The government announced in the budget anintention to investigate the feasibility of introducing a shared equity housingscheme to assist low-income individuals and families to purchase a house. Theapproach follows overseas examples where the government purchases the housewith you, ie a shared equity arrangement where the government could own say 30%of the house. The house is co-owned between you and the government, but youget to live in the house. The government shares in the capital gain, but thereis no obligation for you to repay the government until the property is sold.
It essentially works out to be aninterest-free loan.
Like many dangerous ideas, it looksappealing on the surface and delivers some quite attractive benefits. Unfortunately when something appears to be too good to be true, it usually is.
The proposed solution addresses thesymptoms, and not the cause, of the problem.
The perceived problem is that it isbecoming increasingly difficult for a segment of society to purchase a house. Providing those who qualify with what is effectively an interest-free loan willcertainly help those who are lucky enough to qualify. But the approach has anumber of hidden fish hooks.
First, it will help to further inflatehouse prices – essentially in the absence of the subsidy, the demand forhousing would have been lower, which would have put downward pressure on houseprices (ie making them more affordable). The subsidy will perpetuate theperceived problem, and so makes existing home owners the prime beneficiaries ofthe subsidy (at the expense of non-qualifying new home buyers and the taxpayerswho underwrite the scheme).
Second, it replaces the pricing mechanismwith regulatory rules as the rationing device for home ownership. Itinstitutes yet another form of government-determined privilege (to go alongwith state house tenancy, student loans, KiwiSaver, working for families, etcetc). The one thing that economists generally agree on is that pricing mechanismsprovide a more efficient rationing method than queues. Shared equity regimescreate queues that will lower the efficiency of the housing market.
Furthermore, it is likely to impose costson other parts of the economy. By subsidising housing, a shared equity regimewill encourage further investment in housing – New Zealand will continue to over-invest in housing atthe expense of other forms of investment. As a result, shared equity schemeswill contribute to a further erosion in the competitiveness of NewZealand-based businesses. If you are going to support one group, it will comeat the expense of another group. If this support comes at a net cost, itimplies a reduction in national efficiency and national welfare.
Why is home ownership such a greatthing? In a world without taxes there would not be any advantage from homeownership compared with renting. As long as the supply of houses matched thedemand for shelter one would expect the net present value of rentals to equatewith house prices. The incentive to own houses would be house-specific andrelate more to consumption issues (eg getting the kitchen, living area, or viewthat you desired) and less to investment issues (expected capitalappreciation).
Introduce our imperfect tax system andsuddenly we introduce a number of strong financial incentives for investing inhousing and, with these incentives, a wealth gap between owners andnon-owners. At the top of the list is a lack of a comprehensive capital gainstax. Essentially people invest in housing based on expected untaxed capitalgains and less on taxed rental income. Indeed owners of rental propertieshappily make continual losses on their rental properties, as these losses canbe used to reduce their overall tax liability. Ultimately they aim to selltheir rental properties to fund their retirement years – but of course theirtax-subsidised capital gain will be entirely tax free. Land owners typicallyface the lowest effective tax rates in the country; no wonder land ownership isso popular.
Addressing tax issues such as the lack ofa uniform capital gains tax would go a long way towards removing the incentivefor over-investment in housing in New Zealand. Removing tax-induced incentives for investing in housing would bea far more efficient and effective means of reducing the inequities in oursociety that revolve around home ownership than the myriad of counter measures,such as shared equity and KiwiSaver schemes, that have been offered thus far.
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