KEY POINTS:
Every expert in the country has had a say on the out-of-control Auckland housing market and on it spins regardless.
Auckland Mayor Dick Hubbard puts it down to immigrants, urban drift and regional growth. Manukau Mayor Sir Barry Curtis blames regional council controls on urban sprawl. The rest of us point the finger at existing homeowners, driving prices up by speculating on investment properties.
Treasury research seems to back us up. In 2005, 25 per cent of residential property sales were of properties that had been owned for less than two years - a dramatic increase from the 10 per cent of 2001.
It seems a fair bet that many of these sales were made by people seeking a quick, tax-free, buck. I say tax-free because even though there is provision in the Income Tax Act for people who flick a house on for profit within two years of purchase to pay tax on the capital gain, most escape it because the tax officials have to prove the property was bought with the intention of resale.
Capital gain avoidance is not the only attraction for mum-and-dad property speculators. They can also reduce their tax bill by writing off "losses" on the new rental property against other taxable income. I thank Lockwood Smith, National's associate finance spokesman, for explaining it so succinctly in a recent speech.
"It works like this." said Dr Smith. "Most landlords make a loss on their rental properties, since rent doesn't usually cover mortgage interest and expenses. This loss can be used to reduce the landlord's other taxable income."
He says Labour's increasing the top personal tax rate to 39 per cent in 2000 accelerated this process and pushed house prices up one-fifth. "The landlord receives a tax rebate on rental losses at his or her marginal tax rate. So, if that marginal tax rate increases from 33 per cent to 39 per cent, tax rebate available also increases. And this increased rebate will be available every year." He says Treasury analysis suggests 19 per cent of couples and 8 per cent of individuals own a second residential property. In the end, he avoids supporting a capital gains tax, instead siding with the experts and declaring it a complex and difficult problem.
So where does that leave us? Well at the risk of being called simplistic, the only way to bring some sanity back into the Auckland housing market is to start putting the emphasis back on housing.
For decades, Government policy has distorted this market by making it the most attractive and profitable place for investing and profiting from one's savings. Until the distortions are removed and housing becomes no more attractive - and safe - than bank deposits or the stock exchange, genuine home buyers are going to be increasingly squeezed out.
A recent Research New Zealand poll found that 41 per cent of people supported a capital gains tax on investment properties. Given the bad press such a tax receives, that's a remarkable level of support. Enough surely, to at least enforce the existing anti-profiteering tax.
Even more effective would be to strengthen the rights of tenants. New tenancy laws are to be introduced in July, but they hardly resemble a residents' charter. Tenants not on fixed terms can be heaved out on three months' notice. And landlords have to give fixed-term tenants only three weeks' notice that an expiring agreement will not be renewed.
At present landlords can give a tenant 42 days' notice of eviction if they want to house a family member, or if the property has been sold. How disruptive and unfair is that. And how unbusinesslike. What better proof that the housing market is not primarily about providing housing at all.
Want to restore sanity to this market? First, remove the unfair tax advantages it has over other forms of investment. Second, remove the sentiment that treats an investment property as having an untouchable "emotional quotient" favouring the landlord. As long as the tenant pays the rent and obeys the rules, give him or her the upper hand. If the house sells, let the tenant go with it, or be compensated for the distress.
Such simple reforms would burst the housing carbuncle overnight, driving out the speculators and leaving the market to those looking for somewhere to live.
