing bubble we experienced from the end of 2001 through to 2007 saw median house prices double with very significant negative social and economic impacts on our country.
Many first home buyers can no longer afford to buy a house and the proportion of families owning their own home is dropping. Waiting lists for social housing are very long, especially in Auckland. Many New Zealanders spend far too much of their income on housing that is often of poor standard.
At the same time billions in investment has been misdirected into unproductive speculative housing assets when it is desperately needed by the productive sector. The inflationary effect of the housing asset bubble has led the Reserve Bank to increase the official cash rate resulting in high interest rates for households and businesses. High interest rates have in turn placed upward pressure on the exchange rate making life more difficult for the tradable sector. The financing of the housing bubble from overseas sources has left New Zealand with net international liabilities of about 100% of GDP, the second worst in the OECD after Iceland.
The current recession has let some of the air out of the housing bubble but there are recent signs that it may re-inflate. It is vital that the Government acts sooner rather than later to stop this re-inflation.
I wanted to make a series of suggestions to you based on proposals that we released over the last few years. It may seem to take political courage to adopt some of these solutions but they are essential if we are to ensure that future generations of New Zealanders are to be able to afford housing and the New Zealand economy is to prosper.
The proposals here include reducing demand for investment housing and increasing supply of housing.
On the demand side:
- Introduce a capital gains tax excluding the family home. The tax free gains from investment properties are one of the demand side drivers pushing up housing prices (a CGT excluding the family home will also broaden the tax base and make it fairer). Any CGT must not punish the earlier decisions of taxpayers taken in good faith and so must not be retrospective.
- Ringfence the losses on investment properties. The tax system currently encourages people to invest in rental properties by allowing the cost of mortgages and maintenance to be offset against income.
- Restrict ownership of residential land to permanent residents and citizens. This is common practice overseas and takes some of the demand out of the market.
- Reserve Bank needs to be directed to focus more on asset bubbles directly and given the tools to do it. This could take the form of increasing the banks’ capital adequacy ratios for specified asset classes that the Reserve Bank identifies as bubble assets (such as housing). There was also a proposal for mandatory deposit ratios put forward by David Preston at the recent New Zealand Association of Economists Annual Meeting.
On the supply side:
- Increase the supply of affordable social housing by constructing 6000 units over three years. We need to significantly increase the supply of social housing to take some of the pressure out of the market and to make sure that stable housing is available to those who are currently struggling to afford it. This would also create jobs in the building industry.
- Encourage planning changes to encourage medium density housing on mass transit routes. High quality, energy efficient medium density housing is the best way to supply more housing in urban areas like Auckland.
- Make it a requirement that a proportion of the units in housing developments are affordable housing.
There are also a couple of proposals on the table that will only makes things worse while appearing to provide a short term fix.
- Metropolitan Urban Limit. Some have called for government to abandon MULs with the result that we will get more urban sprawl. Urban sprawl makes out cities less liveable and condemns those living on the edges of cities to high oil and car dependency, at a time when the International Energy Agency is raising alarm bells about peak oil production and higher oil prices.
- Environmental and building standards. Some have called for weakening of standards under the Building Act and the Resource Management Act. The lesson of the leaky houses fiasco is that saving a few dollars in the short term by lowering building standards and cutting corners results in much higher costs in the medium to long term.
Your repeated statements that New Zealand has experienced a debt-fuelled consumption boom are well made. A nation which is borrowing to pay the interest on the money we have already borrowed is a nation that will not remain prosperous and in control of its own destiny. The housing bubble was one of the key drivers of that boom.
It requires the Government to take a lead if we are to avoid a repeat of the last housing bubble. So screw your courage to the sticking-place and we will not fail.
Yours sincerely
Russel Norman
Published in Economy, Work, & Welfare by frog on Mon, August 17th, 2009
Tags: Bill English, capital gains tax
on the trolls and those who are unable to keep on topic
yeah..but key has already slapped the idea down..
(this morning..on breakfast telly..didn’t you know..?
..he said his supporters would bury him head first in the ground..)
so..?
and frog..why is it a ‘courageous step’..
..writing a ‘dear bill’..to double-dip-bill-from-dipton..?
(am i missing something here..?..)
phil(whoar.co.nz)
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Excellent letter and I agree 100%. The chances of me being able to buy a house anytime in the next 20 years seems quite dependent on these moves.
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Won’t work.
CGT will drive up the price of housing and rents, as is seen overseas. The only thing that will reduce house prices is to increase supply.
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>>The chances of me being able to buy a house anytime in the next 20 years seems quite dependent on these moves.
Well, you could work and save.
Just a thought…..
That’s what the rest of us did. It’s never been easier to buy a house.
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In terms of increasing supply, do people remember a story on National Radio a couple of years ago on this company in California, which has developed machinery that can build a house in a day?
http://www.contourcrafting.org/
This process cuts the construction costs by about two-thirds and significantly reduces waste and other negative environmental costs associated with building and construction.
Imagine the impact on house prices if this concept ever took off…
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“It’s never been easier to buy a house.”
Just don’t try and build one within 170meters of rich Pommy immigrants, They don’t like kiwi neighbors, and 150 meters is too close!! they just love getting injunctions against people that were there first and have saved all their lives for their retirement.
The immigration department needs to sort its act out, its been citizenship to the highest bidder for too long, it must have had a significant impact on house/land values.
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If you compare the number of years worth of median income to buy a median priced house, I think you’d find that quite clearly that’s not the case.
