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House in an Auckland SuburbGareth Morgan

Owning a house now out of reach for most – and it’s all our own fault

House in an Auckland Suburb

The 1/4 Acre plot is no longer a realistic option for NZ housing

In recent weeks accountants and property investors were trading blows over the tax treatment of housing. As well, a survey was published which revealed most New Zealanders now believe owning your own home is out of reach for most. One of the major causes of that situation is the very thing accountants and property investors were squabbling about.

The tax issues around housing are very simple. Owning a house is just one way people store their savings. Bank deposits, company shares and managed funds are other places people stash wealth, and at a fundamental level these options are no different to housing.

All these wealth stores produce a stream of benefits every year – often in the form of cash but not always. Term deposits produce interest which is a cash benefit, business ownership provides profits and company shares provide dividends which are cash benefits too. Managed funds typically earn both interest and dividends on behalf of investors.

Tax officials love annual cash flows like interest, profit and dividends. That’s because regular cash flows can be easily measured and traced, and therefore taxed. Not surprisingly, we have evolved very detailed systems for taxing cash returns like interest, profit and dividends. And wages too for that matter. It’s a pity our diligence and exactitude at taxing cash benefits hasn’t been paralleled in our understanding that non-cash benefits are just as real and therefore should equally be taxed.

While all stores of wealth produce benefits to their owners, not all produce immediate cash benefits. Some, like land and listed shares go up and down in value and the owner gets the accumulated net benefit in one cash hit when they sell up – the accumulated net gains are called ‘capital gains’. Many countries tax these capital gains but New Zealand limits itself to taxing capital gains earned by traders (those who declare they bought the asset with the intention to sell) only. The effectiveness of capital gains taxes is questionable.

Wealth is also stored in the houses atop land. Houses offer benefits in their own right – the value of the shelter they provide. These buildings might provide owners with cash in the form of rent or it might provide them with benefits ‘in kind’. The value of the shelter provided to owner occupiers is none the less for it being delivered ‘in kind’ – its value is equal to the rent the owner would otherwise have received.

When housing produces a cash benefit in the form of rent it gets taxed just like interest, company profits and dividends. And that’s fair enough as far as it goes. But the deferred cash benefits due to rising property values are left untaxed. And when houses are owner-occupied none of the benefit (of not having to pay rent) is taxed. So our tax system currently pings the owners of immediate cash-yielding wealth but not the owners of other types of wealth.

The consequences of leaving significant stores of wealth out of the tax net are serious. People direct their savings to where the tax load is lightest – land and housing. It’s no accident that New Zealand’s businesses struggle to get equity investors while people queue to buy houses. Our economic growth suffers accordingly, yet this is a problem we’ve created entirely ourselves – and it’s fixable.

Despite what the detractors say, it is relatively easy to tax all wealth effectively, regardless of whether it produces an immediate cash return, a deferred cash return and/or non-cash benefits. We can impute an annual return to all wealth based on a reasonable benchmark and tax that (giving recognition for any tax paid on actual annual cash returns). The average rate of return from government bonds is a conservative benchmark that would do the job. If stores of wealth like land and housing aren’t producing benefits at least equal to this ‘risk-free rate’ they wouldn’t be held by anyone, so taxing them at this rate is a reasonable approximation of the minimum benefits the owners might be getting. We proposed this type of tax reform in our book The Big Kahuna.

For owner-occupied housing you would only tax the equity people have in their homes, not the mortgage value as well. This is because the mortgage produces interest which is taxable to the investors who ultimately provided the funds for the mortgage.

There will of course be cash-flow consequences for the owners of land and housing that doesn’t produce immediate cash returns – the annual tax based on imputed benefits will have to be funded out of wages or interest or some other cash source. So what? That’s how council rates are currently paid, and it hasn’t caused a national catastrophe. For many people the annual tax owing wouldn’t be high, because they own relatively little of their home.  However those with significant equity in housing would be facing a fair tax burden for the first time and will need to think hard about where they invest.  Heaven forbid, they might actually balance their investments, putting their savings into businesses or lending to others, instead of expanding their homes to levels which far exceed their (or anyone else’s) reasonable shelter requirements. Similarly, any farmers investing for capital gains rather than taxable profits would need to rethink their strategy. Most importantly it would stop the price of housing becoming so prohibitive for so many New Zealanders.

