| Address the Cause, Not the Symptoms |
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| Thursday, 13 March 2008 21:10 | |
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CRMS points out that "speculation" only takes place when prices rise faster than holding costs. Land-banking is a symptom – not a cause. Several commentators, and the defenders of Metropolitan Urban Limits and other constraints on the supply of land, argue that there is no shortage of available land, and that the apparent shortage is the result of speculators sitting on land-banks and withholding supply. Such commentaries, some of which come from people claiming expertise in economics and finance, overlook a fundamental economic law. There is nothing to be gained from holding on to land unless the increase in value of the land is greater than the total holding costs over the same period. If one has a million dollars tied up in land there is no point on withholding it from the market unless the land value increases by 10 percent or more if the interest rates alone are 10 percent or more. On the other hand, if annual holding costs are higher than the annual increases in value then the landowner has every incentive to bring the land to market. So we should not blame the landowners. We should blame those whose rules and regulations strangle the supply of land and inflate prices. The real offenders are not the landowners, but are the regional and local councils who administer the Resource Management Act and the Central Government for endorsing and encouraging these policies of Growth Management or Smart Growth. The solution is release land for market and reduce compliance costs. Capital Gains tax is an issue only when speculation pays. Similarly, many commentators, insist that the major driver of inflated land prices (and hence the overall cost of housing) is the absence of a capital gains tax on investment properties. However, the absence of a capital gains tax is only an issue when increases in property values are higher than the rates of inflation, or higher than added value from improvements. Capital gains taxes on investment properties have unintended consequences. A nation's housing stock ages and suffers from ongoing obsolescence over time. Old houses (and even not-so-old houses) need upgrading of wiring and plumbing, kitchen design, insulation , and even basic structure to keep the housing stock in line with current market demands. Much of this upgrading of the housing stock is carried out by enthusiastic "do-up" amateurs, who invest their capital and their own "sweat equity" and skills to upgrade houses for on-sale. If we tax their capital gains they will have to enter long negotiations with IRD over the contribution of inflation, their sweat equity, and their skills. Most will find better things to do with their time, and the quality of housing stock will suffer over the long term. Young entrants into the housing market make a greater contribution to this "do-up" activity than regular investors who typically invest-to-rent. Our TV screens document these activities from markets all around the world. They leave the world a better place. And what would the Living Channel do without them? These new entrants will not be competing with the "wealthy dentists and doctors" if the wealthy dentists and doctors find the sharemarket provides better returns than an inflating housing market. Once again, we should address the root cause rather than use a symptom of market interventions to gather more tax revenue and repress healthy economic activity. |