But I agree that increasing supply is essential. That’s why we need to fix up District Plans and get the government building more houses.
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Russel’s letter to Mr Dippy, along with the Green’s MOE with National will provide them with the perfect opportunity to bring in the dreaded Capital Gains tax…
and blame the Greens for it!
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Shunda – some might say that having you live within 150 meters of them is too much to ask for anyone, no matter what their country of origin.
Do you ever feel that you personalise broad issues due to your own bad experiences (the social worker, the immigrant neighbour etc…)?
Extrapolation – it’s a dangerous weapon ..EVERYTIME and in the hands of EVERYONE!!!
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>>dreaded Capital Gains tax
Unelectable.
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They’ve just been elected. Can do what they like now!
(They’ve got the mandate you see).
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Russel’s letter to Mr Dippy, along with the Green’s MOE with National will provide them with the perfect opportunity to bring in the dreaded Capital Gains tax…
The MoU would provide a framework for cooperation only if both sides want the same outcome. It is pretty clear that Key doesn’t want a CGT, so the MoU will be of little practical use.
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Yes Valis – it was said tounge in cheek, but National is a shark that does and will hide behind it’s remora.
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>>They’ve just been elected. Can do what they like now!
No, they’d be out in one term.
CGT won’t work. What you really need to do is tighten up LAQCs, encourage other types of investment, and tighten banking regulations. Russel makes some good points regarding the issues. You might also want to read Uncle Gareths take….
http://www.gmk.co.nz/Pages/News.aspx?NID=31
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# Valis Says:
August 17th, 2009 at 4:26 pm
> It is pretty clear that Key doesn’t want a CGT, so the MoU will be of little practical use.
Does it really matter what Key thinks? He’s only the Prime Minister – it’s not as if he’s leading this government or anything, is it?
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“Shunda – some might say that having you live within 150 meters of them is too much to ask for anyone, no matter what their country of origin.”
Well its not my house, but any way, I would make a great neighbor greenfly
, share the produce of the land etc, not something the upper class are too keen on though it involves interaction with the “riff raff”.
“Do you ever feel that you personalise broad issues due to your own bad experiences”
No
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Shunda – as a fellow riff-raffian, I know that it’s our duty to ‘interact’ with those who occupy stations above ours. Marry their daughters! (That p*sses them off most!) leering face emoticon
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I found this on the NZ Assn of Econimsts site
“In general terms, the model suggests that a capital gains tax will have the
following effects: it will lead to an increase in rents; it will lead to a reduction in the number of people renting, and an increase in home ownership rates; it will lead to an increase in the net foreign asset position; and it will lead to a decline in the fraction of large houses in the economy. It is possible that home ownership rates could rise by several percent if a capital gains tax were introduced, with a similar sized increase in the net foreign asset position. The increase in rents and the increase in home-ownership rates will be larger if there is a difference in the capital gains tax rates that are typically applied to owner-occupied residential property and those applied to leased residential property, either because the former is specifically exempted from capital gains tax or because landlords typically have higher marginal capital gains tax rates than households who typically rent. If a capital gains tax were introduced without exemptions for owner-occupied housing, it could allow a sizeable reduction in the GST rate, but this is not true if it owner-occupied housing were tax-exempt.
Beyond these general outcomes, one of the main outcomes of the paper is the demonstration that the results depend a lot on the underlying structure of the economy. It matters whether the long run supply of housing is elastic or inelastic. It matters whether construction costs are high or low. It matters whether people prefer to own rather than rent, or vice versa. It matters whether young people respond to rent increases by staying longer in shared accommodation, or by deciding to buy a house themselves. Indeed, some of these factors matter so much that they substantially affect whether a capital gains tax is likely to increase welfare or reduce it.
”
http://www.nzae.org.nz
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Has nayone read this:
PDF Document ACAG_Property_Tax_Paper2.pdf****
Fiscal, Distributional and Efficiency Impacts of Land and Property Taxes Andrew Coleman & Arthur Grimes* Paper presented to Tax Session, New Zealand Association of Economists July 2009 Draft not for quotation without permission of the authors. Abstract Land taxes are known to be amongst the most …
http://www.nzae.org.nz/conferences/2009/pdfs/ACAG_Property_Tax_Paper2.pdf 07/10/09, 319947 bytes
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“Marry their daughters! (That p*sses them off most!) leering face emoticon ”
Its to late fly, I married a Pastors daughter, and that only p*sses ME off!!
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Greens supporting more tax, more regulation and more government spending.
What’s new?
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Urban sprawl does not “condemn” those living at the edges of urban areas to car use – they choose it. Funnily enough, you seem happy enough for the catchment area for commuters in Wellington to be extended as far north as Masterton and Palmerston North as these both have rail services. You’ll happily campaign to upgrade rail services to Kapiti, forgetting that perhaps one of the biggest reasons why Paraparaumu has grown so much since 1982 has been because of the upgrade of the rail service that happened then – which of course made it more commutable, but also mean that people moved there, and jobs moved, and so car commuting grew too (without the highway capacity increasing).
Removing metropolitan urban limits would make a big difference, as long as you priced roads efficiently too. If people are willing to pay for fuel to drive long distances to work, then frankly that’s none of your business, as long as they pay for congestion on those roads that have capacity issues.
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jh, That’s good stuff, reading the second one now, which seems to cover most of the virtues of a land tax. I suspect (and not for the first time) that Grimes &Co at Motu are the only NZ economists who really understand land. They do seem to have their history a bit wrong though, land certainly HAS been taxed by the NZ govt in the past.
