So it seems that our Prime Minister is opposed to a capital gains tax on housing. His reason for this isn’t political, it is because he believes that it wouldn’t help. His reasoning is:
I’ve repeatedly said I’m quite happy to say today, I personally don’t like capital gains taxes. I don’t think that they work very effectively, they certainly don’t stop housing booms, I mean the United States, Australia and the UK, all have a form of capital gains tax on housing, and it hasn’t worked, they all had housing booms
I agree that a capital gains tax on housing wouldn’t have prevented the “boom and bust” cycle that has been experienced in the market. Of course, this completely misses the point of why we would want a capital gains tax on housing.
Ultimately, by not taxing capital gains on housing while taxing capital gains on everything else we increase the relative attractiveness of housing as an investment. By doing this we end up with a relative misallocation of resources towards housing instead of other assets – which is inefficient.
Now how does this balance with the belief that we have under-invested in housing? Well we could say that, instead of building too many houses we have been over-investing in making the houses we have attractive. Of course is this believeable?
However, there is another way to explain why we seem to have an undersupply in housing even though the capital gains tax is inefficient. There are other inefficiencies on the other side of the ledger! The RMA and the convoluted process of getting consents has limited the increase in the housing stock, even as the lack of a capital gains tax has made new properties more attractive. In this case it would probably be best to fix all inefficiencies, including the CGT, rather than letting the odd one slide.
Furthermore, there is another way we can view the capital gains tax as an issue. It influences the composition of savings. We currently have a group of people in New Zealand who have primarily saved by buying a house partially because of the lack of a capital gains tax. This makes these people vulnerable to sector specific shocks (such as a rapid decline in house prices), which is a concern. However, this also makes the idea of introducing a CGT difficult – as this would be a sudden, unanticipated, shock to this groups lifetime wealth.
So in the medium term, we need a CGT on housing to ensure a (relatively) efficient allocation of resources methinks. However, we also have to ask whether the short-term cost to current investors in residential property is “fair”. If not we then need to ask if we could “compensate” them and still come out with a better outcome.