By sticking their head in the sand over taxing of housing, our tax officials and politicians are ruining New Zealand’s economic base, and into the bargain pushing the cost of a house way beyond more and more people. All because nobody has the guts to face up the issue because of the precious votes they think they’ll sacrifice.

  • Christina Carlyle

    Labour proposed capital gains tax and it would have been great if you had been openly supportive at the time of the last general Election. If you were, that’s fine but I didn’t see or hear you.

    • Gareth Morgan

      Christina, I don’t support a capital gains tax. I support a tax on capital. This post explains the difference between the two –

      • Alan Hay

        Gareth supports a tax on capital (such as superannuitant’s houses. Many old people have struggled all their lives to provide a safe home and most certainly cannot find the funds to pay several thousands of dollars each year to be allowed to keep it. Taxing a home this way is designed to pauperise owners and effectively have the state steal the results of their hard work.
        This makes a mockery of any attempt by ordinary people to work, save and not be a burden on the state. Gareth where is your “economist’s moral sense?

  • disqus_RUu023E7aj

    agree with the cats policy but not this one.

  • John Pearce

    Right on. What will it take to get politicians to recognise that overpriced housing, mainly helping Aussie Banks, is gutting New Zealand society, and driving many lower paid families in to poverty? I wish some polly with courage would stand up and be counted, and endorse the Big Kahuna approach. The “let out” for first homes is politically easy, but misses the point. Its elegance is that it addresses the two biggest issues facing poor families. It lowers housing cost, and it shifts investment from unproductive to productive activities, and creates jobs. What about a 1 hour TV debate with the Sec. of Treasury about its impact on the long term quality of life of New Zealanders, and its economic and social value?

  • Anthony Dohrman

    Like you ideas but was wondering if we changed the tax, and this causes house values to drop, what component of the house/land value will drop? Do you think houses could be built a whole lot cheaper that they are now? If yes, where could those savings be made. Basically, I think the value of a house is made up of the land, house, and any “profit” that might be in there. Unless we can change the house building cost (cheaper materials perhaps and a lot less government intervention and rules adding too much costs when uilding a house), I assume you think the land value will drop, because I don’t think there’s a whole lot of profit in building houses these days.

    • Susan Guthrie

      The land values steadily rise, that’s really where the inflation comes from ultimately and it where the pressure gets felt. Building costs might be an issue too – eg the same materials are said to cost more in NZ than Australia – so perhaps there’s not enough competition in materials like timber and concrete.

  • Tom Bicker

    Off course your right, you hit the nail right on the head.
    It is ridiculous that the baby boomers rake in all the cheaper rental
    properties, which would otherwise make ideal starters homes for our young

    No wonder they leave in droves to Oz. This whole rental
    property tax regime in NZ is fundamentally wrong and wrecks the whole country
    in the long run. Time for a change, the
    sooner the better !

  • Peter Wood

    Of course you’re right. It would be tough for a start, especially for superannuitants and people who have paid off their mortgages, but that would encourage sensible decisions on housing as against other investments. In the case of retirees, it could increase the supply of three bedroom homes used by only one person.

  • Sally O’Brien

    Are you suggesting making housing more affordable by increasing the cost of owning a house?

    • Gareth Morgan

      Taxing houses means your other taxes can go down. You’re not worse off, your outlays haven’t gone up.

      • Will Ryan

        So is the idea to tax everything more equally to prevent over investment in certain sectors? In that case why not call for reducing other forms of taxation (such as income tax) rather than just increasing the number of wrongs in an economy in an attempt to make a “right”

        • Bryony de Boer

          What I would like to know is, what impact we are having on rental and house prices by subsidizing rental property owners through accommodation supplements and adjustments? Also, why do we continue to provide these payments for homes that are so poorly maintained, insulated and inefficiently heated that they are making people sick?

  • Curtis Antony Nixon

    Once upon a time, when most laws still came from the Bible, lending
    money for interest was banned (Christians could borrow from Jews, not
    Christians; Jews could lend to Christians, not Jews). So what to do with
    surplus cash? As far as I know, William Shakespeare had this problem. All that
    income from being a successful playwright/promoter needed to go somewhere so he bought houses and rented them out.
    This was just before the beginning of the Industrial
    Revolution. The Enclosures Acts took the peasants land for sheep wool
    production and the surplus people were driven off, to cities, to work in the
    satanic mills or workhouses and to live in slums. The overturning of the right
    of primogeniture added to the exploitative system of Anglo-Saxon capitalism we
    have inherited today. The property markets are structured for the banks benefit
    and people have as few rights as the system can possibly allow. Your tax on capital would balance the system and send money out of dead property and into the dynamic economy. So would UBI.

  • allan

    This sounds like a tax on a tax. I think the is a major need for changes in the tax laws to stop the favouring of investment property as it is destroying the economy but don’t think it is fair for a owner occupier like my retired father to have to pay a tax on his property that he has worked his life to pay off using his already taxed income. I dont think that people should year apon year be taxed just for having assets like owning there own home it is like making someone climb a ladder that is continually sinking into the mud. if you work hard to save your already taxed money why should you still get taxed when you buy somthing with it year after year. Sure i think property speculators should be taxed and have there tax loop holes closed. But dont think this is the right way to make housing more afford Gareth.

    A better solution would be to close tax loop holes to property investors and tax capital gains as part of someones annual income. change the legislation for the banking sector by putting minimum equity on house mortgages say 25% for owner occupiers and 50% for investors from a date of the change. This would very quickly cool the market off and you would see a decline in price to there actual value that would be in keeping with the average nz income due to the fact that most investor have little to no equity to buy more properties. Also a ban on foreign land ownership only nz residents should be able to own property. This would then not make housing such a attractive investment and you would have more investment to the productive sector which will then make an all round stronger economy. The current nz housing market situation is almost like a pyramid scheme you have these property investors who say house prices double every 7 years and as long as they have the mug follower mortaging up properties and bad tax/banking policy the prices will keep going up. but like all pyramid schemes it will eventually go bust and who it at the top of of the pyramid? australian banks .

  • Rob Davidson

    I always like to work backwards from the goal.
    Correct me if I have it wrong and working backwards.
    The end goal is to bring the price of housing down and make it more achievable for buyers.
    The method is to make owning one or many houses less profitable by a tax on capital and therefore making it less likely that investors will drive up prices thereby giving all of us, including younger or less financial people a chance to get a home.
    The cost price to build a new house is unlikely to drop any time soon, and in fact seems to steadily increase through things like new scaffolding and edge protection rules. GST really hurts as every part of a new house and the section is taxed in this way.
    Capital tax will mean investors are less likely to build houses due to lowered profitability and as a result it is probable they will shift their investments into other areas.
    You suggest this will bring house prices down or stop them increasing so fast.
    An issue is however, if new less new houses are built (they will remain expensive), the shortage of housing in some cities will be augmented.
    A shortage of housing will increase house prices by nature of supply and demand.
    Instead of cheaper houses we may have no change to house prices as well as another tax.
    I concede that old houses may drop provided demand is satisfied by supply, but it is most unlikely that new houses will drop in cost due to materials and labour costs therefore leading to a house shortage in cities.

  • jh

    The government is saying “land supply” and are inviting submissions on development levies plus taking a chainsaw to the RMA. Policies which are very close to what the wealthy developers and landlords want.

    • Will Ryan

      Supply and demand economics is always the reality. Developers and investors create rental supply and have to compete for tennants. As a result it is much cheaper to rent than own in auckland, wich is beneficial to those who cannot afford to buy

  • jh

    You haven’t mentioned immigration Gareth. The Savings Working Group blamed tax breaks for property investors and high immigration for house prices.

  • emw

    Interesting some of what is written here, however Gareth you miss a couple of simple facts, Kiwis are very adept when it comes to having to adjust to the environment we live with. Those of us who had money invested before and during the crash of ’87 well remember the supposed captains of Industry who were being lauded for their foresight and absolute brilliance when it came to creating wealth stores with their creative accounting that all collapsed in 87 and many were found to be absolute thieves who stole the futures of many thousands of retirees and others coerced into investing in their fraudulent schemes…….The nett effect is for many of us who have invested in residential properties, we can still drive by and ‘Oh Yes’ the bricks and mortar are still there, NO MONGREL CEO, CFO or BOARDS OF DIRECTORS have had the opportunity to plot and connive to strip hard working Kiwis hard earned wealth from Honest Salt of the Earth workers…….WE WILL NEVER TRUST THOSE WHITE COLLAR CRIMINALS AGAIN, THEY CONTINUALLY POP UP WITH A NEW DISGUISE TO AGAIN TRY TO STEAL A LIFE TIMES WORK FROM KIWIS…………The other point I want to make is looking at the Auckland Residential Market, the investors buying currently are predominantly Asian who want a better return from purchasing Residential Property in New Zealand than what they receive in their home Country. How do you suggest we turn that tide around???