Ecobiz, alas most of the savings from cheaper house construction end up captured in higher land prices, so it doesn’t help home buyers, just owners of developable land.
jarbury and everyone, I really doubt a CGT, particularly one that exempts primary residencies, will help much, if at all. Looks like the first paper jh linked to might agree, but I haven’t read that one yet. Here are some problems: It doesn’t have any impact on non-resident landlords, in fact by removing some of their domestic competition it may encourage them. It only takes away 30% of the capital gain, tops, leaving plenty of incentive to speculate (eg, see Australia). The exemption privileges over-investment in one’s primary residence over productive investments such as shares in new, growing companies, even more so than the current situation where neither is covered by a CGT.
A land value tax actually would do what is claimed above for a CGT. It would also remove any need for banning non-resident land ownership. Why ban when you can tax?
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Russel: I agree with your letter 100% but I don’t think that any of the National ministers will.
To them your letter will reek of socialism!!!!! And don’t forget where the PM. Mr. Key came from, didn’t he work for Goldmund Saachs?
The whores of Babylon? The worshipers of Mamon?
“If we can prostitute our country to the foreign invester so be it, and to hell with the rest.” is their creed.
I don’t think that capital gains tax is anything new didn’t the British Labour Party introduce it in the sixties?
I think the first house and the bach could be exempt then start with 2% then double it with every house.
The important thing is that the government can use this money to built a progressive state housing where tenants can do a ‘rent to own ‘ deal that gives them incentive to look after the property.
Rapacious speculation needs to be discouraged.
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In case you need a history lesson Mr Norman, you would find that suburban sprawl started in New Zealand in the 1920s, and that suburban sprawl never resulted in car dependency until after World War II, and indeed, the worst car dependency can be found in newer suburbs which are often denser than older suburbs (average section size in Botany would be about 500m2; compare with 800m2 for the average interwar suburb and 1000m2 for the average postwar suburb).
What creates car dependency is poor public transport provision, no more, no less.
You’ll find that this has happened in Australia as well. Caboolture, north of Brisbane, turned from small town to suburb thanks to the initial provision of rail services in the 1970s, and subsequent electrification in 1986; now the towns to the north of Caboolture are rapidly turning into commuter towns as improvements are made to the line north. Even to the south of Brisbane, the same thing has happened – when Robina Station opened in 1999, it was in the middle of a field.
A similar thing happened with Gosford in New South Wales; small town turned into suburb when the railway line was electrified in the 1960s. Within less than ten years of electrification, demand was so high that the U-Sets on the Gosford run had to be replaced with double decker V-Sets. Today, it is very difficult to fit in sufficient trains from the Central Coast of New South Wales to get through to Sydney.
My money is that similar things will happen to the regional centres of Victoria (especially Geelong), and with Mandurah in Western Australia.
However, the biggest problem that you guys forget about when you think that a Capital Gains Tax will discourage people from investing is that you fail to realise the potential returns from Property Investing. Generally over time, housing prices increase by the rate of inflation (mandated by the state to be between 1 and 3%). A property investor usually borrows their money to place into their property investment, and thus might only put 10% of their own money in (and even then, this is often equity in their own house, so essentially they are playing with house money). Leverage of course causes your returns to skyrocket, and so we could have a return of between 10% and 30%, depending on high inflation is – please tell me where you can find a 30% return on the stock market? You simply cannot, unless you really hit it lucky with penny dreadfuls.
Further to that, let us compare two investors. Joe Stock invested in a passive fund tracking the then Barclays Index in September 1987. Joe House placed a 10% deposit on a rental property in the same month. Twenty years later, Joe Stock would still be sitting on a 20% loss (the NZSE 40 hit a post-crash high of about 3200 in 2007), while Joe House would be sitting on returns of thousands of percent, and that is merely assuming that he kept the same house and didn’t leverage off that house to grow his portfolio.
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Isn’t the biggest argument for a CGT the fact that it would encourage investment in the productive sector rather than simply in housing?
I’ve had the urban sprawl argument with you many times john-ston, and I won’t repeat it again here.
However, for those who are interested I have written a big long rant on the matter here: http://transportblog.co.nz/2009/07/19/housing-affordability-inter-generational-equity-and-transport/
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A CGT wont encourage any investment, it will discourage investment in housing, it wont increase returns from other investments. New taxes can’t do that.
Of course dramatically lowering company tax and flattening income tax would have the same effect, but the size of the state would have to shrink also – and there we have the crux of the debate.
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John-ston
Compared to the CURRENT situation, in which there is NO tax at all on the profits and an LAQC set up so that my taxes subsidize the speculator’s (investor my left nut) mortgage interest while I have no such advantage when I bid against him for a property?
I don’t want to totally discourage these people. I just want their advantages over the first-home buyer cut down a bit and the property’s price brought down a bit. I’d like to see the irrational increases in “value” put in their proper perspective, which is the income a New Zealander.
Not that you can’t have those things controlled and still have problems. Looking at the USA, the issue of who the banksters lend to, and how they create the money to lend, must also be resolved in some regulated way. There the issue was that the banks had “free” money to lend and income didn’t mean anything at all, as house values always go up… don’t they.
http://globaleconomicanalysis.blogspot.com/2009/08/brace-for-wave-of-foreclosures-dam-is.html
Yeah, That worked well….
So TANSTAAFL still applies and the whole thing isn’t about making it “perfectly fair” but about making it a little less lopsided than it currently is.
