Reflecting on foreign ownership

[An Australian website yesterday reproduced, without my permission, my entire post on the new government’s immigration policy, running it under the heading “Is Jacinda Ardern a fake?”.   That heading does not –  even in the slightest –  represent my view.  I’m assuming the new government will do as they said in their manifesto.   And while I’m a bit sceptical as to how committed the new Prime Minister really is –  the policy having been adopted under her predecessor and she never having talked about it in public fora – the point of the article was (a) that the policy itself does not represent any significant change in the likely future contribution of immigration to population growth, and (b) that various overseas commentators have taken the, quite clearly laid out, Labour policy as something much more dramatic than it actually is.]

A few weeks ago, my 14 year son, mad-keen on ancient history and starting to study economics as well, brought home from the library a book about the economy and society of ancient Greece.  I’m not sure he read much of it, but I found it fascinating.   Among the things I learned was that the ancient Greek states, Athens most notably, generally banned foreigners – even resident foreigners – from owning land.   These states were typically actively engaged in international trade, and often encouraged foreigners with particular specialised skills to settle among them.  So it clearly wasn’t an autarkic approach –  some sort of isolation and national self-sufficiency.

But it caught my attention partly in the context of the change of government here, and the proposed new restrictions on non-resident foreigners being able to purchase existing dwellings.   But the issue goes wider than that, and the ambivalence about foreign investment and foreign ownership of New Zealand assets dates back decades at least.    And the Labour-New Zealand First agreement commits to

“strengthen the Overseas Investment Act and undertake a comprehensive register of foreign-owned land and housing”

This in a country where the OECD already rates our existing restrictions on foreign investment as more severe than those of almost any other advanced country (even if there is some genuine debate about how restrictive our screening regime –  what counts in the index –  actually is).

Of course, the proposed ban (which could yet turn into a heavy tax, to get around FTA constraints) on foreign purchases of existing properties, isn’t really much of a ban on foreign ownership at all.  Non-resident foreigners would be able to purchase a brand new house, with no particular restrictions, but not an existing house.    Since new and existing houses are, to a considerable extent, substitutes –  especially if you aren’t planning on living in the house – it isn’t even clear why the proposed ban would do more than throw a little sand in the wheels.   And land-use restrictions have been the main source of driving house+land prices far beyond sensible levels –  the best alternative use of those resources.   So it isn’t clear why a restriction on non-resident foreign purchases of existing houses will do anything to lower the price (increase effective supply) of developable urban land.   If governments can’t, or won’t, fix the land market, there might be more logic in a total ban on non-resident foreigners purchasing dwellings in New Zealand.   Were there to be strong evidence of a significant effect on our market of such non-resident foreign purchases, I could see a reasonable second or third-best case for such a restriction.  I’d prioritise the ability of our own people –  immigrant or native –  to buy a house+land over the freedom to sell to non-resident foreigners.    That’s a value judgement, but one I’m comfortable with.

To be honest, I’m not sure what to make of the data we have.  Lots of people are quite sceptical of the LINZ data, but I’m still struck by how high the non-resident numbers actually seem to be, at least in Auckland and Queenstown (the numbers are very small elsewhere).   For the first six months of this year, almost 5 per cent of Auckland gross sales were to buyers wholly or partly non tax residents of New Zealand.  In Queenstown-Lakes, the proportion was more than 10 per cent.   There were non-resident sellers as well, of course.  And some of those people (on both sides) were New Zealand citizens –  eg a New Zealander who has settled in Australia, no longer treated as a tax resident of New Zealand, and a few years later sells a New Zealand property.  But at a time when Chinese data show that capital outflows from China have hugely diminished

cap outflows

it is rather surprising how many purchases (net) were still being made by Chinese tax residents, even on the LINZ data with all its limitations.    (In Auckland, net Chinese purchases make up more than the total net foreign purchases –  ie people tax resident in other countries were net sellers.)   And recall that China is the issue simply because the place is currently so badly governed –  absent the rule of law –  that its own people don’t feel safe keeping their money in their own country: we never had an influx of Japanese, French or British purchasers.

