Double bubble trouble

It’s a rare day that I agree with Bill English but he’s right about the danger of another housing boom.

The last bubble has not deflated yet we are already seeing prices start to grow again. There are now projections of 24% growth housing prices over the next three years, in a period when GDP is projected to grow less than 5%. What that means is more borrowing from offshore to fund another round of housing speculation, while underinvestment in productive areas continues. We ind up with more debt, higher interest rates, and more people locked out of owning their own home by high prices. It’s simply not sustainable and it will come back to bite us hard.

So, what can be done about it?

Well, there is a genuine shortage of new housing construction. The Government should take the lead here with a big new state housing programme, which would also boost employment and improve housing condition and health for the poor.

The other big problem is that housing is too attractive for amateur investors. We must make investment in housing speculation less attractive. A simple capital gains tax on second houses (which the Greens have been calling for forever), and changing the tax rules that allow losses on rental properties to be used to write off income tax would be two good first steps.

The variable mortgage levy that was proposed by The Reserve Bank under the last government (which Cullen liked but was defeated before it got going by the media and National crying ‘tax hike’!) would also be a good step – it effectively functions as an extra interest rate only on mortgages making them less attractive while not punishing other borrowers like exporters, unlike rising the Official Cash Rate it doesn’t encourage the carry trade which pushes up our exchange rate hampering exporters, it mitigates against people hedging against rates rises by taking fixed-rate loans, and the money goes to the taxpayer coffers rather than the foreign banks.

All this could be made revenue neutral by taking something off the bottom income tax rate or even the corporate tax rate. Better yet, some of the extra revenue could be used to get the government back in surplus sooner.

We can’t have another housing bubble on top of the one we still have. There are good measures the government can take and it is heartening that English seems to be willing. The questions are: can he drag Key with him, and will they act in time?