The pressure on Finance Minister Grant Robertson to "do something" to address soaring house prices has become intense.
While housing affordability has been building as an issue for a generation, the recent sugar rush of ultra-low interest rates has left Labour further behind the curve on an issue itcampaigned on improving in 2017.
But Labour's commitment to avoid any meaningful tax reform means that solutions he might be about to reach for could make the situation worse, at least at the margins.
This week Robertson promised "bold action" on housing but all we know so far is that it will include initiatives related to both demand and supply.
When it comes to supply - building more of them - the Deputy Prime Minister said initiatives would come as part of May's Budget.
On demand - tipping the scales one way or another for buyers - Robertson indicated something could come this month.
Although he hinted at help for first-time buyers, his options for targeting investors are few, largely because he painted himself into a corner on tax.
Having already ruled out a capital gains tax while Jacinda Ardern is Prime Minister, when Labour announced a new high-earner tax bracket (39c in the dollar over $180,000) just before the election, Robertson spent the entire day insisting there would be nothing else.
Even though he assured NewstalkZB's Heather du Plessis-Allan - in no uncertain terms - that there would be no change to the bright-line test, since then Robertson has confirmed that this is under consideration. Such a move appears likely.
Finance Minister Grant Robertson has said it is time for bold action on housing, but when it comes to targeting investors, his options are limited. Photo / Mark Mitchell
If the aim of the change is to relieve pressure on house prices climbing, he should look elsewhere. If anything, it will do the opposite.
The bright-line test for residential property was not a new law when National established it in 2016, but a way to enforce existing law.
With a few exceptions, if you buy then sell a home (that isn't your main home) within the period of the test, you pay income tax on the gain.
National set the test at two years, aiming mainly at those speculating on quick gains on newly developed properties. Labour extended it to five years shortly after entering coalition.
Robertson has confirmed he is seeking advice on a longer period again, with talk around Wellington that it could be extended to 10 years, or possibly more.
Although the longer the test is, the more people will be caught by it, the bright-line test has an unintended consequence which becomes more severe the longer it is applied.
Any form of capital gains tax tends to see investors hold on to assets that they would not otherwise want, but the bright-line test will create a perverse incentive not to sell in the final years of the test.
If the test was extended, it would only apply to houses bought in the future, but imagine if recent experience - and a longer test - was to apply today, what it might mean for people thinking of selling inside the period.
Between the end of 2013 and the end of 2020, the median house price across New Zealand rose from $426,500 to $749,000 according to the Real Estate Institute of New Zealand, a gain of around $322,500 or 75 per cent.
Using those values and that period, if a 10-year bright-line test applied, the seller of this theoretical house would be liable for a tax bill of $100,000-$125,000 (depending on the seller's marginal tax rate).
But what if the seller decided not to sell, but to hold the property for the remaining three years of the 10-year test? Waiting the remaining three years would mean the tax would not have to be paid, meaning the investor would be $30,000-$40,000 better off a year, even if house prices flatlined during that period.
Robin Oliver, the former deputy commissioner of Inland Revenue and Tax Working Group member, regarded as a leading expert on taxation in New Zealand, warned this week that such a change would not bring down house prices.
The test would encourage investors to simply hold on to the houses they own longer, meaning few would be available for sale to potential buyers.
"I think it will have the exact opposite effect to what the Government is hoping for," Oliver told the Herald. "The benefit from not selling is enormous."
This lock-in benefit exists under the current five-year test, as it did under the initial two, but the longer it is extended, the more intense the payoff for holding out becomes.
If the purpose is to simply inconvenience investors, then it achieves a little bit. But if the purpose is to bring houses to the market for people who might want to live in them, it does the opposite.
