Bernard Hickey argues young renters can’t rely on the Tax Working Group or this Government for salvation in the hunt for affordable housing. They will have to take the levers of power from older property owners through the ballot box.
It’s time for some straight talking to young renters.
You may be hearing a lot of talk lately about capital gains taxes and a surge of new housing supply and a transformation in the economy. You may even actually think things are about to improve and that a first home is a realistic prospect, or that an affordable rental is just around the corner.
You may be about to be fooled into thinking your elders have your best interests at heart and are going to change things to make housing affordable. You may actually think New Zealand is about to do the right thing, rather than the selfish thing.
Sorry to say this, but you’re dead wrong. You’re about to be done over all over again, and you probably don’t suspect a thing.
You think your parents and grandparents and their friends actually want to help you live the good lives they experienced as the luckiest generations. They may even have convinced themselves and you that they do really want to do this, but they don’t really. They’re leading you up a garden path
I write this with a sort of tired certainty of having seen this all before. Time and again, I’ve looked deep into the dark heart of our political economy and seen nothing but greed, constructed confusion, obfuscation, selfishness and an unbreakable desire by older property owners never to give up what they believe is rightfully theirs. We’ve had this debate many times before and property owners simply don’t want things to change. It has made them one trillion dollars richer over the last 20 years, and they didn’t pay a cent of tax on that unearned capital gain. It was like manna from heaven, or a lotto win. No one is taking that back gently.
Only raw political power will change that. No amount of working groups and sage advice and economic modeling will change that. Thirty years of a myriad of policy positions will have to be pried physically out their hands by a new generation in charge of Government and legislation. Sadly, it’s unlikely to happen any time soon because young renters don’t know this, and aren’t voting with their interest.
I’ve seen this movie before
How am I so certain of this? Why am I so cynical about this time being no different?
Because I’ve seen it all before. Many many times. I know where the bodies are buried and they stink. They’re not going to be exhumed, and another grave for another generation’s hopes is being dug as we speak.
We have heard great talk and debate about changing the tax system to solve the problem, building our way out of the problem, and subsidising our way out of the problem. But each time the property owners block any effective change or distort any changes into factors that actually help house prices jump another 50 percent, just like magic.
All the grown-ups in the room, who of course own properties and benefit from house price rises, express surprise, wring their hands and start again with the excuses and distractions and finger pointing. They’re never truly serious and they certainly aren’t this time.
Let me show you why young renters have no hope unless they actively use their votes to take political power away from property owners and their agents.
Exhibit one: tax working groups
So many hopes were packed into Sir Michael Cullen’s Tax Working Group. It was the consolation offered up by Jacinda Ardern and Grant Robertson before and after their last-minute decision in the 2017 election campaign to abandon all hope of a capital gains tax in their first term.
They decided in the last fortnight of the campaign that the naked and sustained roar of opposition from property owners and small business owners who depend on the tax-free equity in their homes for their personal wealth and business working capital.
Surely this time the grown-ups would recommend a substantial capital gains tax or wealth tax to change the incentives in the economy away from leveraged investing in houses and land and towards investing in businesses, new technology and productive assets? Surely sense would prevail?
A careful read of the interim report from Sir Michael Cullen’s group shows it it believes in its bones that any form of tax on capital gains, even a limited form that excludes the family home, will be almost politically impossible. It reads more like a list of excuses for why it can’t be done, than an argument for why it should.
Firstly, it can’t even bring itself to use the phrase ‘capital gains tax’. It has become the ‘Voldemort’ of political life — the tax that is so dangerous it cannot be spoken about in public.
Secondly, it argues the lack of a tax on capital gains isn’t the main reason for unaffordable housing, but that putting on a capital gains tax would make renting more expensive.
Thirdly, Cullen’s group rejected any forms of broad-based wealth or land tax on the grounds it would hurt farmers. It would clearly have been the most effective and easiest tax to apply that actually raised revenue. Even National’s Tax Working Group thought it was a good idea. Yet Cullen’s ruled it out.
Fourthly, it puts up two unattractive straw men in the options to tax capital gains. It almost concludes the simpler version that taxes realised gains is a waste of time because it’s complicated, relatively inefficient and would be, well, just really hard. The more complicated version, which assumes a rise in the value of the asset and assumes a profit that should be taxed, is never going to fly.
Why is that? Because the first of the Tax Working Groups concluded just that. Way back in 2001, the then Labour Government under Helen Clark and Michael Cullen (yes the same one before he was knighted) commissioned the McLeod report to look at changes to the tax system. It all looks remarkably familiar. It (surprise, surprise) concluded that a capital gains tax would be really hard to implement, both technically and politically, so it wasn’t worth doing.
House prices then almost trebled between that 2001 report and the next Tax Working Group commissioned by the then National-led Government of John Key and Bill English in 2009. It had a slightly different aim. It was supposed to give Key and English political cover for a ‘big tax switch’ that would shift tax from income to consumption. It did that, but it also proposed taxing capital in either the form of a capital gains tax or a land tax. Both were rejected out of hand.
House prices rose another 80 percent after that decision. Equity in houses and land has risen by almost one trillion dollars since 1999. None of it was taxed. No wonder property owners don’t want to change a thing.
Exhibit two: housing supply talk
This is the next tactic designed to convince young renters that their elders care and are actually doing something is lots of juicy talk about how a surge in housing supply will solve the problem.
