On 1 October, the Government’s Bright Line Test came in to force, despite the fact the legislation has yet to be passed into law. It is still being considered by the Finance and Expenditure Committee. When it is enacted, sometime before the end of the year, it will be retrospective.
This is National’s too-little-too-late attempt to curb rampant house price inflation in Auckland. There is already a theoretical law that if you buy a property with the intention of on-selling it for a profit you are a “speculator”, and you are subject to tax. However, the intention test, as one might imagine, has been impossible to enforce. Who is going to declare their intention to on-sell a property if it means they will have to pay tax on the profit?
The Bright Line Test is meant to buttress the intention test, along with a requirement for overseas buyers and investors to give a tax identification number or IRD number in another recently enacted piece of legislation. It says if you buy and sell an investment property (i.e. not your main home) within two years, you are by default subject to income tax on the profits from the sale.
Given the increasing evidence of a housing market being driven up by speculation, National finally had to do something. The Reserve Bank of New Zealand, along with bank economists and the Treasury, had been calling for reform of the tax treatment of property to reduce speculation for years now – to no avail.
A capital gains tax (CGT), while a reasonable and common tax that exists in virtually every other OECD country, has not been seen as politically palatable in New Zealand because some people have bought investment properties with the intention of using the capital gains to supplement their retirement income.
So National, ever anti-tax, has never had the courage to campaign on a policy that would objectively be good for the economy as a whole.
A CGT would close the tax-loophole on property, which would help reduce speculation and the incentive to invest in a non-productive sector of the economy. It would also begin to broaden the Government’s revenue base and go some way to reducing wealth inequality. (It’s possible there are theoretical tax solutions that are even better than a CGT, such as a comprehensive capital income tax or a land tax, and I am certainly open to exploring those.)
However, the Bright Line Test will not be a proper CGT. It only applies to investment properties bought and sold within two years, although the official advice from Treasury originally recommended five years and certainly the majority of OECD countries with similar holding period tests are at least five years.
The two year period is too easy to game because it is too short. Smart speculators will simply hold on to the title until just after the two year date has passed. Five years would be an improvement, but why have a threshold at all? If someone is making a profit from purchasing and selling property, why shouldn’t they pay tax on that income – just like all the teachers, nurses, engineers, and retail workers who pay tax on their income? It’s bizarre that people should argue they would be unfairly disadvantaged by having to pay tax on income earned from property. The tax is nowhere near 100%, so by definition, those taxed will still be making money on the sale of their properties.
Another problem with the bill as drafted is that it only applies to “residential” land. The legislation has to go to some lengths to try and define exactly what is and isn’t residential land. The principles of sound law-making and tax policy include simplicity, coherence and comprehensiveness. Making exemptions for non-residential land introduces added complexity and an effective loophole, which could have unintended consequences. The intention test for speculation applies to all land, so why should the Bright Line Test that buttresses that rule only apply to residential? If there is not a problem with farmland or commercial land speculation, then there is no cost to including it in the Bright Line test.
The saga of this Bright Line Test legislation shows the difficulty of making good policy in a political environment. A number of individuals perceive themselves to better off without a capital gains tax, because it means more tax-free income for them. That doesn’t mean the policy isn’t better overall for the economy and society. We need a Government that has the courage to make sound policy that will benefit all New Zealanders in the long run.
National failed to implement a CGT when the Treasury called for it in 2010, and the Auckland housing market has continued to rise at a steeper rate in the past few years. This is not only bad for those who would like to buy a home in Auckland but have been priced out of the market, it also threatens the economic and financial stability of the whole country because we have so much leveraged debt.
What about the supply issue – isn’t that the whole problem according to National? There may be a bit of a supply issue, but nearly half of all house sales in Auckland over the past few months have been to investors, while only 12% were to first-time home-buyers. Meanwhile, rent inflation has been substantially lower than house price inflation, which suggests supply is not the only, nor the main factor.
We would like the Government facilitate the increase the supply of dwellings where land values are highest – the isthmus inner suburbs – so we could have more medium density housing options near good public transit routes and within walking and cycling distances of schools and jobs. They could help this through a National Policy Statement on urban development that gets rid of harmful planning restrictions in the proposed Unitary Plan. Most important, the Government should be directly increasing the supply of state housing in Auckland – not hawking off state houses.
In summary, the Bright Line test is poor legislation that has been rushed through the Parliamentary process and will be retrospective when implemented. The poor process means the law will not be as good as it could be, and the entire policy stance is insufficient and years (if not decades) too late to deal with the overheated market in Auckland. National is also failing to take any meaningful action to increase the availability of warm, dry, affordable homes near good public transport, where we actually need them.
The economy as a whole is paying the price for National’s lack of action, as the Reserve Bank has kept our interest rates higher for much longer than they otherwise would have been. If it hadn’t been worried about pouring fuel on the Auckland housing market fire, the Reserve Bank could have cut interest rates ages ago to spur investment in the productive economy.
We can do so much better than this. Germany has managed to achieve affordable housing even as the economy has performed well, and they’ve reduced climate pollution to boot. A centre-right coalition government there is implementing policy that is closer to Green policy here in New Zealand. This proves not only that it can be done, but that it’s better for people, the planet, and the economy.