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Comment by ACow_Adonis | Hacker News Reader

Just replying to myself now to add: the solution to high house prices is, like much transport policy, boring and well known but not implemented for political reasons. On the housing front: tax capital gains, limit leveraging ability, implement a land based tax and zone/invest appropriately to encourage new supply. This will bring housing far more in line with what people expect.

This brings us to the other awkward point though: truthfully, I'm sure many New Zealanders, just like many Australians, neither want their housing prices/investments to drop in relative price or to return to closer relationships with local use.

Which leads us to the policy/political pantomime game so often involved in these areas where people want to have their cake and eat it too: "I want afforable housing for my children that doesn't make my property prices drop!"

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I would hate to be agreeable on the internet but I think you've covered this from an Australian perspective fairly accurately.

Simply removing the capital gains tax discount would help to prevent speculative investments.

There has been much talk of negative gearing being the issue but those with a short memory don't realise it has been around since the 80s and operating with out much fuss. It was the CGT discount combined with negative gearing that really got the property snowball rolling.

Further, I believe a land tax would help to cool the market in perhaps a more controlled manner.

Just one element missing, it's CGT + neg-gearing + low interest rates.

Not that I can really complain, as we just managed to do really quite well for ourselves off a single year's speculation. But I still think the system's broken.

I talked to my accountant and he suggested CGT + lower personal income tax.

So, someone who owns O(1) house, pays CGT, but that's compensated by O(1) less income tax.

Someone who is flipping houses is paying CGT but in the end, it's not offset by less income tax if they are flipping lots of houses. They pay tax O(N) on it just like everyone else, and they gain O(1) less income tax.

Would something like this work?

(Forgive my bastardisation of the O-notation :)

+1 just for the bastardisation of the O notation

Why allow the compensation at all?

Currently when you sell a house, you are not taxed on the profit that you make.

It's one of the few forms of income which is not taxed. Everyone else pays income tax.

I think the point of introducing CGT is to tax people who are buying and selling houses as their sole form of income.

Given two people, if one person earns 100k through hard work, and another earns 100k through flicking property, the first person would be at a major tax disadvantage, currently.

However, introducing CGT would essentially mean less money in everyone's pocket. It's possible by reducing income tax, that in the above scenario, hard work is encouraged over being a property middle-man while still maintaining some semblance of balance. I guess you could leave income tax where it is at, but that would make it even harder for people to climb up the property ladder after CGT was introduced, IMHO.

> However, introducing CGT would essentially mean less money in everyone's pocket.

On board with you up until this point, but this is where I disagree with you; by smashing property prices you'd actually end up with more money in (almost) everyone's pocket. By pushing prices down and implementing policies that keep them there you're having no impact on most home owners and massively benefiting all non home owners (which is all future generations), as well as stimulating the economy by pushing money away from non productive real estate speculation and into other areas.

Putting income tax and CGT on the same level seems like the sane place to start to me. A CGT should be assessed annually on paper gains at the marginal income tax rate, then any corrections should be made when a transfer of ownership is made by calculating the total profit over the number of years held. This would mean that income from capital gains would be treated the same as income from other means and seems like a fair way to start.

I agree with you. Thanks for taking the time to reply with something meaningful. It's not an area I'm really familiar with so it's great to hear other opinions and learn about different perspective.

I think by adding CGT, you increase everyones tax liability a bit, so by reducing income tax, you'd ensure that everyone was basically in the same place, except for people who were abusing the system in the first place.

I'm not an accountant so I should just defer to those who know better :)

Yeah, that's a fair enough approach. I don't necessarily want to increase the overall tax burden, just distribute it more fairly. Ideally the policy mix should put such downward pressure on prices that people end up paying very little in capital gains taxes.

I don't think offering an offset for capital gains tax is the right thing to do though; you're still essentially taxing capital gains at a lower rate, e.g. someone that earned a 100k from their job would pay more than someone that earned 50k from their job and 50k from capital gains. Instead the income tax brackets could be adjusted to account for the new income stream such that the total tax take remained the same, then both 100k earners would pay the same rate but on average nobody would be paying more.

