Bluffer's guide: What is a land tax?

John Key has raised the issue of a land tax. Photo / Doug Sherring

Prime Minister John Key is threatening to apply a land tax to foreign-based house buyers if there is evidence they are pushing up New Zealand property prices.

But what does this actually mean? The Herald has put together a bluffer's guide with everything you need to know.

What is a land tax?
It's a tax based on a percentage of the land value of a property (not the building), similar to the rates you pay to your local council. The Prime Minister did not give many details, except to say he thought it would be set at less than 10 per cent. Tax experts have previously estimated that a 0.5% annual land tax on all property would raise $2.3 billion a year.

Who would pay it?
Only foreigners or non-resident buyers of New Zealand properties. That means the tax could deter speculation by foreigners in our housing market. It would not address property speculation by New Zealanders, presumably because applying the tax to all property owners is regarded as far too politically risky.

Why is it needed?
Until recently no one could say, as we haven't collected data on foreigners' activities in our housing market. So we still don't know how many foreigners are buying, where, what prices they are paying or their countries of origin. Deals worth $100 million-plus and those involving sensitive land or historic properties come into the orbit of the Overseas Investment Office, but that usually doesn't apply to residential housing. However this situation could soon change. From last October the Government required foreigners buying property to have an IRD number and a New Zealand bank account. The first six months of data on foreign buyers' property purchases will be out in the next few weeks.

Is that why Key has raised the issue now?
That may be the reason. The Government is also very sensitive to public opinion on the issue and is likely to have taken its own soundings on the huge public engagement and response to the Herald's Home Truths series on our housing affordability crisis. Labour housing spokesman Phil Twyford raises another possibility, based on Key's visit to China last week. "Did the Chinese president express concern to Key about corrupt money being laundered through New Zealand?"

What effect would the tax have?
A universal land tax could actually force property prices down - good news for would-be home owners trying to break into the market but disastrous for many people who have bought recently at high prices and find themselves with "negative equity", a property which is worth less than the debt attached to it. The foreigner-only tax the Government is considering seems to be aimed more at making property a bit more expensive for overseas buyers, giving locals more of a chance. In theory foreign buyers who rent their properties could choose to buy anyway and push rents up, but they would risk losing tenants to local landlords who do not have to pay the tax.

Will it really happen?
Key says his gut feeling is that most of the "Chinese buyers" noticed by Aucklanders at open homes and auctions are in fact Chinese residents, not overseas buyers. If this turns out to be the case, it could be argued that a land tax aimed purely at foreign buyers will be ineffective and unnecessary. But doing nothing won't solve the problem of runaway house prices, especially in Auckland where researchers estimate 78 per cent of working households who rent privately cannot afford to buy.