I don’t have much opinion about “urban limits”. It seems to me that the real limits in places like Wellington have more to do with the natural topography, and I am perfectly happy to have satellite suburbs grow up along rail lines. People commute from Paraparaumu by car, to be sure, AND the trains are packed during the rush hour. Masterton is not so well served by rail into Wellington. Comparing the two towns might be instructive.
respectfully
BJ
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But libertyscott, that debate is founded on a fallacy. It is possible to drastically lower and/or flatten our distortionary taxes without shrinking the state. Read that link from jh:
http://www.nzae.org.nz/conferences/2009/pdfs/ACAG_Property_Tax_Paper2.pdf
eg: a land tax of 0.11% would cover a reduction in the top income tax rate to 33%, if that’s your first priority.
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I did a whole lot of land tax calculations on here awhile back; from memory 1% land tax is enough to get us down to a flat 15% tax rate for everything else. Assuming no reduction in state spending or variations in tax take other than the perentage reductions.
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I must thank JH for that link, and pm67nz for pointing it out.
Ive done some calculations using these numbers (significantly more up to date than the ones I had availible when I did mine) and the 2008 tax and spending data.
If we were to introduce a flat tax rate of 20% for persons/corporates/trusts, etc. it would cost us a total of $8,101,000,000 annually in tax take. Using the stats provided in the paper the total unimprooved value of NZ’s land is equal to $1,407,800,000,000. So an annual land value tax rate which would cover the entire tax loss would be 0.575436852%. An average of $0.005754369 per metre per year.
If we were to introduce a flat tax rate of 15% for persons/corporates/trusts, etc. it would cost us a total of $15,276,000,000 annually in tax take. Using the stats provided in the paper the total unimprooved value of NZ’s land is equal to $1,407,800,000,000. So an annual land value tax rate which would cover the entire tax loss would be 1.0850973%. An average of $0.010850973 per metre per year.
So, assuming my calculations are correct, it would seem a very plausable option, esspecially given the likelyhood of productivity increase. To help the poor, GST could be reduced to 10% at a cost of $2,380,000,000 per annum; still likely at an acceptable level percentage wise.
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Just for fun:
Alternativly, a LVT of 4.9083677% per annum would substitute all other 2008 tax take.
Additionally, in that previous post I copied and pasted the wrong value from my documents for the per square metre per year average. The correct averages are:
20% = $0.030151109
15% = $0.056855739
0% = $0.257183266
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Sapient,
How would you calculate the value of the land to base a tax on.
For example I haver a property whose market value is $150K, the Government valuation is $180K and the Manukau City valuation (on which I pay rates) is $250K.
Who sets the value and what is “unimproved” value.
Another fly in the ointment is the fact that all State owned land (DOC ,etc) would not be included in the tax take, nor would Maori land, Church owned land, rivers, lakes, foreshare and seabed, etc.
I would need to see the volume of taxable land to be sure your tax take is correct.
It may be a great deal smaller then you think.
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Blue Peter said
Well Said Sir
And also said
We didn’t have flash cars, big TVs, eat out five times a week or have off-shore holidays, but we did have the wonder of compound interest working for instead of against us
Again. Well Said Sir
John-ston said
And therein lies the reason why this country is a land and property based economy. If we had another 5 million people, we’d have a population that would just about make speculative investment in producing enterprises worthwhile. As we are, we don’t have a domestic market that can make more than one multi-millionaire every few years except in housing!
John-Ston got it right
Jarbury asks
Sorry, but no! The biggest of our productive sectors is farming, which has a limit based on the ability of the land, supplemented by science, to sustain and grow food and drink on the hoof. A limit many would like to see reduced. After that, I would suggest our next most profitable productive industry is building
Good try though
Gerrit
The “unimproved value” is generally on your Rates Bill, and is the value of the land you own, improvements are quoted separately and are the value of all buildings, fencing, landscaping, etc., Both are as determined by Quotable Value New Zealand.
As for
I see no reason why these should be exempted from land tax. The state paying would be foolish, and I don’t want any fools playing with this stuff. So bottom line – even if it amounted to $0.10 per sq meter per year, (10 times that quoted in Sapient’s pen-ultimate paragraph) it would be a bargain compared to today’s inequitable tax regime.
It would also have some quite valuable off-sets, in that any multi-story building (e.g. inner city apartments,) would result in a DIVISION of the tax payable, which may result in less travelling for many, and so less pollution.
Sadly, the last major structural change in our society was the introduction of votes for women. I doubt there will be an appetite for this before we move to a five year Parliamentary term – 3030 a.d. perhaps>
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Strings,
I except your expalination but we are going to be setting up a tax regime based on value “interpretations” by some blank faced state servant.
If the state want to increase the tax take it simply hikes the land value (as Manukau City has done) directly.
Or indirectly through changing the land zoning from say farming to residential (much as councils do now to rate people off their properties).
I dont have a problem with the land tax per se, but would like a better picture of how it would work. And how much personal taxation and GST was reduced so as to be tax neutral.
Hence all calculations should be put on hold until the formulae is set into some sort of agreed to concensus.
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Strings Says:
August 18th, 2009 at 11:27 am
Blue Peter said
The only thing that will reduce house prices is to increase supply
Well Said Sir
—
[from: http://www.nzae.org.nz/conferences/2009/pdfs/ACAG_Property_Tax_Paper2.pdf
A tax on land could have non-trivial effects both on aggregate fiscal revenues and on individual households and firms (including farms). On the fiscal front, using 2006 figures, we show that a 1% p.a. tax on all non-government land could raise approximately $4.6 billion annually (rising to $6.7 billion annually by 2030 with 2% p.a. land inflation).
