Treating the Auckland housing bubble as a supply-side problem doesn’t work; neither does blaming some group without a careful analysis of what is happening. What might work?

There are two separate Auckland housing issues which are only loosely linked. The first, dealt with here briefly, is providing sufficient housing in the region. Beset by long term population pressures, the awkward geography of the isthmus means that an increasing number of dwellings may have to go up, rather than out and that the opportunities to fulfil New Zealand’s dream of a quarter acre (increasingly less) section are diminishing in Auckland. (The European practice of an apartment in town and a bach/dacha/retreat/weekend cottage in the country may become more common among those on middle incomes.) This is a long-term supply-side problem.

The second issue is the more immediate issue of the rising price of Auckland houses. The stock of housing hardly changes in the short run so supply measures have little effect. The rise in price must be mainly from the demand-side. One factor may be migration to Auckland. But this cannot explain all the inflation.

Moreover, house prices have risen to the point where, apparently, it is no longer economic to service the debt on an investment from the rents which the tenants pay. This suggests that Auckland has a housing bubble in which purchasers, especially investors, expect handsome returns from the (untaxed) capital gains caused by rising house prices.

Saying a financial market is a ‘bubble’ can be contentious within the economics profession. There are those who say that bubbles cannot happen because that implies investors are irrational; the more cautious may say bubbles can happen but they cannot be identified until they pop and there is little that can be done before that. Others – among whom I am one – say that sometimes investment returns can get so skewed that you can identify a speculative bubble before it pops. We would probably all agree that the Auckland housing market is now a bubble.

A lot of the last few paragraphs has been analytic conjecture; plausible yes, but hardly definite. In any case we need to be clearer about what is happening. There are a lot of anecdotes. A persistent one is of Asians (or Chinese – New Zealanders are not always good at differentiating between them) being successful at house auctions. The anecdote goes on to say that such purchasers are not really buying for family needs but for investment-speculative purposes. (Their tenants may well be grateful though – unless they have been trying to buy a house.) On the other hand, there is the claim that Asians make up only a very small proportion of purchasers (although only a little extra demand can stimulate a bubble process).

From that perspective the recent data showing that 40 percent of the purchasers of one real estate agency had Chinese surnames may be helpful. There are numerous caveats; for instance, the anonymous agency may have cornered the market of Asians purchasing houses.

(I do not think this fact is ‘racist’. That arises from how one responds to it. When I first studied poverty in New Zealand – some forty years ago – I was able to show that Maori were more likely to be poor than non-Maori, and I brought together other features of their lives, such as poor outcomes in education, health, housing and unemployment which seemed associated. I was trying to use the Maori data base to help understand poverty more generally; As far as I know, nobody said I was racist..I am doing the same here.)

Insofar as this data sheds any light on what is happening in the Auckland market, it seems to support the anecdotal evidence that there is a strong demand from Asian purchasers. Moreover it suggests that much of the demand is coming from offshore although some may be from immigrants (since Asians arrivals into Auckland are greater than their proportions of residents). Of course, the offshore investors need not all be Asians. But there are similar bubbles in Sydney and Vancouver while Chinese living in China are being told that New Zealand housing is cheap and a good investment. If they are allowed to invest in New Zealand housing, why not?

Supposing this offshore investor scenario is true. Financial crises are caused by leveraged borrowing. We do not know to what extent that their New Zealand equity is borrowed from offshore (in renminbi, say) and vulnerable to a financial downturn in China – or wherever. For a major issue of public policy, it is surprising how little we know about the Auckland housing market – the government should have got onto finding out, years ago.

If Asians, or whomever, think New Zealand property prices are low it is possible we are getting a price adjustment which is equilibriating offshore and Auckland housing prices. I wont go into an analysis – ask your favourite economist – because it does not explain why housing prices have risen to the point that there is no return to being a landlord. No, I am persuaded there is a housing price bubble where expectations of future capital gains are driving up housing prices.

