New Zealand's skyrocketing house prices should be driven down by introducing a capital gains tax and stopping rich people borrowing too much money, a new paper by a leading think tank says.
The dizzying price rises had been a goldmine for Baby Boomers but threatened to blight the lives of up-and-coming generations if the Government failed to act, the Helen Clark Foundation report released this morning said.
Property investors, however, warned the capital gains tax had already failed to win support, while the use of taxpayer dollars to drive down house prices would be hugely unpopular.
Yet report author, Jenny McArthur from University College London, said it was property speculators and their debt-fuelled buy-up of housing who were especially to blame for the housing crisis.
So long as investors could get untaxed capital gains and access to ever more debt to buy new investment homes, they would continue pouring money into property and driving up prices, she said.
"The system has made one generation wealthy, but it is unsustainable in the long term," she said.
"Without targeted interventions that disrupt this system, prices cannot be brought down to genuinely affordable levels."
She said the risks to New Zealand from unchecked price growth were many and serious.
Home ownership rates were now at their lowest levels in 60 years. Among 25 to 40-year-olds, it had dropped from 46 per cent in 2001 to 35 per cent in 2013, the report titled Somewhere to Live said.
Housing costs were also now equal to 51 per cent of the average income of the bottom 20 per cent of wage earners, up from 29 per cent in 1988.
This threatened to drive a fault line of discontent through society and have "severe impacts" on family health and education, McArthur said.
Too much money was also piling into housing and taking cash away from productive activities that generated jobs and distributed wealth more fairly, she said.
High debt levels could also trigger a recession if too much money went on repayments rather than being spent in the economy, she said.
A capital gains tax could help correct this by disincentivising property investment, while a Government-set limit on how much debt, high net-income people could borrow would also restrict investors' ability to buy, McArthur said.
But Property Investors Federation executive director Andrew King pointed to recent Massey Housing Affordability studies to argue house prices were not as unaffordable as made out.
"It's always been really difficult to buy your first home," he said.
"And if we introduce a capital gains tax on people providing rental properties then we are making rental properties more expensive."
"Therefore, when rents go up it makes it even harder for tenants to save a deposit for a house."
Housing Minister Megan Woods and Opposition spokesperson Judith Collins both ruled out a capital gains tax.
Woods said the Government opted last year not to follow through on a recommendation by the Tax Working Group to introduce one, and that stance would hold.
"The Prime Minister has ruled out a capital gains tax under her leadership," Woods said.
Woods said the Government was stepping up to build new homes.
It's build programme of public and transitional housing had picked up speed and a strong pipeline of affordable Kiwibuild homes was coming through.
Opposition spokesperson Judith Collins said National's focus would be on reforming planning rules to ensure more homes could be built.
"This report calls for more government intervention when less is needed," she said.
Critics of McArthur's new report also said forcibly driving down house prices could also cause a market crash, costing hundreds of millions of dollars.
But McArthur said the Government could help create a soft landing for house prices by setting up a Government fund to lend at low interest rates to homeowners, who might have trouble making repayments if prices dropped or interest rates jumped.
Nick Goodall, head of research with analysts CoreLogic, suggested a different approach, however,
Rather than hitting investors with a stick, he said sweeteners such as tax breaks to encourage investment in KiwiSaver and other investment options could be used.
This could reduce house prices by in the log run by reducing buyer demand, he said.