To place these numbers in perspective, $4.6 billion represents 20% of all income tax revenue forecast for 2009/10. The top personal tax rate of 38% applies above an income threshold of $70,000 p.a. Total income tax revenue raised on those earning above this figure is forecast to be $9.8 billion for 2009/10. If the top personal tax rate were reduced to 33%, the direct loss in income tax would be $491 million, which represents just 11%
of the revenue from a 1% p.a. land tax.
While a 1% p.a. land tax could result in significant fiscal revenues – so enabling material reductions in other tax rates – it would also have other major effects and its impact would fall more heavily on some sectors of society than on others. One currently untaxed sector that it would fall on is foreign-domiciled owners of New Zealand property, who otherwise pay no income tax and who pay no GST if they do not purchase goods and
services in New Zealand. A shift to a land tax would therefore widen the tax base not just in terms of the base of assets on which tax is raised but also in terms of the number of people (i.e. non-New Zealand residents) who become taxpayers. The tax paid by non- New Zealanders contributes a net benefit to the country that exists over and above any efficiency (productivity) benefits that might accrue from the tax shift.
The overall effects of a switch to land/property taxes would depend both on what other tax changes are made at the same time (e.g. to GST or income tax) and on the structure of the economy (which determines general equilibrium prices and allocations). Our partial and general equilibrium analyses (sections 3 and 4) demonstrate that certain key
parameters (e.g. housing supply elasticities) and the exact nature of the tax (e.g. land versus property tax, incremental versus flat tax, etc) will lead to different outcomes.
We therefore cannot be definitive about the overall impacts of a land/property tax. Nevertheless, we can use the foregoing analysis to make some informed judgements about the effects of certain tax policy options under different circumstances. Consider the effects of a comprehensive flat land/property tax funded by a proportionate reduction in
income taxes. In this case, with inelastic supply, we may expect land/property prices to fall with rents remaining broadly unchanged. The present discounted value of the tax is effectively reflected in the initial price of the land/property; rents remain unaffected since the tax (which landlords indirectly forward to renters) is offset by the reduced rent
required to yield a market return on the reduced initial value of the property. With elastic supply, rents rise since the change in supply means that prices do not fall by the full present discounted value of the tax while the tax is still shifted to renters. In this latter case, the owner-occupancy rate falls slightly as owners’ housing costs rise; in the former (inelastic) case, the owner-occupancy rate rises slightly as more people are able to afford (cheaper) houses despite the housing tax requirements.
In all our general equilibrium simulations, aggregate indebtedness of the economy declines with the introduction of a land/property tax, essentially because New Zealanders borrow less to finance domestic property holdings. At a conceptual level, the value of New Zealanders’ housing assets and liabilities fall but, at the margin, the liabilities are
sourced from foreign savers and a land/property tax reduces the amount of foreign capital that must be borrowed to fund domestic property.
Owners of existing property would incur a loss of wealth following introduction of a land/property tax unless there were perfectly elastic supply. Even in this latter case, if the owners retained the property they would face the present discounted value of the future land/property tax flow (although of course they would also be in receipt of tax reductions
from other sources). With a flat land/property tax, the wealth loss would be proportionate to the existing value of land/property. Owners of land-extensive residential properties (including lifestyle properties), farms and forests would be liable for the largest losses in proportion to their property holdings if a land tax were introduced (since improvements
would not be taxed in that case). Those with no property holdings would not face an immediate wealth loss. The effect on their rents would depend on the supply elasticity; the less elastic is supply, the less that rents would rise following introduction of the tax.
In relation both to current income and current wealth, each of a land and a property tax would tend to be broadly progressive, with higher income (and higher wealth) households tending to bear the greatest burden of a new tax.52 The retired cohort would be more likely than younger cohorts to incur a wealth loss given the higher initial value of their housing assets. They would also likely face an increased overall tax burden if a land/property tax was matched by an income tax reduction, simply because their incomes tend to be low in relative terms. Younger cohorts would face reduced current and future income taxes that, on balance, would more than make up for their higher lifetime land tax payments. Wealth losses would tend to be concentrated more upon Pakeha and Asian communities than on Maori and Pacific communities given the low rates of homeownership amongst these latter two ethnic groups. Households with three or more dependent children, on average, would suffer lower wealth losses than households with fewer or no children given existing homeownership patterns.
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Please get your facts right.
Numerous studies show that while people further out may pay more per household than their inner city folk the inner city folk pay more for their land.
The result is that in lightly regulated markets where supply can respond to demand the end result is that both households end up with the same total expenditure for house and transport.
People are not stupid.
However, once MULs are introduced land prices rise so rapidly that all households have less net income after house and transport spending and the resultant congestion means that transport costs increase for everyone and especially for those forced to commute to downtown areas because Smart Growth tries to discourage employment centres on the periphery.
Again in lightly regulated markets the suburban households spend less time driving than those in inner city suburbs who face congestion every time they get in the car. Suburban commuters are normally diving across town rather than into town.
The MUL premium per household can by 150,000 or more. That is a lot of cost for no added value. Californian smart growth cities are losing population as people flee to where they can afford a house and find a job. The whole State of Florida is losing population.
