It’s been said so often that surely everyone understands it by now. New Zealanders invest too much in property. It’s “unproductive” investment in that it doesn’t create or export anything. It’s often done on borrowed money, which drives up debt. Oh and just incidentally, it prices houses out of reach of ordinary Kiwis (never mind Mum and Dad investing in privatised assets, currently they can’t afford to stay in their own homes).
Bernard Hickey addressed part of this messy picture in his Sunday piece:
All our eggs are in the wrong basket
Finance Minister Bill English made a habit of brandishing one chart in his first few years in the job. It showed how the “good” tradeable sector, which includes productive sectors that export and compete with imports, had languished through the mid to late 2000s under Labour at the benefit of the “bad” non-tradeable sector, which includes government, financial services and real estate.
It was a useful tool to help him argue for a re-balancing of the economy. It powered the “big tax switch” of 2010 that encouraged saving by increasing GST and reduced incentives for residential property investing by changing the tax rules on property depreciation.
The theory was great. New Zealanders would save more, reducing the need for foreign capital. We would also invest less in rental property and more in “productive” assets that generated export returns or competed with imports, improving our trade surplus and our ability to pay our way in the world, which we haven’t done for a while.
Nice theory. Except it hasn’t worked. The chart was noticeable by its absence in the minister’s Budget presentation last week. Dig it out though and it shows the “tradeable” portion of the economy has kept declining since the National Government was elected in 2008 and is now back to levels last seen in 2002. …
All this is happening as the Government forecast in its Budget that New Zealand’s current account deficit will widen to 6.7 per cent of GDP in 2015/16 from a forecast 4.2 per cent of GDP this year as our demand for capital to go on spending outpaces our ability to pay for it.
How to cool the property market and thus redirect investment elsewhere? How to raise some revenue to address the current account deficit? I know, how about a Capital Gains Tax! Labour did all the hard work before the last election, and the proposal was almost universally well received by the experts. Time for the Nats to swallow their pride, and do what’s best for the country. CGT Now. Because taxing paperboys isn’t going to cut it.