In the last week there have been two big announcements aimed at curbing the runaway housing market in Auckland. First up, last Wednesday the Reserve Bank announced an important change which will kick in from October: home buyers who are not going to be owner-occupiers in Auckland will require a deposit of at least 30 percent to buy the house. Second, the Government chipped in on Sunday with a pre-Budget announcement of "capital gains tax lite" (all capital gains for investors who sell within two years of purchase will be deemed to be taxable income). Both are interesting options, but I wonder if there is a better option - to bring back a targeted sales tax or stamp duty. More on that at the end of the post.
Comparing the effects of the two policy changes is informative. I think this NZ Herald cartoon has it about right:
Thinking about the Reserve Bank rules first. The rules don't apply to owner-occupiers, and presumably that test needs to be met only at the time of purchase (unless they really want banks making periodic checks that the owners are occupying the property). So, would it be possible for a savvy investor to purchase a house as an owner-occupier, then move on leaving it as a rental while they buy a second house (as an owner-occupier again), and so on? Alternatively, could a couple buy two houses (one each) as owner-occupiers, then co-habitate and rent one property out? Those are two immediate options for skirting the rules. Moreover, how many investors are likely to be caught by this in any case? Bruce McLachlan of the Co-operative Bank opined that "the new restrictions would have little impact on the market because property investors tended to have at least 30 per cent equity". And they won't apply to foreign investors who are not borrowing from New Zealand banks (though, if they are borrowing from foreign banks, they do take on some exchange rate risk).
And there may be unintended consequences. Family trusts can't be owner-occupiers, so presumably all family trusts will need 30 percent deposits for home purchases (unless there is an exemption for trusts, in which case investors will just pile properties into trusts and skirt the rules that way). Also, is the rule restricted to residential property - how will lifestyle blocks be considered? Thirty percent of a lifestyle block purchase price is quite significant. Rents will likely rise (to the extent that higher deposits raise the costs of landlords, which is debatable).
What the Reserve Bank rules will do though is reduce demand (at the margin) for homes in Auckland. As Brian Fallow points out, investors are often "the marginal buyers, who set the price, in large tracts of the market. They are buyers who don't have to be there and the prices they are prepared to pay are the prices home seekers have to outbid." Lower demand will lower house prices (though, given that many investors may be able to skirt around the rules, the effect might only be small).
As for the government's capital gains tax lite (unless you're John Key, in which case this isn't a capital gains tax), it also has some loopholes that can be exploited. First and most obviously, the two-year "bright line test" simply pushes out the minimum horizon for house sales by speculators to two years. It's unclear how many speculators were selling within two years in any case (at least, once you exclude the DIY crowd who buy, do up, and sell on), but officials estimate up to one in five houses in Auckland are sold within that timeframe. Granted the IRD will probably look closely at house sales two years plus n-days (where n is some small number), and they are getting extra funding for the property compliance programme as well (for more details on the PCP, see here).
As for unintended consequences, it appears that the new rules will exclude estates and matrimonial property settlements which is good. However, it will accidentally catch at least some people who didn't intend to make a capital gain. Consider if you bought a house, then your job changes and you move to a new city - will you need to hold onto your old home so that you don't get lumbered with the tax? The tax provides a disincentive at the margin to homeowners moving to new opportunities (which would increase the effect predicted by the Oswald Hypothesis). What about if you lose your job and the bank forecloses on your home and sells it in a mortgagee sale - will you then face a tax bill on any capital gain the bank obtains?
What this rule change (or policy change, take your pick) will do is the same as any excise tax in a market - it will increase the price for buyers, reduce the effective price for sellers (the difference between the two is the amount of the tax), and reduce the quantity of properties traded. Of course, it might have only a small effect if few speculators are caught in the first place.
Better than both options, I believe, is to (re-)introduce a geographically-limited stamp duty (or a land sales tax) - an option that I haven't really seen aired too much in the discussions over the last week (maybe that reflects my limited reading - there is one notable exception here). Stamp duty was abolished in New Zealand in 1999, but when it was in force it applied to all land sales. The Australian states have stamp duty at variable rates, with concessions for first-home buyers and sometimes for new home builds (see the tables at the bottom of this page). I would favour stamp duty over the proposed policy changes above, if it excluded owner-occupiers buying their first home. It would capture foreign purchasers (not covered by the RBNZ rules), and include both speculators and investors, and would be hard to avoid. It could be made to be progressive (with higher rates applying to more expensive homes), and apply only to the Auckland council area (though this would likely create boundary effects - better to buy a home in Pokeno or Tuakau and not pay stamp duty, than in Bombay or Waiuku where you would).
On the downside, stamp duty would increase house prices for buyers, and lower the effective prices for sellers, and reduce the quantity of homes traded - similar to the capital gains tax lite, but with larger effects as more sales would be captured. And taxes create deadweight losses. However, stamp duty would also generate revenue for the government, and that is key to my suggestion. As part of this plan, I would ring-fence the stamp duty to be used for building additional housing supply in Auckland. Assuming a 2.5 percent stamp duty, the government could add one house to the housing stock for every 40 homes sold in the city. Even if some of that revenue was diverted towards necessary infrastructure instead of home construction, it would still significantly increase housing supply and lower house prices, probably more than enough to offset the higher prices caused by the stamp duty in the first place. Without undertaking an extensive modelling exercise, I guess that this would be a much better option that either of those proposed by RBNZ or the government so far.
More from my blog on Auckland housing: