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.

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