Finally, households have more than one person normally. And their life may require them to drive in different directions. Forcing them to live closer to the CBD may well increase household miles driven and normally does.
Do you understand the connection between automobility and job accessibility?
Or between automobility and the labour pool available to an employer?
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libertyscott Says:
August 17th, 2009 at 10:11 pm
Urban sprawl does not “condemn” those living at the edges of urban areas to car use – they choose it.
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That doesn’t necessarily mean they can choose any optimal outcome. Private ownership of land creates a mass of rigidities so if a society could dream up a range of options ( based on the best examples from around the world) and get a significant degree of consensus these could never happen, as private owners would hold out for maximum capital gains or just get in the way.
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Lovely, Russ.
I can say no more… for a change!
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Gerrit,
With LVT there is no need for zoning for non-industrials, infact that is a very important component for it allows land to be used for the most productive purpose; essentially the market sets the zoning. Ideally industrial would also not be subjeted to zoning though to do this all sorts of other measures would need to put into place as industrial will tend to affect property prices. Crucially a public approval requirement and a land value loss compensation would be needed.
Strings is of course correct that Quotable Value New Zealand (http://www.qv.co.nz/), a private company, is responsible for the evaluations for most, if not all, counsels. I used to be clued in on how this was done but I can no-longer remmember, I beleive it has alot to do with the market rate for unimprooved land of X quality and in Y location, Z distance from the nearist urban centre, etc,etc.
The calculations are mearly ment to be indicitive. The 2008 values are however as accurate as the state has reported, down to the decimal. The land values taken from JH’s file relate only to productive land and exclude lakes and the alps, im not sure about major rivers. The only part which is open to any real questioning is my use of land mass for the calculation of average square metre charge per annum. This was entirly for demonstrative purposes only, though that said the land area excluded lakes but not the alps.
It is far from a treasury calculation but the purpose was to show only that it is plausable.
For the purposes of simplicity churches, maori land, and state should pay. If neccacary maori land can have its tax returned to them; prehaps minus the bill for social services, esspecially if there is gong to be a reduction in income tax.
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So we are in a recession and want to get out of it?
You would not think so. This makes sure we have a shortage of housing and thats a few thousand jobs down the tubes. There are some incredibly selfish people out there. And they wonder why there children are leaving the country.
Environment Court rejects 460ha Waimauku Estate development
Jazial Crossley | Tuesday August 18 2009 – 12:40pm
A proposed development that would have housed triple the number of people already based in Waimauku has been rejected by the Environment Court, leaving the developers unsure what the site’s future will be.
The development was first proposed by Rick Martin’s company Cornerstone, which built Orewa’s Nautilus apartments and the Sentinel in Takapuna.
Cornerstone sold the 460ha section to Malory Corporation last year.
With 1,375 properties the subdivision proposed for the site aimed to house up to 3000 people, when the current population of Waimauku is only 930.
The proposal for the subdivision was rejected by Rodney District Council in September 2008 because it was considered inconsistent with the area’s Structure Plan which outlined only limited growth in the area.
Say four jobs per house on site and a multiplier of six to seven say 12,000 jobs?
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Not only that, but said development in Waimauku might have been enough to garner patronage to save the Helensville rail service, which is probably under threat having not met its patronage requirements.
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Ah come on. We’ve had a CGT already. As recently as Norm Kirks Labour Government. All they did was rename it the Property Speculation Tax and what did it do? Caused the price of property to skyrocket as Property Speculators just tagged on the tax and a bit more to the price they wanted for the house. Bam Bam, CGT is a disaster in the making. Russel Norman is a Prize F*** Wit.
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jh said “if a society could dream up a range of options”.
Individuals dream up options, and just because groups of people agree what they think is best for everyone doesn’t mean they have a right to force everyone else to submit their bodies and property to some self proclaimed “general will”. Leave peaceful people alone and negotiate, and learn to live with the consequences when people disagree with you.
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Housing New Zealand has the potential to develop about 2500 additional units in Mt Roskill and Otara that are buildable without too difficult resource consents. Clearly not all of these extra units would need to be retained for social housing.
That would help housing affordability. It would create thousands upon thousands of jobs, it would put more people within good proximity of existing services and transportation and so forth. Why aren’t we doing it? Ask Phil Heatley I guess….
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jarbury,
Given than there is no shortage of private developers in NZ, what makes you think that 2500 extra units would be a good thing, rather than a misdirection of resources?
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The issue there is that only investors would purchase houses that are sold in Otara, since people of means would avoid that area due to the already high crime rate. In terms of 2500 extra units helping housing affordability; you are way off the mark – we need something closer to 25,000 to bring median house prices back down to a reasonable 3 to 5 times median income figure (Owen, while this might be higher than what Cox mentions, remember that 2 to 3 times median income prices were in an era of high interest rates, which would have had an impact on mortgage payments. It was also at a time when men worked, and women stayed at home).
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@wat – because investors can’t raise funds at the moment for developments. Do you see much being built around Auckland at the moment? I sure don’t.
@john-ston – 2500 is a good start, and if we weren’t in a hurry we could certainly put a bit more time into urban design measures that would allow higher intensity developments. In terms of Otara, if we’re ever going to turn that suburb around then I can’t think of a better way than basically rebuilding it and reducing the concentration of state houses.
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libertyscott Says;
“Individuals dream up options”, . Leave peaceful people alone and negotiate, and learn to live with the consequences when people disagree with you.
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Individuals have dreamt up things like new urbanism.