What can be done? The government’s policy of tackling the supply-side muddles up the long-term challenge with the short-term demand-side problem. It wont have much impact on the bubble.

The Reserve Bank has used its statutory powers to reduce the exposure of New Zealand banks to the popping of the bubble (but it cannot do anything about financing coming from offshore).

The government is to impose a property speculation tax when the house is turned over within two years. (Own homes are exempt; I would not exempt the ‘residential’ houses of ‘non-doms’ – those who are not domiciled here for full taxation purposes.) I have sympathy with the Treasury recommendation of five rather than two years.

I am not persuaded that the Australian restriction of offshore purchases only to newly built houses will be particularly effective; it is reactive populism without careful thought. But it is interesting that Australians are able to make this distinction because international obligations can prohibit discriminating between nationals and non-nationals for tax purposes.

I remain of the view that a comprehensive capital gains tax would be an important step to reducing speculative bubbles, although it should not be imposed on the homes taxpayers are living in. I would not confine it to housing either: land generally and the sharemarket should be included.

As its grudging property speculation tax shows, the government is reluctant to think about tackling the demand-side, instead offering ineffective long-term supply-side nostrums to tackle the short-term problem. So here is a compromise.

Why not apply capital gains taxes to all non-doms (including offshore Asian investors) who have to pay taxes on their New Zealand income but not on offshore income? No, it would not be a tax on non-nationals. There are non-nationals living here who are not non-doms, while not all non-doms are non-nationals;  there are New Zealanders who arrange their tax affairs so they are not domiciled here for tax purposes. The effect would be to reduce the number of players speculating in New Zealand markets, taking the heat off bubbles without entirely preventing them. Those who live here would still be able to participate in the tax avoidance, but that cannot be helped until we are willing to treat all income on the same basis irrespective of how it is generated. My preference remains for a comprehensive capital gains tax.

Comments (15)

by James Green on July 19, 2015
James Green

Yeah, I don't see why capital gains don't count as income. Surely they should be taxed at the same level as workers salaries.

Also, all this conversation about racism recently makes me think these liberals have no idea what the word means.

by mikesh on July 20, 2015
mikesh

Capital Gains Taxes are a tax on capital rather than on income. That may be OK, but it does seem discriminatory when other capital is not being taxed.

by Lee Churchman on July 20, 2015
Lee Churchman

Also, all this conversation about racism recently makes me think these liberals have no idea what the word means.

They have an inverse Humpty Dumpty view of meaning as other people's words mean what they (liberals of this sort) choose them to mean, neither more nor less. There's no arguing with such people as they've placed themselves beyond the scope of reason.

by Vanessa L King on July 21, 2015
Vanessa L King

Why would the government really want to curb demand in the Auckland Housing Market when it is helping to prop up an economy in danger of stalling? It seems to me that endless demand will help to prevent the bubble from bursting as there is no danger of oversupply here and they well know it...this in turn insulates kiwis who may have over extended themselves to get a foot on the ladder.  To hang with the rest of us it seems...

by Tim Watkin on July 21, 2015
Tim Watkin

Brian, why do you think the 'build not buy' law that Australia has wouldn't work?

by Tim Watkin on July 21, 2015
Tim Watkin

And while you're at it, what about Vanessa's point? Would slowing Auckland's housing market slow/harm the economy overall, at a time when falling dairy prices and Christchurch having peaked is already slowing things down?

by Peggy Klimenko on July 22, 2015
Peggy Klimenko

"As its grudging property speculation tax shows..."

A spot of déjà vu, for those of us old enough to remember. In 1973, responding to concerns about property speculation driving up prices, the Kirk government enacted legislation allowing for the taxing of property sold on within 2 years of purchase. There were some exemptions, relating to family homes and to do with purchasers' intentions when buying property, if I remember rightly. And also, I think, those loopholes left the Act largely unenforceable, leading to its repeal in 1979. It seems likely that the same thing will happen again. This sort of tax seems to be the very least of the measures the government could be taking: further evidence, if any were needed, that Vanessa L King's suggestion above is plausible.

