The government announced in the budget an intention to investigate the feasibility of introducing a shared equity housing scheme to assist low-income individuals and families to purchase a house. The approach follows overseas examples where the government purchases the house with you, i.e. 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 you get to live in the house. The government shares in the capital gain, but there is no obligation for you to repay the government until the property is sold.
It essentially works out to be an interest-free loan.
Like many dangerous ideas, it looks appealing 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 the symptoms, and not the cause, of the problem.
The perceived problem is that it is becoming increasingly difficult for a segment of society to purchase a house. Providing those who qualify with what is effectively an interest-free loan will certainly help those who are lucky enough to qualify. But the approach has a number of hidden fish hooks.
First, it will help to further inflate house prices – essentially in the absence of the subsidy, the demand for housing would have been lower, which would have put downward pressure on house prices (i.e. making them more affordable). The subsidy will perpetuate the perceived problem, and so makes existing home owners the prime beneficiaries of the subsidy (at the expense of non-qualifying new home buyers and the taxpayers who underwrite the scheme).
Second, it replaces the pricing mechanism with regulatory rules as the rationing device for home ownership. It institutes yet another form of government-determined privilege (to go along with state house tenancy, student loans, KiwiSaver, working for families, etc etc). The one thing that economists generally agree on is that pricing mechanisms provide a more efficient rationing method than queues. Shared equity regimes create queues that will lower the efficiency of the housing market.
Furthermore, it is likely to impose costs on other parts of the economy. By subsidising housing, a shared equity regime will encourage further investment in housing – New Zealand will continue to over-invest in housing at the expense of other forms of investment. As a result, shared equity schemes will contribute to a further erosion in the competitiveness of New Zealand-based businesses. If you are going to support one group, it will come at the expense of another group. If this support comes at a net cost, it implies a reduction in national efficiency and national welfare.
Why is home ownership such a great thing? In a world without taxes there would not be any advantage from homeownership compared with renting. As long as the supply of houses matched the demand for shelter one would expect the net present value of rentals to equate with house prices. The incentive to own houses would be house-specific and relate more to consumption issues (eg getting the kitchen, living area, or view that you desired) and less to investment issues (expected capital appreciation).
Introduce our imperfect tax system and suddenly we introduce a number of strong financial incentives for investing in housing and, with these incentives, a wealth gap between owners and non-owners. At the top of the list is a lack of a comprehensive capital gains tax. Essentially people invest in housing based on expected untaxed capital gains and less on taxed rental income. Indeed owners of rental properties happily make continual losses on their rental properties, as these losses can be used to reduce their overall tax liability. Ultimately they aim to sell their rental properties to fund their retirement years – but of course their tax-subsidised capital gain will be entirely tax free. Land owners typically face the lowest effective tax rates in the country; no wonder land ownership is so popular.
Addressing tax issues such as the lack of a uniform capital gains tax would go a long way towards removing the incentive for over-investment in housing in New Zealand. Removing tax-induced incentives for investing in housing would be a far more efficient and effective means of reducing the inequities in our society that revolve around home ownership than the myriad of counter measures, such as shared equity and KiwiSaver schemes, that have been offered thus far.