With a well-functioning urban land market, sales of houses/apartments to non-resident foreigners  –  even ones that just sat empty –  could be just a modestly rewarding export industry.   But we are a very long way from that sort of well-functioning market.

In Eric Crampton’s piece the other day, he highlighted that the proposed restriction would affect those here on work visas, as well as those who were not resident at all.   If so, that was something I hadn’t realised.   But his argument against drawing the line there wasn’t particularly persuasive

If someone is building a life here, it shouldn’t matter what visa they’re on.

But it does.   If you are here on a student visa, or a temporary work visa, you might well hope you are now on a path to “a life here”.  There might even, in some cases, be an implied expectation that that is how things will turn out.  But New Zealand has not made a decision, at that point, to grant your wish.  It does that only at the point where you get a residence visa (and then permanent residence).  At that point we’ve said you can stay,  but not before.  If there is going to be ban or a tax, I don’t have a strong view on where the line should be drawn (there are avoidance issues wherever it is drawn).  In practice though, not many people going to another country (or even another city) for just a couple of years will buy a house –  the transactions costs are just too high –  so if we are going to impose restrictions, I’m not convinced drawing the line in a place that banned those on temporary visas would be particularly problematic.

But restrictions on non-resident purchases of urban dwellings are mostly a second-order distraction from the real regulatory failures that have rendered house prices here –  and in similar places abroad (eg Australia, UK, California) –  so unaffordable.

Perhaps more sensitive, and more difficult, issues are around other foreign ownership issues.  In reading around how they did things in Athens, I noted that foreigners might not have been able to own property, but they had the same access to the courts as citizens.  These days, however, we –  and many other countries –  go one further and give foreign investors better access to dispute resolution than we provide to domestic investors, through the investor-state dispute settlement (ISDS) provisions included in numerous preferential trade and investment agreements, including TPP (and presumably the replacement for it, now close to finalisation).    I wrote about these provisions back in 2015, quoting a writer for the New Yorker

“these provisions have been opposed by an unusual coalition of progressives and conservatives”

and a contributor to –  not exactly left-wing – Forbes magazine that ISDS provisions represent a

“subsidy to business that comes at the expense of domestic investment and the rule of law”

In a country with a good quality legal system, it should simply be offensive and unacceptable that we provide foreign investors access to different courts and dispute settlement procedures, under different rules, than are available to domestic firms (even in the same industry).   Equal status before the law is –  or was –  one of the cardinal principles of our democracy.    At very least, citizens should always have at least as good rights as non-citizens or non-residents.   (And that should apply to our citizens when operating in other countries, relative to the citizens of those countries –  but that is an issue for those governments, not ours.)

What of the foreign investment itself?

There are easy cases, at either end of the spectrum.  I don’t suppose anyone much is going to have a problem with a foreign investment fund owning an office block in Queen St.  And I don’t anyone would have opposed restrictions if, say, the Soviet Union had found willing sellers for the whole of Stewart Island.

The hard stuff is where to draw the line between those extremes.   There is a case –  I think generally quite a good one –  for a pretty relaxed view for most potential buyers and most potential assets.  In part, that is a property rights view.  If I own an asset and want to sell it, government restrictions on who can buy the asset lowers, probabilistically, the price I can command.  It is, in the jargon, an uncompensated regulatory taking.     Then again, a lot of the value of any (location-specific) asset arises from choices society has made collectively, about institutional quality, rule of law, good governance etc.  Auckland airport, for example, wouldn’t be worth much if New Zealand were an ill-governed hell-hole.

There is also the argument that the New Zealand and, in time, New Zealanders generally will benefit most if the assets are owned by those best able to utilise them.    When foreign investors bring technology or management expertise to a New Zealand industry or opportunity that isn’t as developed here, it is likely that in time there will be a wider benefit to New Zealand.  That was how, for example, Tasman Pulp and Paper was set up, under government sponsorship in the 1950s.  Or Comalco.  (And, yes, I deliberately choose examples where there might be some doubts as to whether these firms should have established here in the first place.)