“and just because groups of people agree what they think is best for everyone doesn’t mean they have a right to force everyone else to submit their bodies and property to some self proclaimed “general will””
In an urban planning situation individuals can subvert a plan [Gloucester Towers Gloucester St, Chch]. At present investors can let their properties run down and fill them with rowdies or pressure local government for zoning changes and build neighbours out, but this is considered all part of the healthy cut and thrust.
One danger of local govt being the developer would be political interference so that as today where the “needy” receive more than people who work, they are first off the stand.
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The UK has had a Capital Gains Tax for a very long time, applicable to all secondary housing and investments etc. Did that stop housing price bubbles there? Course it didn’t, there have been at least 2 big ones in the last 20 years. So why does anyone think it would work here?
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That is a suburb that would be next to impossible to turn around; like I have said before, no-one of means (i.e. people who can actually afford to pay off a mortgage, even with lower house prices) would move there, simply because of the crime risk. Not even reducing the concentration of state houses will have an impact, because the criminal element will still be there.
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Madeline Ave (which was known as Mad Ave) was turned around….
It only took the complete demolition of the place, the renaming of the street and the introduction of many more privately owned residences to do so. Not altogether dissimilar to what I suggest for Otara, just on a smaller scale.
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The thing that Madeline Avenue had was it was on the border with a reasonably well off area (i.e. Glendowie and St. Heliers). Otara doesn’t have that.
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john-ston,
You have just shown why most people dont understand property develoment and the means to take a long term advantage from it.
People have been buying Otara properties for a long time for 3 reasons.
1. Price is cheap.
2. It is close to the both Botany and Manukau City shopping developments.
3. It is close to the expanding East Tamaki industrial area that provides local jobs.
4. Sections are larger then available in Botany.
5. Plenty of tenants willing to rent.
6. Development of Botany is hitting the hills and green belt between it and Beachlands and fill funnel long term development towards Otara.
7. Access roading to and from the motorway plus the industrial area has been much improved by the new Highbury interchange (love those motorway expansions).
Unfortunately for you, those of us with long term outlooks have already bought when the pricing was even cheaper then now and bargains were not hard to find. Pricing in Otara is getting up there.
My suggestion for a long term purchase option is Tuakau. Pukekohe is expanding as a satillite city and with commuter trains all ready running to Pukekohe, the long term future of places like Tuakau is pretty bright. Especially when passenger train services run through to Hamilton. (maybe one day we may even see double decker trains like they run in Sydney)
You will need to be quick as the buying and development is well underway.
The secret is to look at planned long term infastructure developments and make a prediction of the demographical effects they will have on surrounding areas.
Hands up those who bought a Ponsonby villa when it was the Otara of Auckland back in the 1950′s?
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Skeptic
I pointed out above, that the CGT in the USA was accompanied by a reserve bank giving away money. With mortgage lenders who actually wound up lending to at least one person who was already dead. We’ve never had that, and yet WE are having to deflate a bubble in the market prices.
No ONE measure is THE measure. A mixture of controls, taxes, and banking sanity must be used or you can not discourage the property speculators from driving up prices trading with one another.
Gerrit
The difference right now is that my children on the line. If it isn’t a good neighborhood, it’s going to be hard on the kids. That problem doesn’t magically disappear. Over generations it MAY disappear, but I am not able to take advantage of it. Who OWNS the house is not a material factor in who is willing to live in the neighborhood and risk the crime. Nor is gentrification of such places a certainty.
You are taking a risk… not a large one in a different economic environment, but when the next leg down hits in the US what happens here, and there? I’d be doubly careful now my friend. I know you are, but I don’t see this year ending well.
BJ
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BJ,
I guess we all have notions of what is a good or bad neighbourhood.
I live in the deep dark depths of South Auckland and yet I love it. Dont like the North Shore with its angst against the rest of Auckland, take or leave the Easterners and Westies but Southsiders are cool.
There are two ways to look at living in a “good” neighbourhood. Do you protect your children from the worst of mankinds behaviours or do you expose them to it and help them to cope with it.
I prefer to let children be exposed to the bad and educate them to the good. Strengthens their outlook on life.
While I have some reservations about the economic outlook, I dont hold out grave fears for it. Some massive corrections in banking-financial industries are about to occur, but these affect how we do business not the business itself.
And is the reason investment in property is still the best way to insulate against those changes. Just make sure the equity that the bank holds is on the least performing housing or factory unit, that way the freehold stuff is pretty secure.
The message to john-ston was more on how to lift the eyes from the negative and look long term. The long term future is pretty rosy.
In fact once the banking-finacial rubbish has been sorted back to basics, the future is very bright. Money will be invested into real and performing assets, not lent and relent several times over and repaid with “borrowed” interest.
One day we may even see a balanced New Zealand budget. One that only spends what it can tax (taxes its citizens to the barest minimum to maintain government function), borrows on infastructure and repays that loan on interest received from the proceeds of that infastructure.
And lets the people pay for the services the people deem neccessary (ie democratically) for their wellbeing.
This can be achieved by either all out socialism, capitalism or a combination of both.
Though socialiast are least likely to enable the people to have total democratic freedom.
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Gerrit
If it weren’t for the kids I’d probably take the challenge of going into the neighborhood and trying to help it… perhaps I am oversensitive to this owing to my experiences in LA. There of course, the risks aren’t so easily shrugged aside. In the bad neighborhoods the bullets come through walls to kill kids in their lounges. Not through “intent” just poor gun control… in both senses of the word.