Not sure if you're Kiwi or not, but TOP had a very interesting tax policy this election - http://www.top.org.nz/top1 - along those lines, no increase in tax take but a massive change to where it comes from, which would have meant large income tax reductions.

Aucklander here: you're right. One of the effective political tactics against the Labour Party was to suggest they'd threaten house prices: most of Auckland home owners need high real estate prices, either to keep rents (investment cashflow) up, to continue to leverage their retirement real estate Ponzi scheme, or for the simple reason that nobody wants to have to move for work and lose money when they sell their house. These all make it hard for a government to be effective at lowering house prices without the needed-but-deeply-unpopular introduction of a Capital Gains Tax.

The "no sales to foreigners, let's curb immigration" is a sop to affronted New Zealanders of European and Māori descent, who are increasingly finding themselves outbid by recent (last 20-years) Chinese migrants who not only want a house for themselves but also want to participate in the only economically thriving part of the NZ economy that doesn't require a dairy farm: real estate.

I don't see any issue with NZ putting up that block to keep out Chinese 'investors', considering the roadblocks foreigners have to face to do business in China.

Seems fair to me.

There's not going to be any change in money coming in to buy property from foreign buyers.

What you're actually going to see is a cottage industry of lawyers setting up citizen-owned shell corporations to funnel this money through -- minus their fees of course.

Welp, then, a law will be erected that forces lawyers to report info of shell companies if they are involved in real estate deal.

Just a few months ago, US govt started a program where if a foreigner buys real estate of a certain value ($4 million?) in certain hot markets like Los Angeles, NYC, they have to report it to Treasure or IRS. As of now, that value is too high to be effective imo, but there are ways.

So my family had a house in Forest Hills Gardens (NYC) that we were selling in early '07 listed at $4.5mil. August-September of that year happened and we had to take an immediate $2mil haircut (eventually more like a $2.4mil one). Luckily it was owned since the 50s and not some crazy leveraged investment vehicle.

It still took an additional 6 years (roughly) to sell, but throughout that whole process, 99% of the potential buyers, including the eventual purchasers, were Chinese nationals. I lived in that house and met everyone that came through (including the time Anna Chapman came through to show the house...wow).

There's an entire class of real estate here that just has no market without Chinese money coming in.

Isn’t another way of looking at this to say that the presence of Chinese money artificially inflates the prices of some classes of real estate past what the rest of the market will bear?

It's possible. It's also just possible that the average American family in New York doesn't have much need for a house with 5 bedrooms. I don't have enough data points to draw conclusions here.

Ya, try buying a house as a foreigner in china (first tier city). It isn't impossible, but they put up a lot of obstacles to do it (lots of residency requirements, which seem fair enough).

To be fair, Chinese non-residents of first tier cities also face restrictions, and even residents may face limits on e.g. the number of houses they're allowed to own.

Yes, though foreigners have additional hoops to go through to show residency. Also, foreigners can never obtain hukou even if they are resident for a long time and own property, nor do they get school benefits. so there is little incentive for us to buy rather than rent.

There's reasons for these sorts of policies that go beyond housing prices. For instance, too many vacation/investment properties makes it harder for cities to provide services. How do you forecast demand for electricity, gas, water, trash removal and schools when non-resident owners are using those services sporadically or not at all? These kinds of services all benefit from higher population density and ownership by absentees makes it harder for city governments.

It would be nice if these laws were written in a less xenophobic fashion (i.e. allow ownership for citizens and permanent residents who've lived a certain number of years in country), but these kinds of policies have their purpose, even if they don't solve the housing affordability problem. It's in the interests of a city/country to have the people who own property in it be people who are committed to living there and caring about the community.

I would need numbers to be able to agree with you that foreign investment isn't a driving factor in housing costs.

Wouldn't you also need numbers to arrive at the implication that foreign investment is?

The numbers, at least historically, have always been hard to find, but the macro economic theory and indicators are generally quite boring and straight forward: employment stays high and household incomes improve, interest rates drop, lending and leveraging increases to household, supply is inelastic, house prices rise.

Everything lines up pretty well, so why look to blame foreigners (who, even at the most generous estimates on what data does exist, are still a minority).

If the numbers are hard to get, then it’s difficult for you to say whether foreign investment is or isn’t part of the problem.

