Auckland home owners are “richer” than last year by $64 billion

The average price for an  Auckland home is now just over $1 million. The media focuses, as they usually do, on how impossible it is nowadays for young people to buy a house, with a side mention of how difficult it is for nurses, service workers and teachers to buy a house, and how the Auckland problem is spilling over to the entire country. There has also been a great deal of publicity in the last six months about homelessness, with a marae in Auckland shaming the Government into action by opening its doors to the homeless for the winter.

But there is another big issue that is almost never mentioned – the lost potential public revenue from land rent. Land rent is what the occupier would pay to the public if the public owned the land. Many have explained that the rise in value of homes is really the accumulated land rent over that period. It is also called the capital gain or unearned windfall.

QV HOUSE PRICE INDEX AUG16

Recent figures from Quotable Values New Zealand allow us to work out the on-paper profit for our country's homeowners and for Auckland's homeowners. This of course is just on-paper, but because it represents their realisable assets it does allow homeowners to do other things e.g. borrow more for other purposes. This calculation acknowledges that the figures are the houses that are sold only. Houses sold in that period were more like one tenth of the housing stock. But if my neighbour's house sells for $1million and ours is similar we know ours could sell for a similar price. Our house value is what a valuer would estimate or better still what the market would pay. Valuers value by looking at what did sell in the district and making comparisons. The bank recognises this as the value of our asset.

And the fact that I had a huge mortgage didn't really make any difference. Supposing I only have $200k and buy a $900k house, selling it a year later for $1 million. I make a profit of $100k because my deposit of $200k was turned into $300k.

Let's first take Auckland where the figures are the most dramatic. 

House prices rose nearly 16% last year. The average uplift in Auckland house prices in that period was $138,781.

Since land values are created by the community around them, by the governments and communities that serve that site, the uplift belongs to the public purse. Rise in property prices are virtually all attributable to the rise in land prices. Schools, hospitals, infrastructure are built by government, central and local, and the private land owner reaps the profit. Businesses arrive, clubs start. Without a community around it, land has little value. (Even agriculture requires transport infrastructure. Land for conservation is usually publicly owned). 

The total uplift for Auckland properties was 461,669 (the number of residential properties in Auckland Council) multiplied by $138,781, or $64 billion.

Sold Home For Sale Sign and House

Now supposing this uplift was publicly captured month by month in the form of a full land rent, as it should be. What would the council do with it?

1. They could give half to the government straight away, leaving $32 billion.

2. They could put aside about $20 billion for infrastructure building and upgrading including rapid transit, and debt relief, leaving $12 billion still to be shared.

3. Sharing the rents is important. So the $12 billion could be given out as a Citizens Dividend to every man, woman and child in Auckland. The population of Auckland is about 1.58 million, making about $7,600 per person. For a family of five that would be $38,000.

That should help a few homeless families!

New Zealand homeowners are $138 billion richer than last year 

There are at least 1,771,2000 residential homes in NZ (2013 census). The average uplift in NZ house prices was the difference between the Aug 2016 price and the August 2015 price, which as $78,196.

So multiplying these two, New Zealand homeowners on paper have assets worth about $138 billion more than last year. The tax take last year was $66.6 billion. So it is more than double the tax take. All this is privately captured when it really should be going to the state. In comparison to the $138 billion uplift for NZ, the GDP last year was about $170 billion.

However there are several political obstacles stopping us from applying these solutions in our current context:

• Aucklanders pay rates. However Auckland Council was introduced by legislation when amalgamation took place. This mandated that the rates were levied on capital values, thus requiring legislation for a change to rating system on land values. There is only miniscule awareness of this as a political issue.

• The viability these days of a centrally imposed land tax is not good, given the fact there are at least three bank lobbyists for every legislator and neoclassical economics is in full bloom. Nowadays the power of the landed and moneyed elite is so much greater in relation to the 99% than it has ever been.

• It has been legally impossible to impose land tax in NZ since 1992, though the PM seems not to know this because it was he that suggested putting a land tax on property bought by foreigners earlier in 2016. The idea died within a day or two. However this law could easily be reversed.

• No politician wanting to be re-elected would advocate a measure that was going to bring down house prices and leave homebuyers with negative equity. A 5-6% land tax would actually be for politicians and doing it gradually wouldn’t work either.

• Imposing a land value tax must go hand in hand with dropping of income tax so this has to be incorporated into the solution.

But all is not lost! The obstacles are not insuperable. Think about the untenable current situation of housing prices and its destructive consequences of widening the wealth gap. We have to start on other ground breaking solutions. Let’s be pioneering here.

