Dead horses do not build houses

Published in Insights, The New Zealand Initiative’s newsletter, 24 April 2015

Talk about a capital gains tax (“CGT”) as a solution for the Auckland housing market has heated up again over the past couple of weeks.

The Reserve Bank’s Deputy Governor, Grant Spencer, suggested that the tax treatment of housing needed to be changed. Treasury Secretary Gabs Makhlouf, Housing Minister Nick Smith and ex-central bank economist Michael Reddell all refuted the idea, whereas the NZ Herald’s Fran O’Sullivan and economist Gareth Morgan came out in support. So far, so predictable.

Frankly, I find the debate over a potential CGT tedious, and not just because we are flogging a horse so dead it should have been composted years ago.

The first reason CGT is a non-starter is political. In order to make it work properly, it would need to include owner-occupied housing. On this point, most supporters and opponents even agree. The political reality, however, is that no political party would ever touch it. Gareth Morgan deplores this as “populist leadership”, and perhaps he has a point. But like it or not, the likelihood of a comprehensive CGT is practically zero.

The second reason a CGT is not the best answer to New Zealand’s housing crisis is more fundamental. It may come as a surprise to CGT fans, but taxes do not build houses.

There is no doubt that Auckland house prices are spiralling out of control in front of our eyes. Yet there is a very simple explanation: construction is not keeping pace with population growth.

As Auckland’s population will grow by around half a million people over the next 15 years, it is obvious what the real challenge will be: Not to suppress demand but to build the houses that a growing Auckland needs.

One cannot repeat this often enough: If there is a housing shortage at the root of our affordability crisis, the best response is to increase housing supply.

Incidentally, by turning on the supply tap, we would also deal with some demand-side factors that the CGT brigade is concerned about.

Put simply, the moment you increase supply, housing is less attractive as an investment. Increased supply immediately reduces the potential of future capital gains so there will be little left to tax (if you do not believe it, read my column in Interest).

There is no need to exhume the dead horse CGT. Instead, let’s build more homes. Now.

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