Way back in 2007, John Key campaigned to remove regulations that were restricting housing supply. He described house prices then as in crisis and that more houses was the answer. His views on that changed once he was in Government and the Global Financial Crisis had started.
There were no changes to the Resource Management Act to make it easier to build houses, and no infrastructure investment by the National Government. It waited until the last minute before agreeing to fund half the City Rail Link and to start an off-balance-sheet entity (Crown Infrastructure Partners) to help fund the infrastructure needed to build houses.
That funding is needed because councils in growth areas such as Auckland, Hamilton, Tauranga and Queenstown say they cannot afford to build the pipes and roads and parks and bus networks and train lines needed to underpin new housing supply. These councils are even more dominated by older property owners, who fight at every turn to stop the new debt and rates needed to build that infrastructure. They achieve that by blocking new borrowing and rates increases, and by ensuring council officers apply their zoning rules and use the Resource Management Act to block new suburbs and new apartments that would increase housing supply and threaten future tax free gains.
There’s a healthy dose of NIMBYism in there too. Young people in Auckland got their hopes up a couple of years ago when the Auckland Council appeared to pass a pro-housing development Unitary Plan. But recent decisions by the council itself under pressure from neighbouring home owners has shown that was a mirage. Just in the last month, the Auckland Council has blocked two apartment developments on main roads that would have added high quality apartments after complaints from NIMBY neighbours. One of the developments was even proposed by a council entity. But it was still blocked.
The other proof that older property owners aren’t serious is the refusal by Governments to fund infrastructure development on a scale that would make a difference. Both the National-led Government of 2008-2017 and the Labour-New Zealand First coalition now have prioritised debt repayment over building the roads, railways, hospitals and schools needed to underpin significant extra housing supply.
The irony is there is a fantastic case study for the effects of increasing housing supply when a Government is serious. The National Government essentially suspended the Resource Management Act and pumped billions of its own capital into the underlying infrastructure of Christchurch to enable a massive surge in housing supply in response to the earthquakes.
It worked. Rents and prices are falling and Christchurch is quickly becoming more affordable for first home buyers and renters. But it only happened because the Government of the day broke its own official rules around not increasing debt and not changing the Resource Management Act.
Exhibit three: extra migration
The last government helped unleash a migration surge and capital inflows that were fantastic for house prices, especially when the same government helped councils restrict housing supply by refusing to fund extra infrastructure to cope with the population surge.
The current Labour-New Zealand coalition talked a good game in Opposition about restricting migration, but has done nothing so far. Its few policy decisions have actually loosened the rules for temporary workers and students.
Stop mucking around. Only power matters
There is only one way for renters to change things in a sustainable way. They have to take the levers of power in the same way their parents and grandparents did during the 1980s. They have to vote in their own parties and policies in council elections and through general elections.
Some might argue that existing parties already have the necessary policies.
None of them are actually serious about it. Labour and the Greens signed up to the fiscal responsibility targets that prioritise debt reduction and low interest rates for home owners over extra housing supply. The Greens also won’t allow any RMA changes that might allow massive new housing developments, and don’t want urban sprawl. NIMBYs can easily use both those positions to block development, and are day in and day out now.
New Zealand First has never loved a capital gains tax and represents a portion of the older property owners who don’t want new housing supply. Its position in the coalition is one reason why a capital gains tax will never get across the line with this government.
And don’t get me started on National.
Unless you take power and change the rules, you are toast.
There are enough of you
It is possible. The problem is you don’t vote at the same rates older property owners do. If you did vote for a party that prioritised a wealth tax, infrastructure investment and housing supply then you would have a chance.
This chart from the Electoral Commission shows how few young people enrol to vote, let alone vote. Voting rates for some of the younger age groups approached 50 percent of the eligible in some parts of the country. Voting rates for older property owners are close to 90 percent.
There are 1.43 million eligible voters aged from 18 to 39. That is more than the 1.33 million eligible voters over the age of 55.
But at least 500,000 young people don’t vote in general elections. The number of missing and non voters in council elections, which are arguably even more important for housing supply, would be well over one million.
Until that changes, nothing else changes.
But surely it can’t get worse?
Again, sadly, it can.
I and many others thought house prices were at extreme levels in 2008 and would fall substantially during the Global Financial Crisis and again after interest rates rose in its aftermath. They did fall around 10 percent in 2008 and 2009, but have obviously risen 80 percent since then.
I could easily paint you a picture of another doubling in house prices under perfectly reasonable scenarios from here.
Our population is growing twice as fast as places like Britain and America. We have yet to catch up with previous undersupply, let alone the latest population surge.
Interest rates could fall back towards zero percent and central banks could be forced to print money, which would further inflate house prices. Councils are not investing heavily in infrastructure, and neither is the Government.
This report this week gives the Government plenty of excuses not to act. The forces against change will mobilise.
How would you all feel in another nine years time if house prices double again.
Part of me will say that will learn you. I’m continuously amazed by the complacency, laziness and ignorance of young people who aren’t engaged in the debate and keep trusting the grown ups.
Another part will just celebrate like other home owners. I wrote in 2013 that falling interest rates and the lack of a capital gains tax that a surge rental property investment would power another rise in house prices. Having given up on meaningful reform, I took my own advice and bought more property.
I’m sitting pretty.
Tragically, young renters are not. They’re just sitting there.