There are also diversification arguments.  It bothers some people, but doesn’t really bother me, that most of our banking system is foreign-owned.  There are some possible downsides –  and we might have been better off if the foreign ownership was not so concentrated in Australia –  but my reading of the international (and New Zealand) experience is that we are probably better off (more stable) for having a largely-foreign owned banking system.

There are also bureaucratic competence/incentives arguments. Our current overseas investment act in many cases requires demonstrating that a proposed foreign purchase would be “beneficial to New Zealand”.   Beyond the evidence of, say, a foreign buyer being willing to offer the highest price, how comfortable can we be that officials and politicians have the ability or incentives to make those judgements correctly?

There are also arguments about debt vs equity.    You might, in some cases, worry about control passing to foreign owners.  But if domestic owners are reliant on lots of foreign debt there can be different, but at times more intense, levels of vulnerability.    Debt can be called up, or simply not rolled over.

Foreign investment has played a significant part in New Zealand’s economic history, and its economic development.  Sometimes in quite odd ways: the protectionist insulationist policies of post-war New Zealand encouraged quite a high degree of private direct foreign investment, as the most cost-effective way for foreign firms to get their products into the New Zealand market (inefficient and costly as it may have been for New Zealanders).  But my reading of the New Zealand evidence and data is that foreign investment restrictions aren’t to any material extent what holds New Zealand’s productivity performance back.  It is a more a case of there being too few good profitable new potential investment opportunities, whether for domestic investors or foreign.

None of this is really an argument for a laissez-faire approach, even if I’d still be more hands-off than most New Zealanders might.      National cohesion and national identity aren’t easy to pin down, but are both real and important.  And part of that –  perhaps especially in a small country –  is the control/ownership of land.   I find it quite plausible that there might be international agricultural operators who could add new and different value to New Zealand operations through ownership and management of substantial parcels of agricultural land.  But if, on the other hand, a growing number of wealthy offshore people simply wanted to own South Island stations and install local managers to farm much as they always have, I also don’t care very much if political unease is real enough that we end up simply saying “no” to such purchases on a large scale.  Again, at an extreme, if non-resident non-citizen buyers ended up owning 80 per cent of the land in some locality –  be it Northland or central Otago, or wherever –  then I think we’d have undermined something about what it means to be New Zealand –  given undue weight, including in local government, to the interests of people who aren’t part of this polity – in that area.     A country is some mix of people in some specific place; a bundle of tangible people and land, not just an idea.

How real are those particular risks?  I’m not sure –  perhaps the new register will help give us a better sense.  And there are plenty of countries –  other open liberal societies – that place few or no restrictions on such purchases.    But perhaps things are a bit different in a small country?

And then there are the national security dimensions, which seem to be treated too lightly here.  A standard response is “but the local government can always regulate things” .  I don’t think it is typically an adequate response if, say, a hostile foreign power owned key telecoms networks or ports/airports: regulation and governments just aren’t that good, and can also become too responsive to the interests of the overseas investors.    Of course, confronting this issue also involves identifying the minority of countries that count as potential “enemies” and, on the other hand, which are countries where there is (a) a substantial commonality of interest, and (b) where investors can be reasonably assumed to be working in their own interests, not those of their home governments.   At a time when the Soviet Army was just across the border, the West German government would have been crazy to have allowed Soviet interests to have purchased and controlled major West German infrastructure or technology assets.   We’d have been crazy to sell Stewart Island to Soviet interests.

Today’s Soviet Union is China, with the difference that these investment hypotheticals are increasingly real, used as a direct means of extending political reach.   That is nothing about race, and everything about (geo)politics.  I don’t think that taking these issues and threats seriously means banning all, or perhaps even most, Chinese foreign direct investment.  But it means a greater degree of realism, than tends to have pervaded recent governments, that their interests are not our interests, that all or most Chinese corporates are effectively under the thumb of the government and Party, and that not all voluntary transactions are likely to be beneficial for New Zealand as a whole even if they benefit both the buyer and the immediate seller.

