Heading off the next housing bubble

BY SIMON EDWARDS - HUTT NEWS

While just about every economist from Reserve Bank Governor Alan Bollard down is saying another debt-fuelled housing boom is the last thing New Zealand needs, the Greens are pessimistic about whether the Government will have the fortitude to take action.

Greens co-leader Russel Norman says the National Party is "frightened" of an electoral backlash if it introduces a capital gains tax.

It is "pretty leery" of the idea of a land tax, too, he says, but that is more likely should the Government find a stomach for measures to tackle what Mr Bollard described as our "excessive exuberance" for mortgaging ourselves to the hilt, not just to buy our own home, but also investment properties.

Speaking during a recent visit to the Hutt Valley with Greens co-leader Metiria Turei, Dr Norman said people with property investments outside their family home now number in their hundreds of thousands.

"They're a well-heeled, organised, vocal group ... mainly upper middle-class people who are trying to reduce their taxable income under 60 grand."

That means there is a "big political risk" to tackling the issue "and so far it's only the Greens who have spoken in support".

Dr Norman cites a series of interlinked problems with housing asset bubbles and inflation.

"We know it's one of the key drivers of the Reserve Bank pumping up interest rates during the last little boom because they were trying to suppress inflation coming out of the housing sector."

Increasing the official cash rate (OCR) hit New Zealand's productive sector with a high kiwi dollar, hurting exporters and making it expensive to borrow money for capital investment, according to Dr Norman.

"And so it became a problem for the whole New Zealand economy and that's reflected in our trade deficit and current account deficit."

The Greens believe housing asset inflation has to be attacked directly, not through the OCR, "which has all these problems associated with it", Dr Norman says.

The key is hitting tax incentives for speculative housing investment.

Many people are benefiting from taking a loss on their rental properties, he says.

"Lots of people write off or reduce their taxable income by taking losses on their rental properties.

"Losses through Loss Attributing Qualifying Companies (LAQCs) have spiralled out of control.

"It's now at the level of billions of dollars a year and people are using it to reduce their taxable income."

The Greens favour a capital gains tax, excluding the family home, as another way of reducing demand for more and more investment properties.

On the supply side, there needs to be an increase in affordable housing, Dr Norman says.

He advocates more state houses and changing of some of the rules to make it easier to build medium-density housing around public transport routes.

The Greens would also give the Reserve Bank another tool to target asset bubbles  increasing the capital adequacy ratios required of banks that lend.

The current ratio is about 8 per cent in high quality assets for loans made.

That could be hiked if the Reserve Bank is concerned about a flood of money going into the housing sector.

"The way banks currently put aside money for bad debts is pro-cyclical.

During the boom they don't need to put aside much because ... everything is going well.

Effectively, because they lower the level they're putting aside, they're putting more money in, so they add to the boom."

In a downturn, because there are bad debts, money is pulled back to put aside, exacerbating the contraction.

"We need changes to reverse the way it's done."

Dr Norman acknowledges the potential for rent rises with a clampdown on LAQCs and a capital gains taxthe housing market, as investors would have to be more diligent about getting a return on their properties.

"That's why it's essential we increase the number of rental properties at the same time, particularly during the transition period, but also during the longer term."

Asked if it would be fiscally prudent to pour more money into state houses at a time New Zealand is borrowing up to $250 million a week to keep the ship of State floating, Dr Norman said he would redirect the spendingfinance minister Bill English is doing.

"For example, we wouldn't be increasing funding for state highways by billions and billions. We would redirect that to state housing and public transport."

A double benefit is that a surge in state house building would help the construction sector, "probably the hardest hit sector of all" in the downturn.

Dr Norman said it would be "totally unfair" to make a capital gains tax retrospective because people made decisions based on the "rules" at the time.

"So you've got to have a starting point. Having one now isn't such a bad thing while the housing market is still flat."

Asked if there are many Parliamentarians with second and third houses, Dr Norman replies: "Most of them. That's one of the problems."