Jury still out on impact of foreign property investors

New Zealand would need data on the activity and influence of foreign property investors before committing to the risks and costs associated with a selective land tax, says Bob Buckle, the dean of commerce at Victoria Business School who chaired the Tax Working Group.

He was commenting on Prime Minister John Key's suggestion that he would consider a land tax if data due in the next few weeks shows foreign buyers are distorting or inflaming the property market. The government will have accumulated almost seven months of figures under changes to property tax rules last September that included a requirement for overseas investors to furnish a New Zealand tax number.

The Tax Working Group's January 2010 report, A Tax System for New Zealand's Future, considered a land tax and a capital gains tax among options to broaden the tax base, rather than a measure targeting one group of investors, and found there were risks with either option.

"History has shown that, with a land tax, various groups were awarded exemptions and the tax base was gradually eroded," Professor Buckle said. "There are always challenges in applying a tax selectively." They include identifying those whom the tax is intended to influence, plus administration costs.

There was also the question, as yet unanswered, about "the materiality of foreign buyers – what influence are they having and does it warrant setting up the infrastructure?" he said.

The central bank introduced Auckland-specific lending restrictions covering loan-to-value ratios in November last year while the government's more stringent enforcement of taxing speculators' capital gains began in October, moves aimed at countering the impact of record inbound migration and a supply shortage of housing in the city that's driven up prices. The Auckland market has shown signs that it is heating up again, based on the latest Real Estate Institute data, which showed the median house price in the city reached $820,00 in March, up 14% from a year earlier and the first time it had broken above $800,000.

As a measure to broaden the tax base, a land tax had some merits, the working group's 2010 paper said. It would be an efficient tax in not imposing distortions of economic behaviour, provided it was applied at a single rate, and would generate a large amount of revenue off a low rate, given the nation's $450 billion to $480 billion of property assets at the time. Inland Revenue could also access existing land and property value data used by local authorities to levy rates.

But such a tax would also be expected to cause "an initial fall in the value of land," could push indebted investors into negative net equity, and could result in more than one outcome in terms of rental properties, the report said. Fallout from the Auckland market was increasingly driving up demand in other regions, the data showed.

"The one area we as a group were uncertain on as a base-broadening measure was a capital gains tax or land tax," Buckle said. "There are good reasons to be cautious."

Andrew King, executive director of the New Zealand Property Investors Federation, said he agreed with Prof Buckle that more concrete information was needed on the influence of foreign buyers.

"There is a lot of anecdotal evidence and people in the media saying that foreign buyers are a problem in pushing up house prices," Mr King said. "But the housing market is complicated and it's so important you don't make decisions on what you think is happening."

"Of course, if there is money being laundered and things like that happening, then we need to deal with it" but, more broadly, the government needed to take care it didn't attempt a policy response to temporary factors in the market. For example, he said, commentators point to record net migration, of which Kiwis returning home was a part, but that situation in itself could turn quickly.

There were also race-based assumptions being made, such as property auctions in Auckland being dominated by Chinese investors, when such people could be New Zealand citizens.

"There are an awful lot of Chinese people moving to Auckland – if you allow them to come to this country, it's fair enough they can buy a home here," Mr King said.

Investors as a group also drove demand for rental properties, where New Zealand faced "a real shortage" and it was important any tax targeted at foreigners didn't have the effect of choking the supply of such properties, he said.

Some market analysts tended to liken the property market to the stock market, driven by speculative investors, but housing was much less volatile as an asset class, he said.

(BusinessDesk)