I haven’t been following the debate about loan-to-value-ratio (LVR) regulations as closely as Matt and Eric, but this article in the Herald yesterday (HT: Matt) caught my eye because of the following quote:
Treasury suggested introducing a capital gains tax and restrictions on foreign buyers as part of a long term prescription to curb house prices increases, documents released today show.
So, as always whenever someone recommends a CGT, I rushed to the Treasury document to see what the justification was and whether it can convince me that the benefits would outweigh the costs.
First a clarification. In the document, Treasury list a capital gains tax as one of a set of longer term measures that “might be feasible” and that “could have an impact on housing demand but would require more detailed design and lead time to implement” [emphasis added], which certainly fall short of being a recommendation.
But even with that caveat, I am struggling to see a coherent view in the Treasury’s document. The document’s focus is on rapid house price inflation, but it is not clear just what they see as the policy relevant issue there. They note a concern with financial stability, macro stability, and housing affordability; they acknowledge that the main factor determining house prices in New Zealand are supply constraints and that recent policy changes are addressing that; and so they then focus on policies to restrict demand.
One of the first things we teach our students in economics is that economic analysis should never start with price. Resources can be consumed, prices cannot; prices change in response to other changes in the economy, but whether the outcome is good or bad depends on what caused the change and what determines good and bad. So a statement like
additionally, high prices may also affect broader economic performance over time by diverting resources into sectors of the economy that tend to exhibit lower productivityimmediately raises the question: How will a particular policy designed to reduce prices (or restrict price growth), succeed in diverting resources into high productivity sectors (or make housing more affordable, or promote macro and financial stability)? What is needed is a view of what is causing demand for houses to increase, what aspect of that demand increase is a bad thing, how a particular policy would act on that bad aspect, and what would be other possible effects of the policy that would need to be considered.
For the suggestion of a capital gains tax, all that is given in the Treasury document is the statement quoted above that it is something that “might be feasible”. Sadly, I am none the wiser (nor better informed).