A comprehensive capital gains tax has been ruled out by both major political parties. While the bright-line test was expanded by Labour in 2020, this only applies to house sales.
What about those investment properties sitting empty for investment reasons?
New Zealand’s housing market has remained strong, despite global economic uncertainty and rules restricting foreign investment in residential property.
While the rules, passed in 2018, restrict new investment in residential property, they don’t address existing property ownership. Economists have also remained sceptical about the impact foreign buyers have had on the overall direction of the housing market.
Around 5 per cent of New Zealand’s housing stock – 95,000 dwellings – were considered empty during the 2018 Census.
According to an Empty Homes report, roughly 10 per cent of the empty homes surveyed were intentionally being kept empty, while 35 per cent were empty because they were holiday homes.
A further 8 per cent were kept empty for personal use (often as a second home), 23 per cent were empty for renovations and repairs and about 17 per cent were vacant rentals, sometimes due to non-compliance with Healthy Homes standards.
The remaining 6 per cent were empty for “other reasons”, which often meant they were awaiting sale. It shows the underutilisation of property taxes by the New Zealand Government.
It was not clear how much of New Zealand’s housing stock remains in the hands of international investors. But the National Party has promised to allow foreign buyers back into the property market. Under National’s plan, foreign buyers will be limited to properties over $2 million and will need to pay a 15 per cent tax on the sale price.
Introducing an empty homes tax
The central government earns 4.7 per cent of its total tax revenue from property, 1 per cent less than the OECD average of 5.7 per cent.
But New Zealand is fertile ground for an empty house tax, which would directly target property investors and those who are most financially well-off.
An empty house tax targets homeowners who let a property sit empty for a certain length of time. This type of tax already exists in a number of countries. New Zealand has the infrastructural prerequisites needed to implement an empty house tax.
New Zealand has an existing land registry which records essential information regarding all parcels of land, bypassing the need to establish this data or to rely on self-reporting from homeowners.
A potential boon for Government
Paris, France has an annual surcharge of 160 per cent of the standard rate of rates on empty properties. In Vancouver, Canada, the vacancy tax is 5 per cent, and failure to pay results in a flat penalty of 5 per cent.
In Ireland, the empty house tax is three times the property’s existing base local property tax. In Melbourne and Sydney, house-buyers who leave a property unused for six months face an annual charge of at least A$5500.
These countries’ responses to vacant properties suggest that high rates and tax penalties steer investors towards more productive areas of the economy - a reason cited by policymakers in Vancouver and elsewhere.
An empty homes tax on property in Queenstown similar to Vancouver could generate $255m a year.
Time for serious consideration
New Zealand could take one of two paths when introducing an empty home tax.
The first option is to charge a tax of between 200 per cent and 300 per cent of rates, similar to Ireland. Alternatively, we could introduce a tax of 3-5 per cent of land value, like Vancouver.
Different cities and districts could then charge a tax tailored to the needs of their communities.
The rules could exempt residential and rental properties, with an exception for holiday homes unless they are normally used as Airbnbs.
People forced to relocate from their residential homes for extended periods due to work requirements could also be exempted from paying the empty home tax.
To ensure the success of the empty house tax, we need to include credible measures to monitor compliance.
The revenue from an empty house tax could then be funnelled into building new homes. An empty house is still an asset accruing value, even without rent.
On the flip side, introducing an empty house tax will penalise land holdings for speculation, and encourage property owners to enter the rental market – which could in turn increase rental affordability.
Dr Ranjana Gupta is a senior taxation lecturer at Auckland University of Technology.
