The state should share its windfall from the housing boom.
Listener: 19 April, 2008.
<>Keywords: Macroeconomics & Money; Social Policy;
We are not thinking clearly about the housing market. If higher interest rates could not restrain higher housing prices, why will lower ones solve the current problems? There are two major concerns, other than mortgage outlays being too high.
First, if house prices fall too far, some people’s debts will exceed the value of their assets. (The effect will be even worse if unemployment rises.) Second, as it takes longer to sell houses, those who need to move for job and family circumstances cannot, gumming up both the labour market and the efficient allocation of housing.
But the housing market is not only a commodity market, where households obtain what they currently want by laying out income. It is also an asset market. (Simple economic theory treats income and wealth as smoothly interconnected, but they are not. Some people with high incomes cannot buy a home.) A consequence is the housing market has increased wealth inequality. As housing prices rose, those who owned houses had their wealth go up. Those who didn’t missed out on the capital gains and now find it harder to buy a house.
This suggests we need to transfer wealth (rather than transfer income, which is what interest rates do). The logical answer could be a wealth tax, to be used to move wealth from the rich to the poor. But it would take so long to do that, we would have had a couple of housing crises by the time we got around to it. (However, I would support the early introduction of a capital gains tax on second houses, providing the base price was, say, its 2008 value, so the imposition was not retrospective. The purpose would be to blunt subsequent housing booms, although the next one is not in immediate view.)
We could encourage voluntary transfers from the rich to the poor. It’s time we looked at the gift tax regime, whose trigger values have not changed for 15 years. However, families are probably already sharing their wealth, and the gift tax is but a small – perhaps largely avoidable – irritant. So a reform will help, but not by much.
So we will not compulsorily transfer wealth from rich households to poor households via a wealth tax, and encouraging voluntary transfers will be insufficient. However, there is one major wealth holder that might be willing to give some of its wealth to the wealth-needy.
The Government is very wealthy. Housing NZ alone has more than doubled its net assets from about $7 billion in 2002 to $15 billion in 2007. Partly, this has been prudent management, but the Government has benefited from the house price boom, too.
Should the Government share some of its good fortune from wealth gains, just as it shares its rising tax revenue, by (among other things) income tax cuts? It could do this by providing those cut out from the housing price boom – potential first-home owners – with a ‘‘suspensory’’ loan when they buy their first house. Interest would accumulate on this mortgage, rather than be paid, and after a period – say, 10 years – the liability would be written down. Banks treat suspensory loans as a kind of second mortgage, enhancing the leverage of the home purchaser.
The sort of amount I have in mind is around $15,000 for an adult and $5000 for a child, so buyers would still have to contribute some of their own (or family) savings. This is not a scheme for funding the improvident. (I’d also increase the suspensory loan for houses that meet some environmental standards.)
Its effect would enable the purchasing of housing at the lower end of the market. Those trying to flog off million-dollar houses won’t be assisted by this scheme. But by supporting the bottom of the market, we would reduce those earlier-mentioned balance-sheet and labour-market difficulties.
<>A suspensory loans scheme has a fiscal cost. Introducing it would reduce the funds available for income tax cuts. But it would contribute to easing any housing crisis, while helping some who were left behind by the housing price boom.