Geoff Simmons says Labour's solution to the 'crisis' they have identified is based on incorrect analysis with solutions that are unlikely to work

By Geoff Simmons*

Labour has got itself in a tangle over their ‘leak’ of Auckland housing data. Putting aside the politics of playing the race card, are they right?

Foreign buyers may well be contributing to the Auckland housing crisis. But should it come as any surprise that foreigners are keen to share in the tax breaks that we have enjoyed for so long?

And would Labour’s proposed regulation actually do anything to stop it?

We doubt it.

The numbers

Labour’s analysis of real estate data shows that 40% of buyers have a Chinese surname, despite the Chinese only making up 9% of the local population. Therefore the difference, according to Phil Twyford and the Herald, must be down to foreign buyers. That, folks, is as complex as the analysis gets.

Statistician Keith Ng has already crunched the numbers and given Labour’s claims a thorough critique. Suffice to say it is hard to come to strong conclusions from the data Labour used, though that won’t stop people eager for a reason to shut our market off to foreigners. As Ng points out, it is certainly plausible that the domestic rather than absentee Chinese population bought the houses in question, particularly since recent migrants are far more likely to be in the market for a new house.

Besides, under our investment migrant category, once someone owns two average Auckland properties, they are eligible for residency under the Migrant Investment category. So if these people buying our houses aren’t Kiwis, they might be soon.

One worthwhile point that Labour made was that we should collect this kind of data. Like nature, data doesn’t like a vacuum, otherwise we end up with the patchy half-analysis that Labour have done here.

Hands off our tax-free investments!

The real question we have to be asking is why anyone is so keen to buy here. And the answers are obvious, Aotearoa New Zealand is a stable, growing economy with good natural and social capital, and most importantly of all we don’t tax the returns from housing at all. For Chinese investors looking for a safe place to store their wealth, the Auckland housing market makes total sense.

The Chinese certainly have plenty of money looking for a good home, and they can apparently borrow at very reasonable rates. So if our houses look like a good deal to them, what should we do? Should we complain or simply enjoy the fact that we can rent the houses far more cheaply than we could live there with a mortgage?

Those Chinese surnamed-people are just doing what we have all been doing for decades, sticking our money where we think it is safe. Add in some supply constraints and you have a speculative bubble. The only trouble is that we can’t all get rich from buying houses off each other – this is not a productive investment. Meanwhile our industries that actually create wealth and are competing for the investment dollar, are disadvantaged procuring the investment funds they need to grow.

The answer, as we have pointed out time and again, is simple. We need to tax the returns from housing and land in the same way we do all other investments. Capital gains are only a part of this. And for this to work any tax needs to include owner occupied housing.

Even Treasury at long last has seen the light on this tax loophole – in the recent Budget documents they proposed a temporary 1% tax on the capital value of all rental properties.

But the Chinese don’t let us buy their houses!

No they don’t, because they have a highly regulated economy. Do you really want an economy like China’s, where you need Government permission to move your money in or out of the country? Because that is really what is needed to really stop foreigners investing here.

We have open financial markets, which make it very difficult to stop foreigners investing in this country. While there are ways to stop the Mum and Dad Chinese investor, the really big guys will find ways around regulation, just like the really wealthy people in New Zealand find legal ways to reduce their tax bill. They could set up a company, or simply use a New Zealand resident (possibly a relative) as a proxy to purchase the property.

Should we follow Australia and ban foreign buyers?

Labour is calling for us to follow Australia’s example and ban foreigners from buying existing houses until they have been in the country for more than 12 months. The idea is that by not preventing them from buying new properties, economic activity wouldn’t be harmed.

The question is whether this policy would actually work. Our hunch is no – it hasn’t exactly taken the heat out of the housing market in Australia’s main cities. That could be for two reasons; perhaps foreigners aren’t the problem and domestic speculation based on tax loopholes is the real issue, or perhaps foreigners have found a way around the regulations.

Either way, it would be nice to see an evaluation done before we blindly follow in Australia’s footsteps.

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Geoff Simmons is a senior economist at the Morgan Foundation. This article was first published on the blog garethsworld.com and is re-published here with permission.