    • Ross Calverley

      That you restrict sales to residents and those that spend enough time in the country.

    • Andy C

      “Predominantly Asian”
      Except they’re not. Sorry to deflate your narrative, facts are a pain like that.

    • Craig Millington

      Thankyou EMW see my point “exactly” I don’t trust the white collar mongrels iether. Finally some common sense.

  • Guest

    A tax on capital if you own more than one house? Yes. A tax on capital if you own one house ie the family home- NO.


    Leave a message…

  • Dave Eskildsen

    A Differing View:

    1/- The main underlying reason for house price inflation is the same as that causing appreciation of all asset classes since 2000. That is excessive growth in the money supply. Add Auckland supply constraints, and the result is not too surprising. The fact that New Zealanders have so much investment tied up in houses at the expense of other assets is as much the end result of trying to live a life in this economic climate as it is adjusting investments to suit the tax rules. Whether rented or owned, we have to live somewhere.

    2/- To be fair, tax rules are modifiers to this underlying cause, but labelling owner occupied residential property as unjustly favoured, is looking through a very narrow lens. Consider the following points;

    a/ Interest payments on owner occupied property are not tax deductible. Neither are rates, insurance, or maintenance. This needs to be noted when comparing the rental value of a house with the owner occupied benefit.

    b/ Over a lifetime, the benefit of owner occupied housing is the shelter and security it provides. Nothing more. It is not a savings store, except in so far as it provides some protection against the ravages of inflation. We can’t live in our house and sell it at the same time, (reverse equity loans excepted). The security aspect should not be under estimated. In hard times, and often in older age, we tend to under maintain our houses. This cushion effect is a social stabiliser.

    c/ Rather than saying housing is under taxed, we could as easily assert that interest earning deposits are over taxed. The inflation component of interest logically should not be taxed, (nor deducted on the business borrowing side). Accumulated CPI inflation since 2000 has been 39%. (Reserve bank website)

    3/- If we treat owner occupied houses as providing a taxed benefit, what about cars, boats, motor homes, caravans, artworks, jewellery or in fact any other significant privately owned property or possession? In an economy with more appropriate monetary settings houses would more easily be seen as a consumption item, rather than as an investment. They would likely not be as expensive, and probably neither would the average new house be as large.

    4/- There is some room for looking at the land component, since this requires no maintenance, and could seen as some sort of investment likely to grow as an economy grows. More pointedly this would apply to farm land. A low level land tax found it’s way into the report from the “Savings Working Group”. Even for land though, in a balanced economy, farm land would be worth a multiple of what it can earn, and other land would bear relationship to that. Bare land should be worth the same amount either side of the city boundary, with the cost of a section containing this amount, plus the development costs and a risk/profit component.

    I am sure I can be challenged on the implications of this view point, and I am prepared to defend it, or be convinced by logical argument to change my mind.

  • rossco

    I like the idea but what about us poor people who donot live in Auckland. i have just had $40,000 (18%) wiped of the GV off my two bedroom unit. Would I be entitled to a tax credit as this is a loss

  • Rann Saicher

    While the demand pressures in the housing market are definitely the icing on the cake, the fundamental issue with house (and all asset price rises over the last 50 years) is the financial system we have that has bequeathed money creation to the banks. Banks are currently pushing about $1bn a week into the NZ property market, and thru fractional reserve banking, are creating 90% of this money. This process is also the main driver of the European and American debt crises. Until politicians stop messing around with fringe policies and take back the money creation process , and turn banks back into savings and loan institutions, the worlds economies will continue to face asset price inflation, debt burdens will threaten us all, and the dream of home ownership here will remain just that

  • Andy C

    Gareth, are you saying all accumulated wealth must supply a return? Eg if I have saved $x and can either put it into a bank OR spend it on a painting because I like the look of it (or a garden ornament, or outside table, or whatever), would both still need to be taxed somehow?

