Bright-line extension is a bright idea

A capital gains tax was long seen as political suicide in New Zealand, where houses sometimes earn more per year than their occupants. That meant that when the ‘‘bright-line’’ test was introduced by the previous Government, it was perceived as a watered-down version that might dampen property speculation without frightening the middle classes on polling day. It determined that an owner must hold onto an investment property for at least two years to avoid paying income tax on the gains. It was intended to counter rampant on-selling in a wildly overheated market. But was two years long enough? As signalled in 2017, the new Government thinks not and is pushing the time period out to five years, probably from March onwards. Revenue Minister Stuart Nash is introducing the legislation to Parliament. The belief is that the extension of the bright-line text will dampen speculation even further and make houses more affordable for those who want to own the home they live in. It can be expressed as good news for owner-occupiers, bad news for would-be landlords. As a populist move, it sits well with Labour’s larger arguments against foreign ownership of New Zealand property, immigration changes and the KiwiBuild programme. Five years feels like much more of a barrier to short-term speculation and investment, and is as close to a real capital gains tax as Labour can get without putting it before the public. But there are also clear downsides and not just for speculators. Officials from Inland Revenue and Treasury have cautioned that it could reduce the number of houses for sale, pushing up house prices. Another perverse side effect is that rents could rise if the bright-line extension pushes investors out of the market. The officials speculate that a reduction in the supply of rental housing could outweigh the reduction in demand for rentals. It is also noteworthy that the Auckland property market that looked so overheated when the bright-line test was first mooted has softened considerably since. There is no longer the sense of urgency or panic about houses prices and unaffordability that dogged the last Government. In a larger political sense, the extension signals another welcome shift away from short-term thinking and the unproductive effects of housing speculation. While the five-year test may not generate much more revenue, it should further dampen speculation. As Nash said, this is the chief effect the Government has aimed for. He also sees it as a way to put fairness back into the tax system. The point about fairness is critical and was at the heart of the previous Government’s typically tentative response to the problem. It recognised that many New Zealanders felt aggrieved that some were earning untaxed income simply by buying and selling the homes that others live in. It was a step in the right direction, but only just. This goes further.