Building more houses won’t solve crisis but risk free rate method could be a start.

As the housing bubble spreads out of Auckland, most New Zealanders understand that one of its underlying causes is speculation. In a token gesture in 2015, the Government introduced a so-called two year bright line test to capture the profits from buying and selling houses within two years. Why such profits should not be taxed after a two period has not been explained.

To up the ante, Labour's new housing policy promises to "crack down on speculators".

If elected, Labour will not only ban foreigners from buying existing houses but extend the bright line test from two to five years. Labour however appears to have abandoned any interest in a comprehensive capital gains tax.

Neither of the main political parties appears interested in really getting to grips with the inequality driven by the housing crisis. Increasingly the nation is sharply divided by those who own housing and those who don't. Over the past decade almost 70 per cent of all new housing has been rental while the homeownership rate has fallen from 67 per cent to just above 63 per cent. Over the past two years investors have outnumbered first time home buyers more than three to one in mortgage lending statistics.


Wealth statistics from 2015 show that while tenant households made up 36 per cent of all households they had only 8 per cent of all household wealth. These same statistics show that the wealthiest 20 per cent of New Zealand households collectively have 22 times more wealth than the poorest 40 per cent of households.

We have created a society where the well-off can easily accumulate more wealth while the young and less well paid cannot even get a start. An additional injustice is that much of the wealth accumulation of the well-off goes untaxed while the first dollar of the meagre or modest incomes of those at the bottom is taxed.

But a capital gains tax is an inadequate tool to address this huge disparity of wealth. One problem is that a well-designed capital gains tax would take years to develop and be very complex. But even if a capital gains tax came in tomorrow, it could not capture all the excessive gains to date.

Another approach, well worth investigating, recognises that an imputed income arises from real estate asset ownership. Why should this large part of income from capital escape the tax net? We should reconsider the risk free rate method first proposed in the 2001 McLeod review of tax in New Zealand.

This method takes a person's total equity (real estate value less mortgages) and taxes it as if it were money they had on deposit at the bank. Interest from a deposit would be taxed as income.

Take a developer with a $600,000 rental house and a $400,000 mortgage. Instead of returning the rental income (typically a loss after interest costs are deducted) he would be taxed on the equity of $200,000 as if it had been put into the bank and had earned a risk-free rate of say 4 per cent.

The developer's taxable income would be $8000 regardless of whether the rentals were profitable or the magnitude of the mortgage payments. At a 33 per cent personal tax rate this is $2640 of tax.

The family home would need to be included in this tax otherwise people would over-invest in their own home. We do not need any more over-elaborate homes to gobble up our scarce building resources. An exemption would protect those who have modest property equity so that the majority of New Zealanders would be unaffected.


Let's say Anne and Arthur have a family home worth $2.4 million, a rental property worth $600,000 and a family bach worth $1m. Each has property assets of $2m. With a personal exemption of say $1 million, they would each be liable for tax on an imputed income of $40,000.

At a personal tax rate of 33 per cent, they each would pay $13,200 in tax but they would not have to include any rents as part of their taxable incomes.

There would be an incentive to make sure the rental and bach were generating some rental income and not standing empty. All of the complexity of keeping records of expenses and deciding which are really capital items on the rental property disappear. Negative gearing would be impossible.

The burden of the tax would fall on the older wealthy with large equity while the young with small equity and high mortgages would be protected.

Overseas owners and those with no family home would have no exemption. Nor would property-owning trusts.

By relating the taxable imputed income to the equity held, as property prices increase, future capital gains would be captured.

So is this practical? A fulltime dedicated expert independent taskforce is needed to sort out all the fishhooks.

There needs to be an agreed way to assess the capital value for each property. But in principle this could be introduced within a year and have the desired depressing impact on house prices while releasing more houses for sale.

We are not doing policy development well in New Zealand.

The huge imbalances of a housing bubble gone mad won't be solved just by building more houses no matter how much they are needed.

Susan St John and Alan Johnson are executive members of Child Poverty Action Group.