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!

Submission to the Local Government Commission on Reorganisation of Wellington Local Government

You will be aware that there is a push for a Wellington supercity. Here is our submission to the Local Government Commission:

3796322_origSubmission to the Local Government Commission on Reorganisation of Local Government in New Zealand

1 March 2015

1. Who we are

We are a political party that was started in 2011. Our goal is to have a just and sustainable economy that mimics nature in its organisation. We want a tax system that taxes what you hold or take not what you do or make. We want a money system where money is created without interest by the people not by commercial banks. We want a welfare system that encourages sharing, honesty and intimacy. We want open government and participatory democracy, including participatory budgeting.

2. We do not favour the proposal in its current form but would recommend an entirely different form of cooperation and sharing. While we are in favour of the organisation of a larger unit, not all power and control should go to the central body. Your model does this. All revenue is collected centrally and it does not appear to be shared fairly. All major decisions appear to be made centrally or by unaccountable Council Controlled Organisations. This is not nature’s model. Although we understand that ‘finance
follows function’ it is the central organisation that does all the deciding in your model and this is unacceptable.

We like both big and small and so we commend working on the organisational model from scratch. We believe that each small community have its own unique nature and be in a state of constant negotiation with the nearest big centre and with the centre. As far as possible it should recycle within its own community. When there is a major financial decision to be made there should be participatory budgeting.

3. Organisation of government should resemble nature. Nature has complexity, continuous recycling of energy and matter. There are managed boundaries. In nature there are systems within systems and wholes within wholes. There are well designed feedback loops for constant readjusting towards equilibrium. There is continuous self-organisation and response to stress or change. In nature there is no conflict between the needs of the larger whole and the needs of individual cells or organs. n nature decision making is spread. Cooperation supplements competition. There is diversity and coordination of parts and an awareness of the whole. Since for any whole part the energy and resources in must equal the energy and resources out, it is critical not to deplete resources from the periphery or it withers and that is not good for the whole. CCO’s must be managed on this principle.

4. This requires the reinstatement of paid community boards and the right of local communities to elect their own community board. Democracy costs money and we should not sacrifice democracy to starve the periphery of representation. There needs to be a balance between efficiency and resilience. Nature manages quite a lot of replication. It saves energy and resources by its superb organisational principles. Although under this model Local Boards (formerly councils) have the choice to have local
committees (previously Community Boards), it must be remembered that Kapiti Coast District Council in 2008 was one vote away from disestablishing Community Boards.

5. As a second best alternative please at least recommend legislation to require local representatives to call public meetings to discuss major budget decisions at local level and give them the money to do this.

6. CCOs must be answerable to elected representatives and the LGC must make it clear how this is to happen. These have largely been responsible for the fact that both Rodney and Waiheke are now working to escape from the Auckland supercity. We need more information on CCOs and their powers.

7. We endorse the submission of the “Land” Rent for Revenue and Justice Association of New Zealand where it recommends that in Local Government reform a larger entity should reinstate a rating system based on land value alone rather than capital value.

We believe in the principle “location, location, location”. Where there is a location that gives access to more services like infrastructure, commerce or nature, it is the land that goes up in value. Because we should pay for what we hold, we should pay for our continuing use of the land.

a. It is a progressive tax. Rating on land value alone means rates are lower for more ratepayers. Hence where a poll has been taken –

a situation that existed for decades – the public has has always chosen land value rating.

b. It discourages sprawl and saves public money. Since sprawl leads to a demand for building infrastructure it is essential financially to have a rating system based on land values. When this happens, landowners will either sell underused sites or use them appropriately. Capital value rating results in cities with holes in as development often “leapfrogs” outwards in search of cheap land.
Wellington should remain compact and we should encourage compact development in each town within the region.

c. There should be public ownership of infrastructure. The larger council should own and coordinate the infrastructure – the natural monopolies of water, main roads, rails, pipes, wires, ports and airports. Where possible the operation should be leased to private operators at market rentals.

d. It discourages speculation because those who do not use valuable land properly are penalised.

e. Land value rating encourages building and improvement of properties, whereas capital value rating discourages it by penalising it.

This is good for business. It is no good arguing that Wellington economy is not flourishing and then putting in a rating system that discourages economic activity.

Visitor levy Bill illustrates the commons of local authority infrastructure

Yesterday I happened to turn on a Parliamentary debate on a Bill called the Southland District Council (Stewart Island/Rakiura Visitor Levy) Empowering Bill. The legislation would give the council, whose rating basis is very small, the right to charge visitors up to $5 to pay for the island's growing tourist infrastructure. It would be expected to raise about $250,000 a year.

I was heartened by this debate. Not only had the Select Committee had a very collegial discussion on it, but there was little opposition in Parliament, other than worrying that other councils might follow suit. I hope they do. Far North District Council could be one.

The infrastructure of roads, sewers, community halls, water, wastewater and stormwater is part of the local commons. It was built by the people and belongs to the people so the people have the right to charge others for the rent of it, no matter how temporary.

Our national built infrastructure of our roads, dams, power stations and electricity network is similarly part of our commons and should never be sold off. The sweat of our nation's grandfathers is in those dams. The vultures are coming to get it, including the land. Those who would sell it are guilty of treason. And they are coming to Greece right now. Imagine selling off the Parthenon, the cultural commons of the Greeks.