Affording a first home

There has been some interesting talk among the blogs in the last few days on the question of how darn difficult it is for those now in their 20s and 30s to afford their first home. This follows a column in the NZ Herald by John Roughan who advocated a capital gains tax on non owner-occupied housing.

As Jordan puts it,
"There is something wrong with a housing market that is structured to deliver endless capital gains to people who have capital, and deny the ownership of housing to the upcoming generation as the consequence."

Successive Governors of the Reserve Bank and many of the neo-liberal acolytes bemoan the fact New Zealanders sink so much money into the housing market, pretending the "market" cannot be interfered with, when there is an obvious solution - a capital gains tax. Such a tax could have significant downstream benefits for the New Zealand economy as more locally based capital would become available to finance local business. The sharemarket would get a boost, and less overseas ownership of New Zealand companies would help reduce the current account deficit. In other words, we would be more productive in using our money.

The difficulty is building political support for such a change, especially when many of the 'baby boomers' already own a house and an investment property or two. Given that they were only responding to the unbalanced way investments are taxed in this country, perhaps it would be reasonable to give a few years warning before a capital gains tax took full effect. Unfortunately, because there are so many of them, we need to convince the baby boomers to put aside their self interest in favour of the best interests of the wider New Zealand economy.

I thought of some other ways the cycle of first house unaffordability could be broken. At present, the banks have a significant bias towards lending to the housing market. If greater restrictions were placed on the ability of the banks to boost their short term profits by selling more and more housing related debt, this could also help control house prices. While this could restrict the availability of mortgages, measures could be taken at the same time to encourage and assist first home buyers.

The State Advances Scheme introduced by the second Labour Government offered 3% morgages and the ability to capitalise the family benefit to make up the deposit. The main argument used against such policies is that they might push up house prices further. Yet as we are dealing with a scheme introduced in 1958, this should be an empirical question - ie look for a link between the number of loans offered through the State Advances Scheme and increasing house prices in the surrounding areas. I would be interested if anyone knows of any figures on this. We should not let the right get away with arguing from pure theory (which is usually a simplification of the real world anyway).