There is no particularly strong conclusion to this post.  Drawing appropriate lines –  and translating them into legal rules –  isn’t easy, and that is often a good reason for restraint.  And yet neither is defining, or  fostering and sustaining, nationhood.  But that something is hard isn’t an excuse for simply ignoring the potential issues.  Part of doing that well is perhaps first fostering a compelling and convincing sense that governments are governing in the interests of New Zealanders as a whole.  Of course, different people will see those interests, and the policies that best serve them, differently –  that’s politics. But finding the right answers –  as perhaps around immigration –  is unlikely to proceed best by simply exchanging slogans.

21 thoughts on “Reflecting on foreign ownership

  1. I wonder what constitutes a foreign buyer? The 1 million New Zealanders that live overseas that do buy NZ property? What about companies? What percentage ownership constitutes foreign?


    • There already definitions in the Overseas Investment Act – that sometimes render companies one might think of as iconically NZ, as foreign companies for these purposes.

      I presume we will see detail shortly on how they propose to draw the lines for the house purchase ban/tax.


    • The OIA states that any entity that has more than 24.9% foreign ownership is a foreigner for the purposes of the Act… so NZ companies that have a diverse shareholder base, such as Fletcher Building are treated as foreign because more than 24.9% of its shares are held overseas (Australia mostly).

      There are the provisions of the act on land ownership, there are also provisions for leases… so if a foreign entity leases a property for more than 3 years then they have to get OIO approval – the conditions are less severe compared to ownership, but its pretty nuts that a lease to occupy requires OIO engagement, esp when the property is likely owned by New Zealanders!


  2. “Commitment to a comprehensive register of foreign-owned land and housing”

    Have given some thought to this. What will be the purpose of such a register. Will it be a private undisclosed non-public make-work exercise?

    It’s only value will be if it is available on line in the public domain and land holdings are cumulative and all additional acquisitions require the aggregate holding to be re-submitted to the OIO process


  3. NZ has more dual citizenship relations than any other country.
    I have a family member who this morning started an investigation of her dual citizenship – the NZ end is solid with certificate and photo to prove it but the other country well we are not so sure. A similar issue applies to politicians in Australia who wake one morning and discover they are really Kiwis.
    So what happens to my family member if she decides to renounce her NZ citizenship – all her possessions automatically change to the foreign owned category?


    • if you are a NZ resident the OIA doesn’t apply – so your family member could give up NZ citizenship, but as long as they are able to be here as a resident then its all OK


  4. “But if domestic owners are reliant on lots of foreign debt there can be different, but at times more intense, levels of vulnerability”. – seems to me, that is where the country is at and in no small part due to the dysfunctional land market. On the latter, struggling with the logic that all these new houses (available to foreign investors) will be built side by side and in a relatively uniform manner to drive down the final cost but that final cost will still reflect land priced in line with current market values (e.g. HNZ asset revaluation reserve current stands at $15.4bn)? What if HNZ land was priced at historical cost?. Deflating land values when you are a debtor nation – beats me….


  5. Michael you are lucky your son is interested in society. Wrt classics Hippodamus was an early urban planning theorist. He championed grid street networks and theorized that land use and society should be divided into public, private and spiritual spaces. In the modern day the NUY guys Alain Bertaud, Solly Angel etc advocate the same with their Making Room plans.


  6. Yes the ancient Greeks have a lot to teach us. I totally agree with your negative characterisation of Communist China. Every sale of New Zealand farmland to a Chinese corporation is a sale to the Chinese state and likely alienation of that land to be part of a vertically integrated food security system for China. I am glad the venal National Party have been removed from government ;
    I only hope the new government is not naive about China’s intentions.


  7. The deception promoted by the recent government with the LINZ database is the view that only 3% of buyers are foreign buyers ie they are non-NZ tax residents. The wave of the hypnotist’s hand is intended to help you believe 3% is such a small number it can’t possibly influence property prices

    New Zealand is a place of slow learning

    Brendan @ 14 June 2013
    Both my folks are agents (not secret, real estate), in the month of April, a client working with their branch purchased 64 homes over a 30 day period, that is just ridiculous, average Joe can’t compete with that buying power.