A little history might give hope. New Zealand had a Liberal Government in the 1890s that imposed a land tax to break up big land holdings. Then it extended, but unfortunately it was at a higher rate per acre for large landholdings than for smaller ones, which was essentially unfair. This resulted in a new political party dominated by larger farmers. But land tax never reached more than 20% of the tax take, and income tax was gradually increased and extended. The same Liberal Government did however enact legislation to empower local government to hold a referendum where ratepayers could choose between land value rating systems and capital value. This was in place for 80 years and always resulted in the more equitable the public choosing land value rating systems. Cities like Wellington and Napier built on this rating system are compact.

If money buys lobbying power, then we have to be more strategic and try different tactics. This might point to governance reform giving much more power to local authorities and to even smaller governance units. Given that the banks have a vested interest in profiting from the buying and selling of land and from the private ownership of natural resources and infrastructure, a host of local innovative actions may be the surprise option. And this would require huge resistance from local communities that are determined to share land values and preserve natural resource values.

Maybe the old system should be left alone to collapse and die, and the new paradigm system reinvented at local level. We need to ask how land trusts can connect with localised governance units whose revenue is derived land and resource rents. But where would the money come from to buy the land? Maybe we need to create a local currency designed to circulate at an optimal speed. Maybe when there is surplus locally it can be steered from the periphery to the centre of government.

Certainly clever, innovative thinking is called for and it should be all hands on deck for that task!

Private capital gain from houses eclipses government gain from progressive tax

Being a political junkie I have been following the Labour leadership issue closely. I have been addicted to twitter. I have read all the good commentators and I became especially enthusiastic when reading David Cunliffe’s speech called Dolphins and the Dole. It said all the right things. But when he announced he was standing, and just when I was getting really excited about his possible leadership, I heard him endorse higher taxes for the rich. Then I remembered why the policy of the New Economics Party is different from Labour’s.

I recalled a short video I had seen where Fred Harrison, the author of Ricardo’s Law – the Great Tax Clawback so I watched it again.

In this video Harrison visits the Hyde Park area near Harrods in London and says the houses are worth millions of pounds. The location of these houses means they benefit from the park, good transport and some superb businesses in the area. These improvements are the work of the community. It is the community that have added value to that land. The poor in apartment homes has paid for the infrastructire in their taxes. It is the poor who are subsidizing the rising land values of the privileged near Hyde Park.

Harrison says sure, the rich with progressive taxes pay about five times as much tax as the poor, but this is all made up for by the huge gains their well sited homes enjoy from these services to their sites.

I couldn’t help thinking about the houses in Parnell, inner Remuera, Epsom, Herne Bay, Freemans Bay and Orakei. It might be their homes. Yes, we owned one once in Mt Eden and made hundreds of thousands when we sold after 13 years. Although at the time we smiled and patted ourselves on the back for making such a good buy, we knew in our bones there was something really unfair about it all.

In Parnell a home might sell for $2 million and the 12% rise on that house price would bring in an extra unearned $224,000 in the first year. This money rightly belongs to society who provided the infrastructure, built the other homes, made the roads, developed the good schools, the CBD, Newmarket and the boutique Parnell shopping centre.

In swanky Herne Bay the capital gains made since 2000 have been astronomical. As one writer says of Herne Bay; “Nip/tuck surgeons live side-by-side with interior designers, ad agency chiefs, and entertainment lawyers.” (Jane Phare, NZHerald)

In 2008 houses in Herne Bay were the first to average $2 million. Their homes are worth 50% more than Remuera houses. Jane Phare in Dec 2008 said the average house price was $2.19m there, and there had been a gain of 24% in house prices over the last year.

A quick look at trademe shows a few houses for sale in the millions.

Dean Barker bought a house in Herne Bay for $5.6 million in 2007. An article on rising house prices TVNZ Aug 8, 2013 said “in Auckland the rate of increase has been even higher, at 12.8% over the last 12 months.” If Dean Barker had been experiencing an average of 10% yearly rise in property value since then (and this is quite likely), his home would be worth $9.9m today. That is a jump of $4.3 million. Even with the steepest progressive tax system, the government could never charge him this amount in income taxes. And whatever it was his tax lawyers and accountants would minimize it. The difference in the two amounts is what the taxpayers are missing out on by not recouping the cost of the government and community services to Dean Barker’s property.

And if the rise in house values on a $3 million Herne Bay property continues at its current rate of 12.8% a year, next year that house will be worth $384,000 more.

In September, 2012 Auckland businessman Grant Nola and his former Bulgarian tennis pro wife Pavlina sold their bungalow on William Denny Ave in Westmere for $2.25 million - $350,000 above its council valuation of $1.9 million. They had bought it three years earlier for $932,000. This is a cool $1.93m profit in three years – once again money belonging to society not to the owners. A progressive tax rate for him would be nothing but a nuisance to be dealt with by tax lawyers and accountants.

