Q: What would it take to convince more kiwis to invest in startups rather than real estate?
A common answer is: a capital gains tax. But I’m skeptical. Let me try to explain why…
The fundamental problem with the housing market is that generally nobody believes that prices will fall. It’s not that capital gains on property are tax free. It’s that everybody believes that capital gains on property are almost certain.1
This explains why people are not so enthusiastic about other types of capital gains, which are also tax free - e.g. gains on investments in businesses.
In those cases the capital gains - and indeed the capital itself - are at risk.
So, it’s difficult to see how a capital gains tax would make much difference to how capital is allocated. Especially if it also applied to other types of investment. Especially especially if there are exclusions related to housing - e.g. family home is excluded.2
If we want to shift investment preferences - e.g. less into property, more into productive businesses - we need to make those things we want to encourage either less risky or more rewarding.
If we want to make housing more affordable we need a solution that causes prices to fall.
But nobody wants their property value to fall, so any solution that would cause that to happen is considered politically impossible.3
Which takes us back to the beginning of this logical loop…
The fundamental problem with the housing market is that currently nobody believes that prices will fall in the long term.
The issue is not that capital gains are tax free. It’s that everybody believes that capital gains on property are almost certain.
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Historically people ranked good deeds based on what was considered most likely to get them into heaven when they died. Now we rank property purchases based on estimated capital gains. Same logic, I suppose. ↩︎
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↩︎A capital gains tax on property, exempting the family home, pool house, in-ground swimming pool, tennis/basketball court and grounds.
— Rowan Simpson (@rowansimpson) September 8, 2017 -
Westpac chief economist Dominick Stephens hit the nail on the head:
People want everyone to be able to buy a house and the financial system to be safe and they don’t want to see house prices fall, and they don’t want to see infill in their suburb.
↩︎Well something has got to give. The resolution is going to involve someone experiencing some disappointment relative to what they’d hoped for.