    Stephen Hulme @ 15/06/2013
    This needs to be exposed – NZ is too small to accommodate fleeing capital trying to protect value in our domestic dwelling market – didn’t we just receive anecdotal evidence of a Japanese buyer consummating the purchase of 27 individual properties (in 2 days) before heading back home?

    RBNZ Deputy Governor Grant Spencer speech 15 April 2015
    “Investors set the marginal market prices that are then applied to the full housing stock within a regional market. Indicators point to an increasing presence of investors in the Auckland market and this trend is being reinforced by the expectation of high rates of return based on untaxed capital gains”


  8. From the PNG ‘Application for Dual Citizenship’ form:
    “”If you are a PNG Citizen who holds Dual Citizenship your rights are limited under PNG’s Constitution
    (Sections 50, 51 & 65). Dual Citizens do not have the right to vote in elections, hold public office positions or
    acquire freehold land. There are also restrictions around freedom of information.””

    They take this matter more seriously than us. Probably because they know they are a poor country and semi-foreigners would buy land and votes.


  9. “Since new and existing houses are, to a considerable extent, substitutes – especially if you aren’t planning on living in the house – it isn’t even clear why the proposed ban would do more than throw a little sand in the wheels.”

    Sand in the wheels – that depends on what is the goal of the policy. I think the goal is to reduce non-resident demand for the existing stock of housing, in order to reduce prices (or at least inflation) and rents. That is why non-residents are not banned from new construction.


  10. Following your comment “China is the issue because the place is currently so badly governed – absent the rule of law – that its own people don’t feel safe keeping their money in their own country” – the implication being they seek to move to jurisdictions in which the rule-of-law provides asset and wealth protection

    Seems they bring that flagrant disregard for the law with them and it seems our legal system does not cope well

    “In the last month we have seen a “property” case unfold that first came to the NZ courts in 2012 as a result of an investigation by journalist Donna Chisholm about a casino high-roller, Land Agent and Amway Salesman. The article says that Lau allegedly made a series of real estate deals which were contrived to make a buck for him and the Asian property investors he represents. It notes that Lau is facing a lawsuit at the High Court in Auckland regarding his investment property dream”

    As the case was in the High Court in 2012 you can deduce the activities were on foot some time before 2012 before winding their way to the High Court

    Anyway – activities since then are not a good read – they document a total and absolute disregard for our law and our culture and our way of life

    Catch him if you can
    New Zealand Law in Action – The casino high-roller who aspired to be a developer – demonstrates how to work the rule of law in NZ
    Augustine (aka) EE Kouh Lau

    Stuff 21 Aug 2016
    Property developer slammed in Environment Court says he is starting a ‘revolution’ against housing bureaucracy
    Poster of a comment wondered what skills shortage the migrants in this article filled

    Stuff 2 Aug 2017
    ‘Slumsville’ developer’s properties bulldozed at ratepayers’ expense 21 Oct 2017
    Another associate of the dodgy property developer, with a company called ‘Jesus (2016) Company Ltd’, defaults on their mortgages

    NBR 24 Oct 2017
    Slum Developer ignores court and jams illegal homes onto residential sites

    NBR 26 Oct 2017
    Bank Chases shadowy associates of slum developer for mortgage arrears

    Google search for Augustine Lau – the amount of legal court ordered fines – Any paid?


  11. So one question is why a foreign ‘speculator’ is so bad compared to a NZ speculator? Because the Govt seems to be supporting NZ based speculators quite strongly…


  12. The details on the work to residence visa are here.

    You’re right that there is no guarantee of a transition from that visa to residence, but it is a strongly advertised path to residence. I can’t see why people on that visa should be counted in a ban on foreigners.

    I disagree with the other bans on foreign buyers, but I can kinda see the logic. If the government wants to ban anyone based overseas from purchasing a house here, then they might need to ban those on student visas from purchasing one too to avoid having folks pick up a couple of courses as a route to buying a house. I don’t see the logic for the work-to-residence visa.


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