John Roughan: Young pay for lack of capital gains tax

Young parents fondly imagine a time will come when they no longer worry about their children's welfare. I'm beginning to discover otherwise.

Mine are well into their 20s now, with good relationships, careers under way and not a worry in the world to speak of. But I'm fretting, seriously, about the debt they will carry when they come to buy a house.

It amazes me that the news is not yet full of an outcry from young people on five-figure incomes trying to save for their first house. Real estate inflation has been running far ahead of the rise in incomes for a long time and there is no obvious end to the trend.

The mean house price in Auckland is now $410,000. The national average annual gross income for a couple with no children is $70,184 before tax. The best deposit that couple could hope to save over several frugal years of renting somebody's investment property would leave them still having to borrow a fearful sum.

Fearful to me anyway; my kids never mention it, just as they have never complained of paying off the student loans that my generation didn't face. I think I could have justified their university fees if they had complained, but not the housing market we have bequeathed to them.

We could have done something about it long ago and we could still fix it at a stroke if we chose, but we don't want to. It is very pleasant if you are a home owner with the mortgage paid and savings accumulating. You can safely put that money into another house and let tenants pay its mortgage.

If it turns out you have borrowed too much, or the rent does not quite cover all the expenses for any reason, you know you will be able to sell the place fairly readily at a capital gain.

The market is so good it keeps the value of rental houses rising at the same time as it maintains an ample supply of tenants who can't afford a mortgage.

Home ownership in New Zealand has fallen markedly in recent years and if the trend continues we could end up with a society severely divided between a class with property and a class with its nose forever outside of the estate agent's window.

If any government wanted to do something about this, you would think, it would be the one in power right now. Inheriting a strong economy, it has always had an under-employed social conscience, but an unimaginative one.

The best Housing Minister Chris Carter could offer first-home seekers this week was to underwrite the risk for institutions lending to them on no deposit up to a value of $200,000 or, with a small deposit, up to $280,000. That's nice for the lenders but brings no relief to borrowers.

The market will be more imaginative than the minister, if it has to be. Should demand for investment houses dry up, banks will adopt clever ways of bringing first home buyers into the market without dropping prices.

Several ways have been mentioned. One is a mortgage lasting 50 years or a lifetime. Nobody would intend to pay the full cost of a loan over that sort of term but borrowers could build some equity by selling the house.

Another market solution would be partial mortgages that left the lender with equity in the house. Or we could see an increase in leasehold where the home-buyer owns only the building and pays a land rent.

But none of these solutions is ideal for first home buyers, and in any case lenders have no need to offer them while there remains a thriving demand for second homes as investment properties.

There is only one reasonably sure way to restore some fairness for the younger generation - and do wonders for the economy into the bargain.

We were told way back, even before the era of radical economic reform, that this country really should have a tax on the capital gains of residential property. Others do. Without it, investment is skewed to real estate at the expense of more productive activities.

The argument has been well made by several well-qualified panels over the years, but conventional wisdom at Parliament holds that it is a sure way to lose the next election.

They used to say the same thing about a value-added tax on goods and services. The idea was demonised in politics until the day Roger Douglas did it.

A tax on the realised capital gains of residential investment property would be greeted exactly like GST. Opposition parties would make hay while they could. But as long as owner-occupied homes were not caught in the net, and people were not taxed on increased value of their homes unless they sold them, it could be done.

Do it within the next 18 months and it would be a non-issue at the election earmarked for November 2008.

Residential real estate would lose its tax advantage over other investments and the benefits would flow far beyond first-home buyers. Established households might do better things for the national economy than buy another inflated house.

Productive industries would get cheaper capital, if not in diverted investment than certainly in lower interest rates when the Reserve Bank had less reason to fear house price inflation.

Everyone in politics knows it should be done. All it requires is some passing political courage to do the country some truly lasting good. A good government would do it tidily and do it quick.