David Parker has an interesting piece in the Herald, on how the various free trade agreements New Zealand governments have signed affect the ability of New Zealand to restrict non-resident purchases, should it wish to do so. The heart of his argument is here:
The most favoured nation provision in article 139 does apply to existing investments and controls on new investments. If we want to further restrict the sale of farmland or houses to Chinese investors, we can. Article 139 simply requires NZ to treat China no less favourably than other countries. Clause 3 of article 139 means earlier agreements with our Australian and Pacific Island neighbours are not affected, and do not flow into the China FTA. Later agreements do flow through.
National does not believe there should be more restrictions on foreign buyers, and so the South Korean FTA does not contain the protections found in the China FTA. This creates risks if New Zealand moves to restrict or ban South Korean investment in residential property. Screening or bans are allowed for existing categories but not new categories, that is farms but not houses.
Article 139 of the China FTA means NZ can’t properly ban sales to Chinese investors but allow them to South Korean investors. Even the South Korean FTA does not limit the sovereignty of a future New Zealand government to restrict house sales to foreigners, but it does create a risk of South Korean claims.
If Parker’s reading is correct, it does appear to leave some options open. According to the MFAT website, the New Zealand-Korea FTA has not yet been ratified, and so is not yet in force.
Rodney Jones proposed a 20 per cent stamp duty on non-resident purchases in Auckland. Such restrictions or taxes are not a first-best solution. Particularly if the non-resident demand from China is likely to persist over the medium to long term, it would be much better to liberalise land-use restrictions and make it much easier to supply new houses and apartments. It is an export industry. (But if the demand was likely to prove pretty short-term in nature, it might actually be preferable to simply absorb excess demand in temporarily higher house prices.)
But I don’t see any sign of wide-ranging liberalisation of land-use restrictions in the next few years. As I’ve noted previously, I’m not aware of other countries or major cities that have had tight supply restrictions and materially and sustainably liberalised them. Surely it must come some day, but regulation once established tends to linger for a long time. Import controls, from New Zealand’s history, were another good example.
I don’t think there is any obvious welfare gain for New Zealand in allowing extensive non-resident purchases of houses/apartments if governments also make it hard to bring new urban land to market and utilise it intensively in response to changes in demand. There is none of the technology transfer that might be associated with FDI. There is simply a redistribution – windfall gains to those who happen to own property in Auckland before the demand picked up, and windfall losses to those who would have wanted to purchase in the future. And the gain is simply the result of government-imposed and maintained supply restrictions. In that climate, I see no major problem in principle with some sort of restrictions.
And yet, I remain a little uneasy. In terms of accommodation itself – surely more important than home ownership – it is purchases of houses that are then left vacant that have the stronger adverse effects. Houses that are bought and put back on the rental market maintain the supply of accommodation. And yet we have no data on how important this “left vacant” component might be, and I don’t think the new post-October information requirements will provide any data on this split. Given that demand for house-buying seems relatively price-inelastic, even if the “left vacant” component is itself quite small, as a marginal boost to demand it could still be having quite an impact on price.
Perhaps this is where advocates of the Australian rule (“you can buy, but only a new build”) come in. The Australian rule doesn’t seem to have been very effective, but perhaps a similar one could be much more effectively policed if the authorities were serious about doing so? Perhaps it really is the minimally distortive approach if there is to be new regulation at all? The caveat to that proposition is that if the offshore demand were to prove short-lived we could be left with a nasty over-supply of the sort of housing not overly popular with most New Zealanders. An ample supply of (cheap) apartments sounds good, but real resources will have been diverted into building the properties, skewing the rest of the economy. Real resource misallocation tends to be more costly than changes in asset prices in isolation. Perhaps that should be less of a concern starting from current house/land prices than in other circumstances?
I’m usually reasonably settled in my views as to appropriate policy responses. For now, on this issue, I’m not. Waiting for October’s data is a convenient line, but I suspect it is a bit of a cop-out. I am left rather closer to Rodney’s 20 per cent stamp duty than I was previously.