Tax cause for housing bubble?

August 5th, 2008

Our Reserve Bank has warned for years that our love of housing investment has been irrational. Some have said it is not irrational given a tax preference created by the absence of a capital gains tax.

Robert J Samuelson in Newsweek lists the US tax "breaks" for housing that frothed their market. He warns that the rescue plans will exacerbate that problem.

Interestingly, we have virtually none of the tax incentives that bedevil other housing markets (other than the absence of capital gains tax). Yet we’ve shared their cycle.

I agree more with those who point to red tape and compliance costs as a primary cause of the loss of housing affordability in New Zealand.

Filed under Economy, Red tape and risk aversion

Comments

Don’t you think the 39% income tax rate imposed by Labour as soon as they became govt in 1999 had a bit to do with it? I do.

“we have virtually none of the tax incentives that bedevil other housing markets”

Is that correct?

Having owned a home in both the US and now in NZ, I think they are very similar with one critical difference. NZ has the same breaks for housing but only for the property investor, via setups like an LAQC, so it fuels the market in the same way, but only for the investor (“Forward Together” – yah right). I always thought that was rather odd, especially when the politicians make a play to sound like they want to help first time home buyers. Why not have the home you live come with the tax breaks, not the rental properties? You can write off the same things here in NZ but only for the investment property. Either way, I don’t think the problems can be attributed to taxes in either country though. It may have been a bit more fuel on the fire but not the main item.

Yes – I do think the 39% crossed a critical threshold where it once again felt very much worthwhile to steer your investment by tax advantage.

And your points TMC are well made.

“From an economic perspective, zoning laws work as a constriction of supply, which played a role in rising housing prices in other parts of the country.

“It raises the price of new-home construction,” Gilmer said. “Those supply restrictions began the process of price increases.”
“In a report issued by the Federal Reserve Bank of Dallas’ Houston branch, senior economist Bill Gilmer found another reason Houston has been shielded from the country’s real estate crisis: the lack of zoning.”

from
http://www.houstongrowth.org/node/14

The report I think is here
http://dallasfed.org/research/houston/2008/hb0801.html#box

Since Houston in the US has not experienced the same rise and fall of housing prices, I believe it is zoning that is the problem. Is there any area of NZ that is free of zoning laws? Or at least more liberal?

I concur the market has been artificially kept high by the lack of land and hence new stock.

Personally I’d like to see satellite development outside wellington with good rail links.

More importantly, the removal of and lessening of tax on investments for retirement would be a good thing.

I think the tax system needs gutting and made simpler.
This working for families tax cuts by stealth must go too.
rather raise the minimum to $22k a year, the same as a beneficiary gets, no tax below that.

whaart bro, whaart you say,
whaart is it that
do yous agree with me.
say to you boss that we need a capital gains tax
lost by helengrand,
New Zealand will be rich my friend if you do,
we do not need an inequitable society
you dont want people like me living off a the capital and suck,
can do this Stephen
CAPIITAL gAINS TAX BRO,
i wish you the strength that i have,
you can do it,
people paid for work not capital bro,
do it now

WIN
Wellington Central for us,
go on,
do it,
and then deliver my friend,
I believe you can.

http://www.interest.co.nz/ratesblog/index.php/2009/05/26/opinion-housing-bubbles-are-a-local-issue/#more-3553
More support for release of fringe land to avoid bubbles