KEY POINTS:
Introducing a capital gains tax may be kamikaze politics, but home ownership is being priced out of the reach of more and more people.
Bob Hargreaves of Massey University says the median house price is now 7.5 times the average wage, more than twice the ratio in 1989.
In Auckland city only 56 per cent of households are owner-occupied.
Little wonder that policymakers are turning their attention to negative gearing - the ability to use investment property losses to shelter other income from tax.
The idea of "ring-fencing" such losses, so people cannot take advantage of negative gearing, seems to be gaining traction. But it would be a second-best half-measure that treated the symptom and not the cause, is likely to be too late to affect this housing cycle, and may do more harm than good.
The Reserve Bank misses no opportunity to promote the idea, which it did most recently in its submission to the commerce select committee's housing affordability inquiry.
Finance Minister Michael Cullen also favours it, and he told Parliament on Tuesday that Inland Revenue did too.
But when National's finance spokesman Bill English asked when the Government planned to implement such a policy, Cullen replied that it would be when National's leader, John Key, and English resolved their differences over the issue so that "consensus over a sensible change to the taxation regime" prevailed.
Let's set aside the bizarre proposition that the Opposition has some kind veto over tax policy. Would it, in fact, be a good idea?
Tax law treats the owner of an investment property as being in the landlord business.
The general principle is that expenses incurred in earning taxable business income, including interest and depreciation, are deductible. And when a taxpayer has more than one income stream, the combined figure gets taxed.
What would be the case for abandoning tax neutrality and making an exception of housing?
Cullen's answer is that "it is one of the very few areas where one can actually borrow 100 per cent of the purchase price with no prospect of an actual return on equity except in terms of the capital gain at the end of the process".
The Government has no intention of introducing a capital gains tax. "We have never considered it," Prime Minister Helen Clark said on Monday. "There's no political will to do it."
But the absence of a capital gains tax is not the only feature of the tax system that makes it attractive to use investment property as a tax shelter. The 39c rate and the bolting down of the thresholds have pushed more people into higher tax brackets, increasing the incentive to dilute income from other sources in this way.
It has long been an odd feature of New Zealand that despite our egalitarian self-image we tolerate, indeed staunchly defend, a fundamentally class-based anomaly in the tax system. If you increase your wealth by the sweat of your brow you get taxed, quite hard. If you increase your wealth by owning the right assets over the right period, that is sacrosanct.
Other countries don't see it that way. The United States and Britain tax the capital gains when rental properties are sold. So do Australia and Canada, but at only half the taxpayer's marginal rate.
In New Zealand the capital gains are not taxed, provided the owners can show that their intention when they bought the property was to earn income from it.
Revenue Minister Peter Dunne says the IRD spends about a quarter of its audit time looking at such transactions and last year flushed out an extra $113 million in tax.
Australia and Canada allow negative gearing, but Britain does not. The US does not allow deduction against unrelated labour market income, which limits negative gearing to professional property investors or developers.
The McLeod tax review is increasingly looking like a golden opportunity lost. It proposed a new broad-based, low-rate wealth tax as an offset (people forget this bit) for substantial cuts in personal and company tax rates. But the instant firestorm from talkback radio-land killed the idea within hours.
In its select committee submission the Reserve Bank says "consideration might be given" to the Australian model of taxing realised gains on rental properties at half the normal tax rate and ring-fencing operating losses. But it adds that if ring-fencing were adopted, care would be needed to minimise any short-term impact on rents.
It might be argued that if market conditions allowed landlords to charge higher rents they would. Avoiding 100 per cent of a loss is clearly better than being able to claw back 33 or 39 per cent of it in tax.
But all else being equal, ring-fencing would put upward pressure on rents, which is hardly desirable from the standpoint of inflation or of housing affordability. In other words the tax forgone under the present rules may benefit landlord or tenant - or a bit of both.
There would also be a big question about grandfathering.
If ring-fencing were introduced and applied to existing rental properties it would be seen as egregiously retrospective taxation.
But if it only applied to properties bought after introduction it would be less effective in deflating the housing bubble, if that is the object of the exercise.
With mortgage rates having climbed above 9 per cent as a result of tighter monetary policy here and overseas the housing boom's days ought to be numbered anyway.
There is another area where the Reserve Bank suggests the Government "might want to consider policy changes" - migration.
It has tended to amplify the economic cycle, the bank says, with immigration levels boosted during upturns to relieve skill shortages. "This approach may need to be tempered in light of migration's apparent sustained impact on the level of house prices."
But it is net migration that matters and over the past decade emigrating New Zealanders have been as big a source of volatility in the net flow as immigrant arrivals.
The Government cannot control that, nor can it be expected to accurately forecast it.
And clearly the net migration gain boosts both the demand and the supply side of the economy. The demand "cost" is front-loaded, but the benefit to the labour supply is enduring.
Without young migrants to mitigate the effects of an ageing population, the country's sustainable growth rate would be lower.
Even from the narrow perspective of the housing market making labour scarcer still would be counterproductive, because job security underpins the market.
Winston Peters has triumphantly seized on the Reserve Bank's comments.
You know things are bad when the bank starts sounding like New Zealand First.
