Joe Hendren

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Tuesday, August 22, 2006

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).

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At 9:32 pm, Anonymous Anonymous said...

It'd be better if the government reduced taxes, in general, to remove the disparity between house capital gain and other income sources. That way we'd achieve the required increase in investment, without restricting the housing market and reducing the production of houses. Then, we'd achieve a general improvement in both investment and the quality of housing.

Thankfully, there are too many people owning houses and similarly there are too many people being bled with high taxes. So, it is merely a matter of time for the required general taxation reduction.

We are lucky to have democracy.

At 5:29 pm, Blogger Asher said...

Hey Joe,

Just noticed you're still linking to my old blog - could you update the link to Left & Lefter to link instead to Anarchia -


At 12:12 am, Blogger Joe Hendren said...

Reducing general taxation would not be a better option than a capital gains tax as this would not remove the incentive that currently exists for people to prefer to invest in investment properties. The problem is not the tax rates themselves, but the unbalanced way in which different types of investments are treated.

Unfortunatly the right regularly attempt to portray tax cuts as the only solution to any percieved economic ill, but economies are generally a little more complex than that. I would not be surprised to find a right winger who claimed accross the board tax cuts could cure cancer!

At 12:13 am, Blogger Joe Hendren said...

Cheers Asher, will do :)

At 11:15 pm, Anonymous Anonymous said...

In response to your response, this isn't a question of "right", or "left". This is a question of the living standards of people. Using a simplistic linear political argument isn't useful.

In response to the relative merits of tax cuts, to the introduction of a capital gains tax, it should be obvious that general tax cuts are better than a capital gains tax. The basic reason is that there are higher compliance costs associated with increased taxation levels. The introduction of a capital gains tax, for example, requires massive administration, thereby adding massive additional costs to the economy.

Reducing general taxation, on the other hand, reduces the burden of compliance costs and thereby reduces the costs to the economy.

As a result, the general taxation reduction would achieve the reduction in the disincentive for productive investment that you consider important. While, it would also not increase the costs of house construction and it would also reduce the general compliance costs in the economy.

It's a much better solution to the problem.


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