Chinese people in particular have been buying property in NZ generally, but especially in Auckland, since the late 1980s, following the Lange government's lifting of pretty much all restrictions on foreign purchase. Back then, it was folk looking for a bolthole against the looming handover of Hong Kong to the PRC. Now, it seems to be middle-class people from the mainland looking to put their money anywhere but in a Chinese bank. And who could blame them for buying up Auckland property? It's legal, and they're furthering their own interests. The plight of New Zealanders priced out of the Auckland market is scarcely their concern, even were they aware of it.

@ Lee Churchman: "They have an inverse Humpty Dumpty view of meaning as other people's words mean what they (liberals of this sort) choose them to mean, neither more nor less. There's no arguing with such people as they've placed themselves beyond the scope of reason."

Indeed. I've also noticed this. Attempts to put a dissenting view are just dismissed out of hand. Much of the MSM appears not to know its semantic arse from its elbow, and espouses this "liberal" view of what constitutes racism. Little hope of a more nuanced debate from that quarter: no wonder much of the public is similarly misinformed.

It's a great puzzle; I've always thought of myself as a card-carrying, bleeding-heart liberal. Had the characterisation flung at me by certain relatives, even. But I know what racism is and isn't; discussion of the role of offshore Chinese (since it's they who've been identified) in the Auckland market most certainly isn't racism. Nevertheless, it seems to me that claims to the contrary have had a chilling effect on debate, especially at the level of our political representatives. Unfortunate and unhelpful in the long term.

by Ben on July 22, 2015
Ben

This is a digression, but it shouldn't be let go... Racism is like any 'offensive' behaviour - people know it when they see it. And plenty of people see it. Just because members of the dominant ethnic group (with tacit political power) can't see it, doesn't it isn't racist. The arrogance of suggesting that offended parties don't even know what racism is, is doubly offensive.

So to clarify... the 'racist' bit was this: 1) wading into a debate about non-resident investment, global currency liquidity, and scarce residential assets, and then 2)contributing to that debate by going through a list of names to identify the Chinese-sounding ones.

It is not just conflating ethnicity with foreign capital, but actually picking out a particular ethnicity, which has made several people, and their friends in the community, feel very uneasy.

by Ben on July 22, 2015
Ben

first para: "...doesn't *mean it isn't racist"

sorry

by Ben on July 22, 2015
Ben

first para: "...doesn't *mean it isn't racist"

sorry

by Peggy Klimenko on July 22, 2015
Peggy Klimenko

@ Ben: " the 'racist' bit was this: 1) wading into a debate about non-resident investment, global currency liquidity, and scarce residential assets, and then 2)contributing to that debate by going through a list of names to identify the Chinese-sounding ones."

No it isn't. People can characterise it as prejudice or bigotry if they like, though that wouldn't be right either, in the circumstances.

"It is not just conflating ethnicity with foreign capital, but actually picking out a particular ethnicity, which has made several people, and their friends in the community, feel very uneasy."

I don't doubt that some people, especially some Chinese, will find it uncomfortable. But it doesn't follow that it's racism, or that we shouldn't discuss it. To propose the counterfactual, had the names on the list been disproportionately, and identifiably, German or French - or indeed, the ethnicity of my last name - would anybody be calling it racist?

by Peggy Klimenko on July 22, 2015
Peggy Klimenko

@Ben: "It is not just conflating ethnicity with foreign capital, but actually picking out a particular ethnicity, which has made several people, and their friends in the community, feel very uneasy."

