Monday, April 10, 2006

Christopher Niesche: Reinventing the wheel never works

The attempt to find a magic bullet to cool the housing market without raising interest rates was a charade and a lost opportunity.

Last week, the Reserve Bank and Treasury reported back to Finance Minister Michael Cullen that they had been unable to find a new tool to curb inflation in the housing market without damaging the export sector in the way that high interest rates do.

The Reserve Bank and the Government were concerned that New Zealanders' preference for fixed-rate home loans meant that the official cash rate was less effective than before.

After the report last Thursday, the official cash rate will remain not just the primary tool - but also the only tool - for cooling inflation.

It is hardly surprising that the attempt to reinvent the wheel (or indeed to invent a new wheel) didn't work.

Even the Reserve Bank and Treasury had little confidence that they'd be able to deliver much. It should come as no surprise that there were no simple, or readily implemented options, that would provide large pay-offs, they said in their joint report to Cullen.

If everyone knew the project was doomed to fail from the outset, then why start it in the first place?

It's hard not to conclude that the inquiry was little more than an attempt by the Government to look as if it was doing something for the export sector.

When, back in November, the Government announced the inquiry, the kiwi dollar was a little below US70c and exporters were screaming for some relief. The inquiry gave the Government something to point to when people asked what it was doing.

Now that the kiwi is back nearer US60c, exporters are relieved and the housing market looks as if it is finally cooling, so it doesn't matter any more.

So we can all forget about it until the housing market booms and the currency soars again at the top of the next economic cycle some years away.

This is a pity. The booming housing market, the resulting high interest rates and accompanying exporters' pain provided a chance to put a capital gains tax on investment properties on the agenda.

Although it's practically sacrilegious to suggest it, a capital gains tax on housing (but excluding the family home) would have several benefits.

First, it would encourage Kiwis to consider investing in assets that might create jobs and export income for New Zealand, such as businesses and shares. Buying and selling houses lets real estate agents buy flash European cars but creates few jobs and adds little to the economy.

Second, if speculators knew they couldn't just buy a house and flick it on in a year or two for a large tax-free profit, they'd think more carefully about the sort of investments they were making and hold on to them for longer. We'd still have housing booms but their worst excesses would be curbed and the Reserve Bank wouldn't again have to ratchet interest rates up so high.

In their report, Treasury and the Reserve Bank suggested something close to a capital gains tax on investment property.

Presently, gains on investment properties can be taxed if the investor bought the property with the intention of reselling it. The report had the novel idea of the Inland Revenue Department paying more attention to enforcing that law at the top of economic cycles, when the housing market needs cooling.

But this idea is impractical. It is the Reserve Bank's job to gauge the state of the economy and adjust policy accordingly, not the IRD's. Cullen was quick to quash the idea.

To be fair, Treasury and the Reserve Bank were forbidden in the inquiry's terms of reference from suggesting a capital gains tax on investment property.

That was a lost opportunity. Taxing investment property has many advantages.

The Government should have been brave enough to at least evaluate them.

* Christopher Niesche is the business editor of the New Zealand Herald.

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