Give back GST on new homes to lower cost of housing, says NZ Initiative

The government should give the GST paid for a new house to city councils in return for opening up new land for housing, says the New Zealand Initiative in the third and final instalment of thinking on housing affordability.

The Wellington-based think tank says that some $60,000 of the cost of a $400,000 new home goes in GST, now charged at 15 percent on all land and materials used in new home construction.

The introduction and increases in GST since 1986 meant "a substantial additional price ...added to the cost of a new house and the raw land on which it was built," says Free To Build, a study lead-authored by former Lange Labour Cabinet Minister-cum-ACT-Party-loyalist Michael Bassett.

As Minister of Local Government in the 1984-87 government of Prime Minister David Lange, Bassett oversaw the last major round of local government reforms before the round now being pursued by the current government.

The same government introduced GST in 1986, although the tax on all goods and services is not charged on the private sale of existing houses, meaning the idea applies only to lowering the price of a new home.

The proposal is uncosted in the document, but if a the government's target of 19,000 new homes in three years' time is met, it would blow a $1.14 billion hole in the government's budget - enough to push it back into the politically important surplus now narrowly projected for the year to June 2015.

"Councils must be entitled to a Housing Encouragement Grant for every new house built in their area," says the document from the NZ Initiative, a privately funded fusion of the now defunct New Zealand Business Roundtable and New Zealand Institute.

"It would be a straightforward calculation and would require no new compliance costs to infrastructure or service providers."

It would encourage a "pro-development attitude within councils and provide a predictable cashflow to local governments by increasing their revenue from more development."

The recommendation chimes strongly with a report for NZ Initiative member Local Government New Zealand, released last month, which encourages what it calls a "new localism" in which councils would compete for new residents and revenue instead of the current tendency to shun the cost of new people.

The report also recommends councils be allowed to raise funds for infrastructure to support new subdivisions, using an idea pioneered in Houston, Texas, known as Community Development Districts: "statutory taxiing bodies that can privately finance debt to build new infrastructure."

Finally, the report identifies the huge cost of providing water services - freshwater, drainage and stormwater - as an issue requiring a fresh approach.

"Five regional water companies should be established in new Zealand with ownership vested in the councils," the report says. "These water companies can use network pricing to create quality water infrastructure and make long term infrastructure decisions free from political or electoral considerations."

The publication was co-authored Bassett and two research fellows at the NZ Initiative: Luke Malpass, and Jason Krupp, a former BusinessDesk reporter.

(BusinessDesk)