Election 2023: National's foreign buyer tax plan has $530 million yearly fiscal hole, new report finds

National's foreign buyer tax costings likely have a roughly $530 million fiscal hole each year, according to several highly regarded economists.

It's more bad news for the party which has faced constant questioning and criticism over its tax plan.

A new report released on Thursday by CoreLogic's head of research Nick Goodall, independent economics commentator Michael Reddell and economist Sam Warburton claims National's proposed tax would only raise $210 million a year - not the $740 million National is predicting.

"This leaves a significant $530 million (71 percent) per year gap in the costing of the foreign buyer tax and the wider Back Pocket Boost policy," the report claims.

National is promising tax cuts which it has said will be paid for by four key tax changes and reprioritising and cutting Government spending.

To pay for the tax cuts, the party needs to find $594 million a year to slice out of the public service, which equates to an average 6.5 percent cut in spending across departments. It's excluded several agencies from needing to cut frontline services, like health and education.

One area of its plan that has created heated debate is its 15 percent foreign buyer tax on houses worth more than $2 million.

But the new report said even using higher-end estimates, the foreign buyer tax would only raise $290 million a year with a shortfall of $450 million (61 percent).

The estimates in the report were based on replicating and building on National's own methods, according to the authors. But even the highest income estimate is well below National's.

"There are several methods consistent with information National has revealed about its method and other public statements. We have replicated each of these," the report said.

"A key result is that no matter what method we use, the revenue estimates are substantially lower than National’s estimates."

The report noted the analysis would have been "fairly straightforward" if there was data about the prices paid by foreign buyers, but that data doesn’t exist.

Instead, the authors replicated the method National used in its estimates but came up with very different results.

The report said National appeared to use three steps for their calculations which were:

  • Estimating the distribution of prices paid by foreign buyers by looking at the distribution of house prices by territorial authority and which territorial authorities' foreign buyers bought houses in
  • Estimating how many foreign buyers would pay $2 million or more for a house using the distribution of prices paid by foreign buyers and the number of foreign buyers
  • Estimating how many foreign buyers who would otherwise want to pay less than $2 million for a house but, because they need to pay at least $2 million for a house in New Zealand, would either decide to buy a $2 million house instead or would overpay for a lower-priced house.

The authors said the first two steps are sound and based on independent house price data. But they said the third step is much more uncertain with "no obvious independent information to inform it".

"This leads to the following key assumption: For our estimates, we assumed that foreign buyers might be prepared to overpay for houses as low as $1.75 million. That is, foreign buyers that would otherwise rather buy a $1.75 million house would be prepared to pay $2 million for it, in order to secure a house in New Zealand or, instead of buying a $1.75 million house, buy a $2 million house instead.

"This assumption was arrived at between the two economists in the review, including after canvassing other economists. We consider that the $1.75 million is generous in the sense that it is likely to overestimate the number of buyers that would willingly 'overpay' for housing."

In the report, three different models were used to estimate revenue but even the best forecast was well below National's.

Model 1 is a "strict representation of National’s method as it appears on page 20 of the policy document".

The authors said model 1 "misses obvious features and so we do not prefer it".

Model 2 includes features such as growth in housing stock, sales and prices, and removes Australian and Singaporean buyers. It's unclear whether these were included in National’s calculations or not.

Meanwhile Model 3, which the authors said is likely to be the best, makes one further change and reduces the estimated total number of foreign sales from 4000 to 3100.

The authors said that's likely more in line with reality. This is based on a spike in foreign buyers right after Labour announced a ban was coming.

"This may be buyers getting in before the ban - that is, if not for the ban announcement sales at the time would have been around 800 per quarter rather than 1000 per quarter," the authors noted.

Even the maximum revenue estimate (model 2) is $290 million per year compared to National’s $740 million per year, the report said. This leaves a shortfall of $450 million (61 percent) per year.

The report also estimated there would be about 710 sales per year, compared to National’s 1700 sales per year. The 710 is made up of 510 sales of houses above $2 million and 190 sales of buyers over-paying to $2 million for properties that would have sold for less.

It's estimated in the report the average price per sale would be $2.7 million, compared to National’s $2.9 million forecast.

Under model 2, there would need to be 2200 buyers paying an average of $2.2 million to meet National’s expected revenue.

"This would require foreign buyers to overpay for houses by up to $900,000 - that is, pay $2 million for a $1.1 million house or buy a $2 million house instead of a $1.1 million house," the report said.

"It appears likely to us that a more realistic estimate is more in line with model 3."

Under model 3, the tax would bring in $210 million per year with a shortfall of $530 million (71 percent) per year.

The authors estimate, under this model, there would be about 520 sales per year - made up of 380 sales of houses above $2 million and 140 sales of buyers over-paying to $2 million for properties that would have sold for less.

The average price per sale under model 3 is also $2.7 million.

Under model 3, there would need to be 1900 buyers paying an average of $2.2 million to meet National’s expected revenue.

"This would require foreign buyers to overpay for houses by up to $1,300,000 - that is, pay $2 million for a $0.7 million house or buy a $2 million house instead of a $0.7 million house."

National's finance spokesperson Nicola Willis stood by her party's figures, saying it's "hardly surprising" different economists disagree about things.

She said National's numbers have been independently assessed by Castalia economic advisors.

"Our figures are conservative and assume that sales captured by the tax will be significantly less than half the number of sales to foreigners before the ban came into place," Willis said.

"We are committed to implementing tax relief that will deliver up to $250 a fortnight for an average income family with young children."

In a statement, Castalia said the critique of National's tax plan appeared to be "based on a view that New Zealand residential real estate has permanently lost its position as a destination for investment capital."

"As far as we can see, the critique assumes that the removal of the ban will lead to a negligible number of investment transactions. In our view, this requires a belief that foreign buyers have been deterred from the New Zealand market by factors other than the ban. 

"Castalia agrees with National's assessment that return to previous trends is more likely to be accurate. National's modelling is based on the experience New Zealand had before the ban. We reviewed this modelling with reference to foreign buyer taxes in other jurisdictions, including Ontario, British Columbia, and Hong Kong.

"Our review included modelling of the reduction in purchases due to the imposition of the new tax. Hence, we believe the forecast number of sales to foreign buyers in National’s tax plan is reasonable and supports the overall revenue forecast in the plan."

National has repeatedly stood by its policy despite questions about it, with leader Christopher Luxon ruling out a rethink on Wednesday.

Luxon told RNZ he is "very confident and comfortable" with his party's positions.

"The bottom line is our tax plan is fully funded… we have delivered for middle- and low-income earners,” he said.

He also told the media on Wednesday he believed National's figures are "absolutely rock solid".

"I am absolutely confident and rock solid we know what we are doing and we will be able to deliver this."