In ditching the CGT, Jacinda Ardern has implicitly accepted that the primary structure of savings and investment in New Zealand will remain bound up in the family home. Accepting this reality may have been necessary to keep KiwiBuild on life support as house prices begin to fall. Avoiding solutions to the political question of wealth and inequality, however, will have implications on Labour's long-term ability to lead, argue Joseph Nunweek and Edward Miller
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When the Labour-NZ First government entered Parliament late in 2017, they brought with them a triumvirate of policies intended to make housing more affordable and redirect capital towards the productive economy: a partial foreign buyer ban on existing homes, the dangling and conditional prospect of a capital gains tax, and KiwiBuild, a daunting commitment in partnership with the private sector to expedite the construction of new and affordable housing. Together, the threat of these policies appear to have arrested - and possibly even reversed - house price growth in key areas.
This apparent cooling of the market is, in order: a sliver of hope if you didn't own or were struggling to get into a first home, worrying if you're a homeowner, and disastrous if you bought at the top of the cycle, now potentially left with more debt than equity. Considering a good chunk of the first group – younger, poorer or both – don't vote, Labour has to rely on votes from those on the property ladder to get into office (either directly, or through its coalition partners), and has therefore had to face a difficult decision.
That choice appears to have been made. In killing off the CGT Labour have chosen to defer the political debate on the distribution of wealth in New Zealand, preferring instead to be seen as a pragmatic government that delivers better social outcomes through the KiwiBuild commitment.
But aside from the obvious revenue challenges in foregoing a tax, KiwiBuild-as-a-legacy-project faces an even greater challenge: falling house prices are compounded by the precarious state of a construction sector reeling from decades of self- and de-regulation where, despite record construction activity, contractors big and small are collapsing. Until prices settle, wherever they may, demand for buying or building houses will remain weak.
Capital gains tax as anticlimax
Labour introduced its policy for a capital gains tax nearly eight years ago, staring down the barrel of a general election they had no realistic chance of winning: a very long shot to kickstart a campaign doomed before it begun, from a leader who failed to inspire enthusiasm or trust among the electorate. Its own half-cocked support for the policy indicated a real unwillingness to actually tackle political questions. The party slumped to 27.5 percent of the popular vote.
This time, the leader is widely adored and the party's polling is at its highest in over 15 years, but the unwillingness to tackle the political still lingers. If the John Key government's approach to a looming New Zealand housing crisis was a kind of benign, relaxed negligence, Labour's modus operandi was different in attitude but ultimately similar in its substance.
In campaign mode, it slammed the government for rental unaffordability and a slipping quarter-acre land ownership dream; but even on paper, it was half-formed, the rough and preliminary workings of a group with no immediate expectations to seize power (which, until Jacinda Ardern's rapid ascent seven weeks out from an election, we should remember was the case).
Once the foreign buyer restrictions began to bite from late 2018, falling prices unsettled fresh home-owners who'd recently taken on mortgages, and established investors with substantial political voice. Before the threat of the foreign buyer loophole closing became real, statistics for the year to March 2018 showed that 20 percent of homes sold in central Auckland had been to foreign buyers. While the government's nationwide figure was only 3.3percent, ASB argued that when corporate entities and migrants holding NZ visa holders were taken into account, foreign buyers accounted for 11-21percent of all sales.
Despite the clear findings of the apparently-agnostic Tax Working Group's that a tax on capital gains would make for a more equal country overall, individuals were worried. As the foreign buyer loophole closed and overseas demand for housing dropped suddenly, Labour's flagship political policy was left in drydock.
The challenge of KiwiBuild
As prices tumbled, KiwiBuild's pragmatic promise – to partner with private developers to build 100,000 new homes over ten years – fell on deaf ears. Even allowing for a slow start to get the necessary structures in place, the struggle to attract both contractors and buyers has meant only a handful of homes have been built, and the Government has even had to buy some itself when they didn't sell.
