The Prime Minister's talk of a new tax on land is a sign that he is worried by the resurgence in house prices, as he should be. He raises the prospect in response to continuing concern about demand from offshore, though he has never been convinced that non-residents are a significant force in the market. He is about to receive some solid data on that issue from new registration requirements and many suspect that he is getting in ahead of results he has seen but not yet made public. That may be, but, as our Home Truths series is highlighting, the pressure on house prices is much wider.

Whatever the scale of foreign investment in New Zealand residential property, the affordability problem is unlikely to be solved by discouraging, or even stopping, non-resident purchases. There is probably more than enough demand within Auckland's growing population to sustain price increases at a rate that is now reported to be surpassing Sydney's. A land tax, should it be adopted, will need to apply to all investment housing, and arguably it should. Land is the precious commodity, not housing. Land values are the rising element in real estate prices.

The Government has long blamed the scarcity entirely on the Auckland Council's efforts to contain the city's sprawl but it was never that simple. A great deal of land zoned residential spends many years lying unused as its value appreciates. Vacant residential sites can be bought and sold and amalgamated and sold again, returning good profits for no investment in buildings or any other improvements. Its value purely reflects the popularity, or potential popularity, of its location, which in turn reflects the investment others have made in that area, individually by building homes, collectively by supporting schools and other public amenities.

An annual land tax could recover some of the added value that owners of idle land are reaping for no effort on their part. Just as important, it could entice them to build on the land in order to obtain more value from it. If they build new houses they will be helping to provide the additional stock Auckland urgently needs. A land tax would be in line with the Government's contention that the solution to housing affordability is to increase the supply rather than dampen demand.


Landowners will point out they already pay a land tax in the form of rates to local bodies, which all households pay. But an additional land tax was studied by a tax working group for the Government six years ago as a way of taxing those who can avoid income tax and found its value for that purpose limited because, like capital gains tax which the group also considered, it is liable to be riddled with political exemptions. John Key would exempt houses owned by New Zealanders living overseas - trade agreements permitting - if the tax is to be imposed only on non-resident buyers.

But there is no case for exempting expatriates, or indeed investors domiciled here. If a land tax is to help increase the supply of houses it needs to be applied to all property lying vacant and accumulating unearned wealth.

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