Offshore demand for houses – some further thoughts

Rodney Jones has a nice piece on the Herald website about the non-resident property issue, perhaps slightly oversold by the sub-editors as “How he’d solve the property crisis”.  Before non-resident purchases were a material issue, house prices (especially in Auckland) were still hugely distorted by poor domestic policy.

Rodney’s approach to understanding the issue is very similar to that in my post yesterday, emphasising how historically unusual the situation is in which a large economic power has such weak domestic institutions that its citizens are looking to buy individual houses in other countries.  As he notes “to express concern about the potential impact of these flows is not racism”.

Rodney goes further than I would yet do.  He proposes a 20 per cent stamp duty on non-resident purchases of Auckland [residential?] property.  Turnover taxes generally make me feel queasy, and I’m always reluctant to endorse a regional approach to tax policy in a unitary state – which creates its own new distortions.  Since there is probably relatively little offshore demand for property outside Auckland there would be no harm in extending such a tax, if it were adopted, to the entire country.   But I suspect that the terms of our various free trade agreements might be more of a constraint.  Some FTAs might allow such restrictions, and some might not, but the China agreement for example does not allow us to adopt measures that discriminate against China relative to other countries (and we have a strong commitment to an open market between New Zealand and Australia).  And I doubt that such a tax could credibly be sold as a “macro-prudential” measure.  But Treasury and MFAT should be carefully exploring the legal options,  and the implications of our interacting web of FTAs, if they have not already done so.   It is not impossible that there is nothing that could legally be done that would not cause more distortions and costs than they would be worth

Rodney’s is a much more substantive contribution to the debate than the lofty op-ed penned by former Foreign Minister (and head of something called the New Zealand China Council) Don McKinnon.  In this surveillance age, the article is somewhat ominously titled “China listening to our housing debate”.  Then again, perhaps we should celebrate the fact.  We are open society, and have our debates openly.  China doesn’t, and its people are the poorer for that.

Or what of the reported comments of Pat English, executive director of the New Zealand China Council.  He claims that “New Zealand has a superb relationship with China. But Labour has done immeasurable damage to that relationship, due to where the debate has ended up”.   Really?  Where is the evidence?  Of course, he may be literally correct – since any damage is unable to be measured.  But any relationship that can’t stand the strain of open public debate is one of rather questionable value.   And these issues are being debated in many other countries too.

In open societies sometimes mixed messages might be heard.  And actually sometimes ambivalence is real and appropriate.  I suspect we’d be happier, and China’s citizens would be happier and better off, if they had the ability to, for example, buy secure freehold title to property in China. Or a system with the sort of economic governance, and rule of law, that the US or the UK had as they rose to dominant positions in the world economy, that made “capital flight” simply unnecessary.  China would probably be better off if, as an emerging economy, it were running current account deficits (drawing capital in from the rest of the world) rather than current account surpluses.  Of course, China’s brutal authoritarian leaders might be less happy and less secure, but that is scarcely a priority for New Zealanders.

Richer than Australia by 2025? Really……

I opened the Dominion-Post this morning to find this story, reporting the aspiration of the new Wellington Regional Economic Development Agency (WREDA, mostly a Wellington City Council agency) that Wellington should be, by 2025, “the most prosperous, liveable and vibrant region in Australasia”.

Memories of an earlier 2025 goal flooded back.  I helped the government’s 2025 Taskforce with their reports, which outlined policy proposals for how New Zealand might catch up with Australia economically by 2025.  But that was 2008/09, and for a whole country.  At the time, the Taskforce concluded that New Zealand could catch up with Australia over 16 years, with the right set of policies, but it required a fairly major reorientation of policy, across numerous fronts, pretty quickly.

But now there is only 10 years until 2025, and the Wellington City Council (with a bit of help from the Regional Council) wants to make Wellington not just as prosperous as the average Australian city, but more prosperous than any of them.  The Tui billboards spring to mind.  Even one of the more sensible regional councillors agrees the timeframe is unachievable.

In search of any substance behind this ambition, I dug out WREDA’s Statement of Intent.  But there was no substance.  There was:

  • No quantification of any of these goals, or any attempt to illustrate how large the gaps are now.
  • No analysis of the economics of cities.
  • No analysis of the sorts of policy tools that are, and are not, available to local councils, and how much difference they have ever made to regional per capita growth.
  • No analysis (or links to other analysis) of the costs and benefits of the grab-bag of policy ideas they do list.
  • No analysis of what has been done in the past, and what has worked and what has not.

At one level it is just a bureaucractic/political feel-good document.  But these sorts of agendas, together with an ambitious new CEO, tend to become the basis for new council spending proposals –  the commitment of real resources that belong to citizens, with little effective accountability.

I’m all for ambition.  Sadly, I think many of New Zealand’s elites have been too willing to settle for the mediocre economic performance New Zealand has achieved over the last 25 years.  But to the extent that governments can change medium-term economic outcomes, it is mostly central government that matters.  If Wellington is ever the most prosperous city in Australasia, it will be because of choices central government has made, and how the private sector has responded to that improved environment.  Central government controls taxes, most regulation, immigration, education, and so on.  Relative to that list, the difference any council can make is very small – and the track record (sports stadia, street car races, application of land use restrictions, and so on) seems pretty poor.  Of course, central government does lots of crazy stuff too (in a Wellington context, film subsidies), but at least they have the potential to make a lot of difference for the good.

This story, small in itself, is just another reason to be wary of seeing local councils as the solution to problems.  In discussions around housing, for example, some, including the Productivity Commission, have argued that a big part of the problem is councils held back from doing “the right thing” by the lobbying and votes of citizens.  Personally, I reckon that the problem is more likely to be one in which councils pursue their own interests and ideologies with little effective check on those activities by citizens.  Strengthening the property rights of citizens, and reducing what damage councils can do, seems a more promising, and economically efficient, way forward.

In the meantime, perhaps the Wellington City Council could get on with stuff we must actually look to councils to do.  The seawall at Island Bay was badly damaged (photos here) in a storm more than two years ago.  Since then, we’ve had a long consultative process, but there has been no progress in actually fixing it up.  Simple really.  They can do it. It will make a material difference to people living here now.  But instead we get this pie-in-the-sky aspirational stuff, with little or nothing behind it.