With the housing market so far out of reach for so many, KiwiBuild struggled to adequately target a niche set of would-be buyers: that is, a hypothetical household with the income to service a $500,000 to $600,000 mortgage, in a certain type of housing, in a limited set of areas. Why settle for an 'affordable housing' detached unit today when a separated Kiwi dream house might be within your sights in a few years once the market settles? With the opposition flailing and struggling to make an impact, KiwiBuild's failure has been among the few swipes that have really struck on this government.
The struggle to quickly generate a higher volume of housing construction in an industry already stacked with other priorities has highlighted issues that Labour undervalued out of office. Other commitments like removing the Auckland urban growth boundary have been shelved, while proposed subsidies for apprenticeships later materialised as a proposed 'dole for apprenticeship' scheme, hardly a panacea for an industry where workers' rights are weak. On top of this, the low margins involved in affordable housing construction and the relatively high cost of building materials in NZ further constrained the government's ability to deliver as anticipated.
However it's the inevitable passing of the apex of the housing price rollercoaster – a moment in which falling house prices, ironically, mean that nobody is buying – that have done the most to hinder KiwiBuild's success. No matter how affordable these properties are, buying today means losing tomorrow, even if that's a point more than three years from now where you can do so without forfeiting the capital gain. That's not just a matter of people cynically flipping the properties – people often need to sell and move for household size, for work, and for accessibility.
The result is a kind of compounding anxiety among both the property-owning class in New Zealand, and the aspirational would-be KiwiBuild buyers. If the former were merely sniffy at a cut of a residential property's ballooning resell value going to the government in 2014, they're now positively frantic as those potential gains erode. The latter, many of which have been raised on the notion that the home is a sole asset in which they have increasing equity and growing value, are scared to take a punt that leaves them stranded in the wrong location and wrong housing in the long-term with stagnating (or even declining) value.
A failed defence
Whether deliberate or otherwise, Labour's own lack of candour and leadership at the point of maximum scrutiny certainly pointed to the pragmatic over the political. A political commitment to tax capital gains cannot be won without a movement ready to back it. At the time the Tax Working Group released its recommendations Labour could have prepared its own proposals – allaying concerns that first and family homes would be treated like investment properties, rejecting certain aspects of the group's recommendations to frame itself as offering a reasonable face of compromise. It did none of these things, and effectively turned the debate over to a void of highly-strung misinformation.
Most would-be homeowners – and most voters – aren't pundits or terminally online policy wonks. By shouting louder, CGT critics have made a bigger impact, even without an actual policy proposal. An effective housing policy required a CGT campaign with grassroots support, linking the tax to the hope that would-be voters could become would-be homeowners. From the perspective of government leadership, that campaign was never there.
The primacy that Labour has given to the (deeply flawed) pragmatic over the political indicates the difficulty involved in unravelling housing bubbles. For all the Tax Working Group's cogent arguments about intergenerational equity, it was not able to get away from the fact that the property market remains a key determinant of wealth in this country, and a significant enough and vocal enough proportion of the country is invested in these cycles that a party they can't win an election without sustaining those cycles.
Political communication doesn't have time for this, and what discussion it does get into is framed along party lines of blame. Few are going to be able to get up in parliament and punchily point the finger at a systemic problem enabled by a plethora of forces over time, and none are going to propose those systems be wholesale dismantled.
In the short-term, killing the CGT – along with the PM's impressive response to the Christchurch terror attacks – may well have secured the next election victory for the Labour Party (although the combination of their coalition partners is not yet clear). In favouring the pragmatic over the political, however, Labour have put themselves in a doubly-difficult long-term situation. Falling house prices will inevitably become a political issue, and their impact on the building market will make pragmatic delivery of KiwiBuild a public relations nightmare.
Long-term political survival will require them to return to their base – and would-be base – with a renewable willingness to tackle hard political questions. Given this question, in the PM's own unambiguous words, appears to be totally closed off for now, that looks increasingly unlikely.