When it comes to recent banking/housing policy, our Kiwi cousins across the pond have it all over us Aussies.
Back in April, I wrote about three policy actions being undertaken by the Reserve Bank of New Zealand (RBNZ) and the New Zealand Government aimed at reducing the economy’s exposure to the housing market and improving financial stability. These measures included:
- the Open Bank Resolution (OBR) Policy, which seeks to protect taxpayers from funding future bank bailouts;
- directing the Productivity Commission (modelled on the Australian body) to undertake an examination into housing affordability, with the stated aim of reducing the economy’s accumulation of debt and exposure to external shocks; and
- introducing macro-prudential tools, such as loan-to-value ratio (LVR) restrictions and counter-cyclical capital buffers, in order to moderate future credit bubbles.
Now the Opposition Labour Party has pledged to amend New Zealand’s negative gearing rules in a bid to improve the nation’s housing affordability.
Negative gearing is particularly pernicious in New Zealand as the country currently does not levy capital gains taxes on investment property. Accordingly, property investment provides an ideal avenue for Kiwis to dodge paying tax by socialising some of the holding costs of an investment property and then privatising all of the capital gains upon its sale.
Earlier this year, the Opposition Labour leader, Phil Goff, questioned the merits of New Zealand’s negative gearing rules:
“What we are looking at [changing] is ways [now] that people can socialise their losses and capitalise on their gains. It’s wrong that you can write off all the costs for your rental housing investment against other income and then when you finally sell the property you don’t pay tax on it either… So you [those offsetting rental property losses] end up paying very little tax. And anything that people avoid paying in tax – the rest of you have to pay it for them”.
And yesterday, Mr Goff canvassed a range of measures to reduce property speculation, including disallowing property investors from claiming losses against other forms of income [my emphasis]:
The Labour Party would like to recreate a New Zealand where more Kiwis owned their own home by controlling house prices through disincentives for property investment, and by allowing people to build up money for deposits through schemes like KiwiSaver, Phil Goff says…
Goff reiterated Labour’s ring-fencing policy of not allowing property investors to make losses on rental properties and claim that back against other income in order to minimise tax, as another disincentive for property investment that would help control prices…
“The concern that Labour has is once upon a time 80% of New Zealanders could aspire to owning their own home, that was the Kiwi dream. Predictions are that that will now drop to 59%,” Goff told media in Parliament on Tuesday.
“That means that 40% of Kiwis can never hope to own their own home. That’s not satisfactory in terms of what our Kiwi dream is, so we need to assist with that,” he said…
Labour was looking at ways to control house prices in its broader policy platform, which had not yet been finalised, Goff said. Labour has already expressed support for allowing the Reserve Bank to be able to control maximum loan to value ratios, and use further supplementary prudential tools to help control asset price bubbles.
“The [cancellation of the] depreciation allowance has been one factor there, ring fencing would be another factor, for example,” Goff said.
“The real objective has got to be to try to get more Kiwis owning their own home, rather than being forced to rent if their real desire is to have home ownership,” he said.
“That’s the New Zealand that most of us grew up in, that’s the New Zealand that we’d like to recreate.”
Of course, the Labour party will need to win November’s election if it is to implement these measures.
An important area overlooked by both the Government and Opposition, but which is critical to achieving both affordable housing and greater financial stability, are reforms to New Zealand’s highly restrictive land-use policies, which prevent low-cost housing from being quickly and efficiently supplied to the market. As long as policy makers focus only on the demand-side of the housing market, whilst ignoring the straight-jacket placed on new development, their dreams of achieving the widespread and affordable home ownership of yesteryear will go unfulfilled.
That said, at least the New Zealand authorities are seriously examining ways to reduce their country’s macroeconomic vulnerabilities, most notably its exposure to the housing market. This is in stark contrast to Australia, whose authorities are yet to publicly acknowledge that such vulnerabilities even exist, and resist any proposals to change the status quo (e.g. the Henry Tax Review’s sensible recommendations on property taxation).
In this regard, New Zealand is way ahead of the curve in thinking through how to handle the financial stability aspects of housing/credit cycles.
Australian policy makers could learn a trick or two from our friends across the pond.