  • Allistar Walker

    So those on fixed incomes such as pensioners could be forced out of their homes particularly as equity increases over time? I guess that is a definition of communism, spread the wealth to those that need it but not necessarily retain it with those that have earned it. We will also see government back into building state housing, which they turned over to the private sector, mirroring our ‘free market’ economy. I must go and sharpen my sickle and find my hammer. – Allistar Walker

  • Stuart Robertson

    As NZers we fear Capital Gains Tax. Pity because it is crippling us. We slide backwards into poverty while we distribute tax breaks, to the world through our no tax scheme for foreigners and then capital gains tax free to locals. The simple answer and it is simple, that is to put GST on everything. Capital, financial transactions offshore, any fixed capital item that is registered ie land shares deposits AND do away with the costly and inefficient income tax system.

  • Fiona

    The real question here, is do we want affordable housing (whether rented or owned) accessible to all New Zealanders.

    We need to weigh up two things in considering this.

    1. Encouraging New Zealanders to ensure affordable housing is available to all(whether rented or owned) against

    2. ensuring excessive wealth is not tied up in housing tax free to the gain of the wealthy and detriment of the less wealthy and young.

    It seems to me, the answer is in having a wealth tax for property to the extent that property exceeds a basic affordable housing cost. Say $300k or $400k.

    There should be no distinction between rentals and ownership. Any house valued under the cut off point should not attract wealth tax. This limit should allow affordability of adequate but not excessive housing for all New Zealanders, whether they rent or buy. No allowance should be allowed for interest deductibility. You either pay rent or pay rates and a mortgage.

    To the extent any residential housing exceeds this limit, a wealth tax should apply to that excess.

    This tax can easily be collected through the rating system, which already has house values, without complex tax rules about interest deductibility.

    A banking policy requiring 25% deposit on all homes, should encourage better decisions on the value of buying, whether for personal or rental use.

    This combination should ensure demand for high cost housing is dampened, while encouraging growth in the development of low cost housing, to cater for the needs of all new Zealanders.

    As baby boomer near retirement they can move to smaller residence, freeing up larger homes for others.

    This basic home exemption, does not act to the detriment of those who have worked and saved hard to cater for their own basic housing needs. It allows for the valid use of home ownership to a limited sum being one aspect of their retirement savings. This form of retirement savings should be encouraged to help reduce the burden on the tax payers, where retirees would otherwise require housing allowances to help pay their rent

    Lastly, the fear non residents ( or any others) are contributing to the increases in housing prices, can be reduced by the application of the wealth tax.

  • Jock

    Ridiculous. Stupidist idea I’ve read in ages. Taxing someone’s capital locked in their own home! How can you tax something that doesn’t even exist? It’s not money until the house is sold. Sounds like yet another way of creaing revenue out of nothing. Take this one to Wall Street, they’ll love it. Hated the comparison to rates too. Just lost so much respect for GMI.

  • Susan_NZ

    Charles waldegrave hss done a considerable amount if resesrch into poverty amongst the elderley – the biggest indicator of being able yo copr financially past retirement is home ownership. Your proposal would add another cost to people on fixed incomes who have done their best to strategically invest their wages to ensure some sort of security into their old age. Petty, mean and ultimately counter productive.

  • Jo

    Is this the same Gareth Morgan who 3 years ago went on a speaking tour through the country saying house prices would fall by 30% and showed us all graphs ? Remember Gareth saying Fontera was going to be a failure ?

  • Alan Hay

    Any tax on hypothetical (unrealised) gains is not “moral” to use Gareth’s term in his book, but to steadily tax year after year, the home usually acquired by hard saving over a lifetime, until it has been stolen from the (retired and low income) owner, is simply theft, pure and simple. Few low income and retired people can withstand this treatment. This is an enormous disincentive to careful management of hard earned personal resources, and yes – oncde again – theft.

  • Trusted Real Estate Management

    property tax in NZ– I don’t see anything wrong with it. Of course, property
    owners should be taxed if they earn income from it.