PHOTO: House prices. FILE
As house prices escalate at extra-ordinary levels, there are increasing demands for taxation as a method of tempering the price growth.
Capital gains taxes are one of several new tax proposals being considered as methods for helping cool the housing market. Unfortunately, such measures, as experienced when applied in other countries, have limited impact on the total cost of houses.
Moreover, enacting tax measures may unfortunately impact the very people that government is attempting to help: new home buyers and those who have been locked out of the housing market.
Macro-economic drivers are behind the housing prices and a capital gains tax does not improve these dynamics, as the law of supply and demand dictates that any punitive measures will reduce the total number of houses that come to market.
Capital Gains Taxes (CGT) may also fail at raising sufficient revenue to enable a government intervention in housing stock because the labour pool and building supply chain is already at peak.
There is plenty of money in the system to encourage further house building.
The reason housing stock is not growing faster is explicitly related to the insufficient capacity in the system to allow for faster growth of supply. There are not enough labourers, materials, production capability, and supply chain transport available today.
INVESTORS ARE NOT A CORE CAUSE OF THE PRICE GROWTH
The demand is driven by multiple factors, with investors making up a small portion of the total number of homes bought.
Moreover, Bank lending figures convey that there is a dominant and insatiable demand for houses coming from people who intend to live in the homes.
The demand is stronger than usual from first home buyers and families who have been looking for several years and are now opting in when interest rates are so low.
Two profound macro-economic drivers encouraging purchase of homes are:
- Extremely low interest rates that have remained low for a long time and are not expected to rise in the near term,
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And the substantially low housing stock in most labour pool centres.
EXTREMELY LOW INTEREST RATES ARE GASOLINE, C4, AND NAPALM FOR HOUSING FIRE
If you retain extremely low interest rates for long periods of time, it does two things to housing.
Firstly, extremely low interest rates drive capital out of banks because the value of the money as such term-investments and other Bank deposits benefits decay when compared to commodities, corporate shares and houses.
Secondly, these low rates create strong incentive to buyers to accelerate plans for moving or changing properties, or buying into the property ladder. To a degree these ultra-low rates, meant to help stimulate the short-term economy are also proving to be a façade.
People are accepting the premise to increase their loan amounts because they have assessed the short-term repayments are affordable. In reality as the current loan rates are obviously for fixed rates at short term the long term (30 years) macro-economic climate dictates that mortgage holders will absolutely see interest rates rise in their mortgage cycle.
A payment of 2.5% fixed for 18 months is distinctly different when that same rate has changed to 5% at some point in the cycle. The typical assumption going forward is that banks will be happy to refinance. However, the same macro-economic driver that impacts the interest rates also impacts liquidity.
People are driving money into houses because they:
- Have few other places to reasonably hold savings, and
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Are given a strong incentive to obtain lending at low rates allowing for higher house price offers.
SOLUTION TO THE HOUSING PRICES DEMANDS A HOLISTIC APPROACH
Any reasonable solution to the affordability and costing of houses requires a review of the overall market dynamics.
Every conceivable economic tap was opened to ensure a transition through the massive market shock caused by the COVID-19 pandemic. However, none of the primary taps have been turned off or even gradually closed.
Today we are still watching as massive stimulus injections are being applied to a market that is more buoyant than expected.
These taps need to begin closing, or New Zealand risks causing counteracting economic dynamics.
Any reasonable solutions therefore demand:
- Immediate reassessment of the conditions around interest rate levels and the need to begin slowly, with gradual but meticulous attention raising these rates to stabilise growth.
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Immediately invoke focused LVRs that will target explicit growth areas, preventing further destabilising of the housing supply but increasing barriers for instance for multi-home buying investors who are over leveraging against other properties.
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Introduce tax incentives to developers and local councils to expand housing stock and infrastructure to enable a relatively closer match between supply and demand. The overall numbers of supplied houses must improve from the current market state or New Zealand will never see the end of double digit house price growth.
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Update regulations around Kiwi saver and first home buyer incentives that match reality, as for instance many of the current conditions do not match the market housing price points any longer.
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Improve the building process immediately updating the RMA and other legislation that limits the types of houses built or creates real world incentives for developers to build smaller, lower cost houses instead of large expensive ones.
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Establish new laws with regard to the use of pre-fabricated houses and improve alternative dwelling statutes or at least offer councils incentives to do so.
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Immediately help to create additional dwellings through modified zoning incentives such as allowing some types of empty commercial real estate to be converted to residential use.
No matter what our leadership decide to do, it is most crucial they understand the reality of housing and capital gains in the context of macro-economics, a holistic economic reality, not one that is concentrated explicitly on the price of the current market.
Otherwise, the very intention to help alleviate extreme growth in prices, as well as helping to improve first home buyers and low income families’ prospects will further diminish.
Mark Rais is the creator of the think tank Trend Analysis Network, writer for the technology and science industry and volunteer senior editor for an on-line magazine. He has published several books and written numerous articles on the topics of macro-economics, technology and society.
