Solving housing supply without any more houses!

Luke Malpass
Insights Newsletter
12 July, 2013

The New Zealand Herald ran two contributions on the housing affordability debate this week. The first was by the Bank of New Zealand’s Tony Alexander advocating the restriction of foreign investment in housing. The second was by Gareth Morgan proposing a new taxing agency to tax housing properly.

Both proposals conspicuously lacked any ideas or plans to address the fundamental problem: a lack of houses compared to market demand.

Mr Alexander’s argument is political and social rather than economic. He cites community fears about Chinese people buying houses and forcing up the price for locals. He believes that the Chinese buying levels are lower than anecdotes suggest, but that such purchases are nonetheless leading to a rise in xenophobic attitudes towards them.

To combat this, he suggests allowing foreigners to only buy newly built houses rather than existing stock.

Unfortunately, given that the rate of new house building cannot keep up with demand as it is, this proposal is unlikely to make any great difference. And the theory that restricting foreign ownership of houses will somehow lessen xenophobia is debatable.

Dr Morgan on the other hand suggests an economic perspective, saying that housing is not taxed sufficiently compared to other forms of investment, distorting investment decisions. This is a reasonable proposition and a widespread view.

Staggeringly, however, he proposes that the government should depoliticise taxes by contracting a third party to design and administer the tax system: emphasising fairness, equity and simplicity. Such an agency would have the equivalent of a policy-targets agreement with the government (as used with the Reserve Bank) and would be expected to deliver on such agreements.

Dr Morgan argues that this would tax housing fairly in the same manner as other wealth by removing incompetent politicians from the process.

This proposal is undemocratic in theory and unworkable in practice. Handing over taxing powers to an unelected technocracy is an affront to Parliament, stripping it of one of the most important powers it holds – the elected power to tax. And in practice, any policy-targets agreement would become politicised anyway, as taxation is far more multi-faceted and less agreed upon than a stable currency.

Both proposals are examples of the muddled thinking we have on housing. They seek to influence demand at the margins but do nothing to address supply or how to build a single new house.

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