So maybe I am more nervous than I have to be here.
I reckon that the mixed version is the way that works. I also will continue my assertion that we could fire parliament and send a guy with a copier to Stockholm. Outsourcing government looks SO attractive given the past decade
… or even more radical. Get lawyers to draw up a contract and find professional management companies to bid on it. Fixed price. Instead of elections we have contract renewals and the people vote on which company gets the contract based on its offered product.
I am trying to figure the difference between that and what we have now
I think I will retreat to a concrete bunker deep in the mountains at this point I haven’t had an idea so outrageous in years and I am sure that people will be throwing things… and they won’t be floral arrangements.
respectfully
BJ
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BJ,
The difference is that we can only terminate the policitcal parties every three years, making them corrupt with power. Because they issue promisary notes (called policies) and once elected send the policies to the shredder (lower taxes anyone?).
So am in agreement with you that the governance of the country is better handled by a professional management company (as opposed to the unprofessional management company’s called National, Labour, etc.) and held to account by either sacking or non payment of funds.
Something unfortunately we cant do with the political parties.
No need to hide in a bunker.
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I still like sending the guy with the copier to Stockholm.
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Just have to pop in and say to Owen McShane – what’s your references for your claims about costs (other than Demographica, which is hardly objective research).
The stuff I have seen (mostly detailed locational studies from Australia) shows just about the opposite – namely that aggregate household costs are much lower in inner-city areas.
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Very helpful post. Would really like to have more such blog posts.
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Norman, a good letter. Basically what is urgently needed is less economic dogma and more economic common sense. A sovereign nation should be able to introduce all sorts of capital and financial controls to deal with specific economic or fiscal concerns as they arise. But because New Zealand has basically capitulated to a fundamentalist neo-liberal market based economic system, which even now is working so splendidly, we are powerless to do so. Not because they don’t exist, there are a million different ways of running an economy, it’s just that one way has achieved a transcendental status, which no-one in authority will question; we’re no better than the most die-hard communist aparatchik.
One matter you don’t mention, Norman, is population growth. High rates of immigration have been one of the main factors in fuelling land and house price increases. Even now, increased rates of immigration are being welcomed as underpinning the revival of the housing market. Apart from the absurdity of wishing to see house prices increase – they are still at very high levels of unaffordability – one wonders in our present recession and lay-offs of citizens already living here why we are encouraging yet more immigrants? I would like to see immigration reduced to a level which merely ensures replacement of those emigrating. Indeed, if immigration were to fall lower than this for a few years, this would provide valuable breathing space for our over-heated economy. It might have lots of other benefits such as reducing increased demands for electricity, roads, health care etc.
A capital gains tax by itself can only do so much, as someone remarked a capital gains tax in the UK didn’t stop their housing bubble. But there are other reasons for a capital gains tax, including fiscal fairness. Without a CGT we are basically implying that earnings through financial manoeuvring are intrinsically more valuable than earnings through labour or intellect. In a country where your first earned dollar is taxed at 12.5% this isn’t very friendly to the poorest in our society and a capital gains tax could go some way to correct this injustice. But of course, New Zealand isn’t actually thinking of doing this, any tax revenue gained will be used to reduce upper levels of income tax.
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CGT is not the answer – the only people who legitimately dont pay tax on property sales gains are investors who buy for income and sell, often to exchange. The real issue is why do people do this, one reason is their trust that physical assets like housing cannot be stolen like finance co deposits, another is the unfair tax treatment of financial investments were the risk cannot only be higher but not adequately disclosed – think ING. So to address the underlying cause requires a broader approach – if CGT in property were to discourage private investment look at likely unintended results – less property to rent and with higher rents – supply/demand – greater call on state for social housing, more investment in things that do not attract CGT or cannot be tracked – think stamps/pictures – which do not add value to the economy and encourage the black economy. So lets think outside the box – try this for starters – tax holiday on ringfenced R&D and perhaps a low initial rate on new business – after all new R&D and a new business paying a lower tax rate is better than none of either producing no tax and probably driving more of NZs talent offshore.
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Freethinker… it doesn’t work that way in my experience. CGT doesn’t raise-lower rents paid to legit landlords. The system is usually set up to penalize speculation. Period.
The problem you outline IS part of the overall housing issue, and clearly having finance companies going down at close to one every month has to be putting off the average investor. I sure as heck wouldn’t have a bar of it, but that is unrelated to CGT. Just a separate problem to address. Your assertion that there will be less property to rent is I think, true, but there will be ample numbers of people building and-or buying for their personal use, and pulling themselves out of the high-end rental markets. The market stabilizes at a new level.
The real issue is whether any government can survive allowing (forcing) prices for property to actually fall, when so many people ARE investing in it. Relying on it for their retirement. Etc. IMHO, they have to… because the real buyer has little chance to get a mortgage and buy into the market. Consider the amount of money from a person on 60-70K income that has to go into a house with a 250K mortgage. With kids, with dependents… there is simply no way to be SURE to be able to service that sort of debt.
That’s deadly. I graduate from uni with good qualifications, I want to start my family, buy a house, I have the down cause my folks helped out, and I look at the prices, the payments the RIP-OFF that the housing here represents, and Oz starts to look really really good. It isn’t just the folks building the houses though… the pickpocket actions of councils and everyone else along the way wind up being just-too-much.
So CGT isn’t THE answer, it is part of an answer, which is better thought of as a major multisystem approach than a singular “do this and its all fixed” bit of wishful thinking.
BJ
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