Call for capital gains tax

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The Key government has been thrown an economic lifeline from an unlikely quarter, with the Green Party calling for the introduction of a capital gains tax.

The Greens' motive, however, is to cool the housing market, not to raise more revenue for the cash-strapped government, which is facing 10 years of budget deficits.

Greens co-leader and finance spokesman Russel Norman is urging the government to show "courage" and act immediately to prevent another housing boom, which he says will cause long- term damage to the country's economy and social fabric.

House prices are expected to surge 11% next year as first-home buyers and investors take advantage of lower interest rates and snap up bargains, according to economic forecaster Infometrics. Nationwide, house prices are expected to grow an average 8% over the next three years.

New Zealand is one of the few OECD countries that does not have a capital gains tax on property.

The tax might cause a voter backlash and it might be a bitter pill to swallow for MPs: Parliamentary Library records show that 53 of the 101 National and Labour MPs own investment properties.

The Greens' support for a capital gains tax is welcome news for the government, which has set up an independent working group of business leaders, bureaucrats and academics to consider tax policy options. The government will set a course of action after the group concludes its work in November.

Norman will write to Finance Minister Bill English tomorrow outlining a number of supply and demand measures to keep a lid on housing prices over the long-term.

It was pointless using the "blunt tool" of raising interest rates to temper the housing market because higher rates hit the entire economy, he said.

He would urge English to introduce a capital gains tax on all property except the family home and tighten the rules that allow investors to reduce the income tax they pay because of "losses" on their rental properties, the most common being mortgage payments and maintenance costs.

Norman also says the law should be changed so only New Zealand citizens and residents can buy housing sections.

Another solution was to increase the stock of social housing, which would relieve pressure on the supply side.

"He [English] needs to show the courage to do what's right because New Zealanders cannot afford another doubling in the price of housing in the next five years. It would be catastrophic," Norman said.

"So far he's not even tinkering. He hasn't even talked about any of these things. He says he's a responsible finance minister who has to make the hard decisions. Well, you've got to have the courage to do the right thing.

"I think they are afraid of upsetting their constituents."

Norman acknowledged that many investors would be angry that his party was agitating for a capital gains tax. "There might be people who made money out of it, and fair enough, that was their right, but it's not in our long- term interest.

"But I think a lot of people know that it's not sustainable to double the price of housing in five years and they know that their kids cannot afford to buy houses any more . . . home ownership rates are plummeting."

A spokesman for English said tax reform was just one part of a six-point plan the government had to get the economy to change direction.

- © Fairfax NZ News