Now just imagine if all those capital gains had been captured publicly instead of by the landowner and the bank which issued higher a higher mortgages. The public purse is missing out on billions. And think of all those young people working for a pittance in cafes, bars and hotels and paying their GST and their income tax. Not fair. Or the taxidriver who made just $3 a hour on his long day’s work. Capital gains on houses in Orakei or Takapuna or Queenstown or Fendalton are in their dreams.

Some politicians, arguing for increased income taxes for the rich, will be telling the public they don’t mind paying this tax themselves. But the wealth of the wealthy comes from land ownership and not from a salary, no matter how high. An owner of a home in an elite street makes money from the monopoly privilege of owning this precious land, while Auckland develops round about him.

The gap between the rich and the poor is not the gap between those who earn big salaries and the others. It is the gap between those who own valuable property and those who don’t own property at all.

If we don’t tax what we use (land and other natural resources) but tax what we earn, then wealth pools with landowners while the poor can’t buy food for their children let alone buy land. The effect of progressive tax systems is minor compared with the gains made from rising house values. Those who have the privilege of living in inner Auckland grow rich on the work of others while those who live in small towns or those who rent grow ever poorer. While the part time professional working for a council pays GST on everything he buys and pays income tax, the landowner watches his house value rise.

I don’t know what the solution is for any one person. Martin Adams whose excellent new book Sharing the Earth, puts it rather more strongly. He says the capital gains you make from your house is really stolen from the public at large.

We must get a fairer tax system, where we tax what we hold or take, not what we do or make.

Rising Auckland House prices are really a tax issue

Rising Auckland House prices are really a tax issue Media Statement July 30, 2013 Rather than ban the buying of homes by people who pay tax in other countries it would be more sensible to impose on them a full ground rent on all urban and suburban properties, according to the New Economics Party. Spokesperson Deirdre Kent said that while it was heartening to see the Labour Party trying to control house prices, they should be focussing on the fact that homeowners who pay tax overseas are not paying enough tax in our country.  “They are coming to our country and expecting huge untaxable capital gains on their house when they only pay rates here”. “It is New Zealanders who have helped increase the value of the land they have bought so the rise in value should be captured by the public.  The best way to do this is not wait till they sell, but charge them a full ground rent every year. For urban sites it might be five percent or over of unimproved land value, depending on the zoning restrictions. (Ideally it should be by auction as this allows for the overvaluing of land at the moment.) This revenue should then be shared by national and local government and ground rent should replace rates.” She said it was the taxpayers of this country who paid for the schools, roads, parks, railways, street lights, community halls, businesses and organisations that gave the site its value. “It is the same when people paying tax in New Zealand go to Australia and buy a house or when John Key buys a house in Hawaii and expects to receive the capital gain without being a tax resident there. Imposing a charge on holding of land is an important way for countries to retain their integrity.” For further comment phone Deirdre Kent 06 364 7779 or 021 728 852      

Change Tax Policy and Control Banks for Affordable Housing, says New Economics Party

January 31, 2013

Media Statement

To get affordable housing we need a tax policy which favours investment in productive enterprises not housing, says the New Economics Party.

“If we don’t control capital coming into New Zealand and then don’t stop it going into housing through our tax policy, it's no wonder we have a housing bubble in Auckland”, said Deirdre Kent, spokesperson for the New Economics Party. “And if we let the banks lend 100% on housing, we are asking for trouble.”

Freeing up land and changing the Resource Management Act is not working, she said.

“Banks are pushing money onto buyers and we effectively have a bubble which will eventually collapse. Wealthy Chinese are buying here to get their money out of China where they are clamping down on corruption. A lot goes into real estate."

No progress will be made towards affordable housing until land tenure is separated from buildings, according to the New Economics Party. Spokesperson Deirdre Kent said “Until we impose a full ground rent - which can replace income tax as a source of revenue for Government - we won’t get any progress."

She said that when homeowners just have to pay the price of the building, the price of the home is halved. “In Auckland where land is on average 60% of the property price, the price would drop even further if a full ground rent was imposed.”

“When property prices rise, it is almost solely because the price of land rises. Generally, the price of the house doesn’t rise. When the public captures the windfall from rising land prices instead of the banks and the private owners house prices will be finally contained,” she said.

She said some Auckland leasehold land fetched a ground rent of 5% of land value at auction and this money should really be public money because it is the public who has paid for the services to that land in roads, schools, sewers and businesses.

“Others have recently been proposing solutions to affordable housing but they are just tinkering around the edges.”