Well, one can use ockhams razor and plug the aggregate finance stats and household numbers in for each country: foreign investment will likely be related to the residual. That is, whatever amount is left over after domestic statistics and aggregate lending are taken into account. We don't have an accurate primary source for foreign investment, but we can reason.

The rba website would be my first stop in aus for aggregate finance stats available publicly. The Abs has some construction/hiding investment data, but there are some issues with definitions you'd need to take into account. And our neighbors across the pond, although I'm not a kiwi, I imagine will have very similar structures and data.

Additionally, such a simple model explains house prices quite well since the 1990s, across various markets with various levels of foreign investment, so we would need very good reasons to insert a "foreign investor" cause in there.

That's literally what your parent commenter is getting at...

People in Canada blame foreigners too for house prices in Vancouver and Toronto but recent surveys show that foreigners only make up about 10% of purchasers. We've had low interest rates too and a vibrant economy. The federal government raised interest rates, changed mortgage terms and increased fitness requirements to stop people acquiring mortgages they can't afford.

The 10% figure that is constantly tossed around is garbage, it was calculated by counting number of owners that voluntarily declared they were foreigners.

Many new condo developments in Vancouver and Toronto are offered for sale in Asian countries exclusively before Canadian citizens can even make an offer on them. If you drive around Toronto there are real estate signs openly advertising areas that don't have a 15% foreign buyer tax.

The RCMP recently busted an elaborate Chinese money laundering ring in Vancouver that was processing $500 million/year in foreign cash alone. Much of it was being used to purchase real estate in Canada. The last article I read mentioned Canadas laws are so lax the authorities couldn't even seize the real estate directly involved in the scam because it was owned by Chinese citizens through shell corps.

yeah but 10% is huge when you consider that's all inflow, not people selling one house to purchase another, not to mention historically low vacancy rates in both cities.

You might be right. Parent OP doesn't specify if it's 10% per year. Compound growth would be huge over several years.

Also, Auckland has had probably more immigration than Australia, at least for the last few years.

That said, dropping prices by 10-20% would mean absolutely nothing for an average labourer.

It's per year. Before the foreign buyer tax in Vancouver, there were parts of the city where 20% of purchases were made by foreigners (Burnaby and Richmond).

10% is a lot for driving market prices.

That's true.

Yet I've heard from one realtor that in some suburbs of Great Vancouver 15% of properties stay empty - pure investment.

Vancouver is not the city to live in anymore. Problem is that it is not the city to work in too. Too long commutes - 2 hours to spend on road. That means work day is not 8 hours but effectively 10. That means people asking and company offering higher salaries.

That housing situation hurts all other businesses except of real estate quite a lot.

10% is a lot for driving market prices only if they live in those houses or leave them empty or massively overpay.

But most foreign buyers in these markets are buying to profit, and rent out the properties, and so only really contribute to balancing rental and sale prices.

A lot of them are not buying to rent out, especially if they are Chinese where in china renting out doesn't make sense. They sit on the properties empty as pure speculative plays.

I don't know Australia or New Zealand, but in London that is demonstrably not true: The proportion of empty properties in the areas that are attractive for investment is the same as elsewhere, and the proportion of empty council housing is pretty much the same as empty luxury housing. As it happens, most long term empty properties are empty for other reasons, such as waiting for re-development of the property, or large scale renovations and the like, or issues with sorting out ownership following death etc..

Sure, a few are left empty by owners who just don't care, but there's very little indication this number is high. Especially as in most countries there are rental management companies that makes it trivial to rent out a property even if you're an absentee landlord.

I don't know about London, but in lots of these places, occupancy is determined on the honor system. They don't check power/water consumption or lights on at night like other places. In china, you just need to count the lights on at night to see how big the problem is, or peep through the door to see that the unit is still not even renovated. They did a study a while back using power consumption stastistics that was quickly hushed up as a state secret.

In Vancouver, the problem is so bad that local shops are going out of business for popular speculative properties because their just isn't enough residents to use them, even though prices are sky high and the developments are all bought out.

Speculation always drives empty units.

If you’re well capitalized it is often cheaper and less hassle to leave them empty. Renting is a pain in the ass and makes unloading the property harder.

Not sure I understand what you said.

