Housing Affordability in New Zealand – Evaluation of the issue and a package of reform

Housing affordability is a major problem in New Zealand and it has escalated following unprecedented increases in residential property values over the last five years. The issue is extremely complex with a wide assortment of variables that have an influence. This paper has focused on New Zealand’s property taxation policies The tax structure in New Zealand is inappropriate as it relies heavily on taxing the productive sectors of the economy. A major hole in the tax base exists concerning the taxation of capital, particularly around property where subjective legislation and susceptible exemptions almost encourage speculation. This paper has reviewed the impact of foreign investment, a land transfer duty instrument and the bright line test on housing affordability. It is recommended that data collected on foreign investment is revised to deem non-permanent New Zealand residents as foreign buyers. It is also recommended that foreign buyers are restricted from buying existing residential property stock. The low-rate and broad based land transfer duty scheme described in this report should be implemented to correct distortionary investment choices while simultaneously generating significant revenue. The revenue should be used to significantly reduce income taxes, creating a tax switch. The main home exemption should be removed from the bright line test to create more equitable outcomes and improve the tests effectiveness. It is hoped this reform package would steer people away from the pursuit of tax-free capital gains from residential property and encourage investment in productive sectors of the economy that actually stimulate economic growth.