In a dramatic shift in position, John Key is threatening to apply a land tax to foreign-based house buyers if there is evidence they are pushing up New Zealand house prices - and it could apply to Kiwis abroad.
The evidence on foreign buyers could be just two weeks away.
A land tax to dampen demand by foreign-based buyers would be a complete flip in the Government's insistence that overseas speculation has not been a problem in the heated property market, and a switch from its focus on increasing supply.
The Prime Minister told the Herald any land tax could also apply to Kiwis abroad with property in New Zealand after an exemption period of perhaps three years away.
But such an exemption could potentially contravene New Zealand tax treaties with other countries.
If it did, the tax would apply at the same time to all foreign-based buyers who are tax residents elsewhere, including Kiwis abroad.
"Subject to our capacity to do so, New Zealanders living abroad would be exempt but you could do it for a period of three years at which point if they retained the property, they might have to start paying [the tax]."
Mr Key used his own work history abroad as an example.
"Me, John Key, going off to London like I did, if we continued to own a house in New Zealand, I'm a New Zealand citizen but I'm a non-resident for tax purposes and, in principle, a land tax could be paid there."
It was all subject to design and whether it breached tax agreements. Mr Key thought any tax would be less than 10 per cent of the value of a property and be charged annually.
The details come amid a Herald Home Truths investigation into the plight of Aucklanders priced out of home ownership and new figures showing the average Auckland home now costs more than in Sydney. Labour housing spokesman Phil Twyford said Mr Key's comments made "a complete mockery of the Government's position".
"If [the Prime Minister] is finally coming round to the idea that foreign buyers are a problem and are bidding up the price of New Zealand houses then hallelujah. They have rubbished the idea for three years."
He also said applying a land tax to Kiwis abroad with property at home would be "incredibly unfair".
New Zealand First leader Winston Peters said Mr Key had "done worse than nothing" on the issue of land and houses in foreign hands.
"He has denied whilst there has been an explosion of offshore purchases."
Mr Key said there would be no land tax measure in the May 26 Budget and there was no evidence yet that one was needed.
He is waiting on data on the number of foreign buyers that has been absent from the debate on over-heated house prices, data which will be available in two to three weeks.
From October 1, foreign-based buyers have had to supply their IRD number from where they are a tax resident. "I don't know what they look like yet but I just intuitively think - and I may well prove to be wrong - that buyers at the moment are residents," he said.
Mr Key acknowledged he started looking at options when Labour adopted a policy to ban foreign-based buyers unless they were buying new houses.
"There's so many ways of ducking and diving through such an exemption that in the end they don't work very well."
He had looked at other options, including imposing stamp duty on foreign-based buyers - a one-off payment imposed at the time of transfer of the property.
A land tax was the most effective because it was annual and could be adjusted for conditions.
"If you want it to be much more difficult for a non-resident to buy a property, the most effective way to deal with that issue is a land tax because it is annual, it is expensive, it can be ratcheted up or down.
"It is just a far more effective tool."
The Government is being attacked by one of its support partners over the proposal.
The Act Party said this afternoon that the proposed policy would be a broken election promise.
Leader David Seymour said that since campaigning on a platform of "no new taxes" in 2014, the Government had introduced two new taxes - a bright line test on property and a travel levy.
"For the third time now, this promise could be broken, as the Prime Minister ponders a land tax," he said.
Mr Seymour accused National of "campaigning from the right and governing from the left" and "trying to put Labour out of a job".
Prime Minister John Key, in raising the idea of a land tax on offshore purchases, said it could also applied to New Zealanders living overseas.
Mr Seymour was concerned that the tax could be extended by a future Government to people living in New Zealand.
Land tax plan Q&A
Why is the Government suddenly talking about a land tax on foreign-based property buyers?
It wants a Plan B in case data due soon shows a large number of overseas-based buyers in the New Zealand market.
Why doesn't it just ban them?
That would be a problem in some of New Zealand's free trade agreements which say foreign investors should be treated the same as local ones.
What about applying stamp duty?
That is a problem in the Korea FTA; a land tax is allowed but stamp duty isn't.
What would the TPP allow or prevent the Government doing if it is passed?
It allows the Government to impose both a land tax and a stamp duty on foreign-based buyers from TPP countries but not to ban sales.
What about a capital gains tax?
After opposing CGT for years, the Government passed one last year on property sold within two years of purchase, other than the family home, inheritance or matrimonial property.
What new data is the Government getting?
From October 1 it required tax residents elsewhere buying property in New Zealand to supply their equivalent of an IRD number.
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