Example: I want to hire 10 developers. There are no places to live with price tags less than 1.5 mln in 1 hour commute radii from here. What would be my options? To pay them enough salary so they can afford mortgages? Cheaper to move the whole business to Eastern Europe / Russia then.

I don't understand what you think the relevance of that is to the effect foreign buyers have on house prices.

The house market is split between people buying and renting. When people buy as an investment, it does drive up purchase prices, but unless they leave it empty rather than rent out, it drives down rental prices by increasing supply. Rental properties also tends to provide more density, as they are more likely to be occupied by sharers, and so increasing the rental supply is likely to soak up more demand than the reduction in purchase opportunities. Eventually the prices reach some degree of equilibrium, because bidding up the purchase prices much quickly becomes unprofitable as rental prices are pushed down.

Ultimately what is driving the cost up is mainly down to more people with enough money who wants to live in a given location, not investors, as if there wasn't demand to live there it'd quickly prove a bad investment.

> the solution to high house prices is ... tax capital gains, limit leveraging ability, implement a land based tax

Your solution to high real estate prices is to make the investment less attractive by increasing taxes? What does this gain for the new buyer?

You left out my other measures :p

Obviously, it's very hard for me to be specific to each market, so those are high level principals.

It gains for the new buyer an average falling of house prices, under the assumption that we are talking about a later period market that has seen asset prices rise due to leveraged investment by primarily high net worth holding entities looking primarily for capital gains of of asset price movements in an illiquid and inelastic-supply market, rather than fundamental connections to longer term investment/income flows and local income opportunities. The logic is that this disproportionately targets the leveraged investors regressively compared to the local home buyers.

Now there's also an argument to be made that if you encounter a market that is not in such a state, it could be individually rational for a new buyer to buy into said market, then lobby for policies which increase demand while removing said policies/barriers for themselves, thus trying to turn such a market into our common current situation now they have become a property holder, but in short, we have to try for policies that allow openness for sensible new investment while still tying values to local incomes, services and infrastructure funding, and long run returns.

Consider negative gearing: This is a tax break given to investors who do not live in the house. Eliminating this tax break would be beneficial to people who want to buy a house to live in because they would suddenly be competing with fewer investors.

More generally, harmonising the tax rates between real estate and other asset classes would also lead to more efficient allocation of resources, benefitting everyone.

Well yeah, obviously. Anything that reduces the profitability reduces the appeal to investors, which decreases price pressure, which leads to price falls, which ideally falls into a virtuous cycle of falling prices and falling investor demand until you have sane prices again. You'd have to hit it pretty hard to actually get that going though; this policy won't do it alone.

For new home buyers lower prices is great. For the economy lower prices is great (the initial massive losses will be rough, but going forward it means far less overhead on all Kiwis with that interest money going elsewhere in the economy, and in general the money going into non productive real estate speculation will go to more productive areas of the economy).

> For new home buyers lower prices is great

Increases taxes to "lower" the price doesn't lower the total cost of ownership, it just hides it by reducing the potential gains (which are _priced into_ the sale price).

I wonder how society functions at all, with the "solutions" I see ...

> Increases taxes to "lower" the price doesn't lower the total cost of ownership, it just hides it by reducing the potential gains (which are _priced into_ the sale price).

That is true, but you're missing the point. Given that the reduction in potential gains means that speculators will (to some extent) exit the market this means that demand and therefore prices will drop further.

Additionally non-investors cannot typically realise their "gains" (they don't exit the market to cash them in, they move to other houses which have had similar gains and so have no net gain) and so they're useless to them. Losing those gains doesn't harm them, but the lower price does help them.

I wonder how society functions at all, with all of the poorly "thought" out criticisms of solutions that I see...

> What does this gain for the new buyer?

Less competition from landlords

There are a lot of weird arguments about this that seem to work of the idea that because there aren't really that many foreign buyers, ergo they don't have much effect on the market.

Agreed that capital gains and leverage have a lot more do to with it, but I don't think Australians are necessarily ready for "zone/invest appropriately" (and fair enough - so we have to watch our cities transformed to megacities?)

> "I want afforable housing for my children that doesn't make my property prices drop!"

There is actually a very simple solution to this problem: build up.

Nailed it.

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