Tuesday, March 23, 2021

A self-undermining policy

New Zealand has a housing crisis. It can only be fixed by causing house prices to drop. The basic recipe for this is twofold: build houses to increase supply, and repress speculators to drive them from the market. So how does this morning's housing package measure up?

On the supply-side, there's a higher debt-limit for Kāinga Ora and money for council infrastructure. The former should help them build ~4000 extra houses (which go on the government's books as an asset, so the debt doesn't matter), while the latter will reduce barriers to house-building (where local government rightly wants someone to pay for the extra sewers and roads in new subdivision), though it is effectively a subsidy to property-developer profits. On the demand-side, there's some solid landlord-lynching, with an extension of the bright-line test (a capital gains tax by any other name) and the removal of tax deductibility. The latter is important, since the deductability rule encourages risky borrowing and effectively subsidises landlords to outbid actual home-buyers. Removing it should make a huge difference.

All of this sounds good, and landlords are squealing. But then there's the downside: raising income and price caps for first-home buyers to get government assistance. Which means the government will be throwing more money at the housing market bonfire it is supposedly trying to put out.

If this seems self-undermining, its because it is. Because at the end of the day, Jacinda Ardern does not want house prices to drop. And until that changes, we're never going to see a real solution to turning houses back into homes rather than house-shaped gold-bars for hoarders to stash.

(Meanwhile, if we're keen on bright-line tests as a substitute for capital gains taxes, how about sticking one on financial investments? Or is directly targeting wealth something beyond the pale for a "Labour" government?)