I should add that Phil Twyford didn't do that, either. He subtracted the percentage of the population who are of Chinese ethnicity from the percentage of buyers who had Chinese names, which left a number of buyers with Chinese names who - it isn't unreasonable to suggest - may well be offshore buyers. Criticise the methodology all you like; this is where we end up when the government doesn't collect data which would have allowed a finer-grained picture to emerge from a statistical exercise. And don't hold your breath about getting anything useful from what the government's proposing later in the year. It's worth pointing out that any data to be collected wouldn't have been released at all, had it not been for Twyford's information.

 

by Lee Churchman on July 22, 2015
Lee Churchman

This is a digression, but it shouldn't be let go... Racism is like any 'offensive' behaviour - people know it when they see it. And plenty of people see it. Just because members of the dominant ethnic group (with tacit political power) can't see it, doesn't it isn't racist. The arrogance of suggesting that offended parties don't even know what racism is, is doubly offensive.

Peggy has done a good job of showing why your other points are dubious. I'll stick to this one.

You're interpreting "offensive behaviour" here as "behaviour that people are actually offended by". However, it has another common meaning, which is "behaviour that people are rightly offended by". The first is descriptive, the second normative. Hence, as those in the logic business say, your argument trades on an equivocation. While much that people are actually offended by falls into the category of what they they should rightly be offended by, some doesn't and vice versa. It's just a fact that people misinterpret behaviour all the time by having false beliefs about the behaviour they witness (consider foreigners offended by the traditional haka, for example). 

If it were true that people knew racism when they saw it, then that would make it impossible for them to ever be wrong. That's ridiculous for at least a couple of reasons. One being that no human being is omniscient, and the other that, were you right, it would be impossible for people to avoid being racist without taking a vow of silence.

Of course there are good reasons for taking complaints of racism made by minorities more seriously than those of majorities, given that the former tend to be more familiar with it, but that is not at all the same as saying we should automatically believe that they are correct on each and every occasion. The latter view is as ridiculous as Keith Ng has now made himself look over this, and I think he will come to regret that.

What's even more ridiculous is that you have people in one sentence complaining that the evidence Labour has provided is not conclusive (and this is something that Labour admitted from the get go because their aim is to have proper records kept – that was their stated object in releasing the study) and that Labour should have held fire for that reason, and in the very next sentence claiming that this is a racist dogwhistle without supplying any evidence at all for that claim. You couldn't make it up.

by Ross on July 23, 2015
Ross

It is not just conflating ethnicity with foreign capital, but actually picking out a particular ethnicity, which has made several people, and their friends in the community, feel very uneasy.

Some people can be easily offended. If you talk about Israel's crimes against Palestinians, there is every chance you will labelled anti-Semitic. The truth can hurt.

As for picking out a particular ethnicity, what about when media talk about Maori being over represented in prison and unemployment stats. Are you equally outraged at this "racism"?

by Brian Easton on July 24, 2015
Brian Easton

My column sets out my position on capital gains and racism so I shant comment further. And yes, Peggy, I had a sense of deja vu too; hence my name for the tax.

 

Vanessa and Tim ask ‘Why would the government really want to curb demand in the Auckland Housing Market when it is helping to prop up an economy in danger of stalling?’

The answer is really the Greek one. You can ‘prop up’ an economy by borrowing offshore. But the borrowing does not go on indefinitely. Not only is the pain great  when the crisis (or whatever) happens, but we also discover that the artificial boom from the borrowing has been retarding the sustainable growth track of the economy.

The policy problem, which is troubling a good number of economists, is how to ease out of the boom without crashing the economy, knowing if we don’t do this the crash will be even more painful.

It is a bit like taking drugs; the short-term consequences may be fun but the long-term ones are disastrous.

 

I have not seen, Tim, a careful evaluation of the Australian ‘build not buy’ law. My problem is that the policy advocates fail to specify what problem they are concerned with (a not uncommon feature of New Zealand public policy debates).  The column is written about the problem of what to do about the property speculation bubble which seems to be dominating the Auckland housing market. The Australian policy might work if it aimed to deal with other problems. But which ones?

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