On Tuesday, economist Eric Crampton argued that legislation to prohibit foreign property buyers will do nothing to alleviate the housing crisis. Today, he lays out all the other reasons why the ban makes no sense.

Yesterday, I wrote about how New Zealand wound up with a ban on foreign homebuyers. I said the policy was bad in principle and worse in practice. Let’s go through a little more on just why this is such bad policy.

During the election campaign, Labour said they were going to stop foreign speculators from interfering in New Zealand’s housing market and pushing up housing costs for Kiwis.

The Bill that came out of it will bring all residential land under the Overseas Investment Act’s definition of “sensitive land”. And that is a bigger and worse deal than you probably think.

First up, the bill is hardly restricted to ‘overseas’ people. If you live in New Zealand on a work visa, you’re covered. If you live in New Zealand as a permanent resident, but split your time between here and overseas, you might be covered depending on how many days you spend here.

That will not just hit fat-cats you might want to punish just for the sake of it.

A doctor moving to Greymouth from London on a work visa to set up a general practice would not be able to buy a house. And if she had planned on setting up practice in a house on residential land, that’s tough too.

A retired New Zealand permanent resident would be banned from downsizing to a smaller house to be able to spend more time with the grandkids overseas if he spent too many days abroad. You have to be in New Zealand for at least 183 days of the prior 12 months.

Or imagine a permanent resident who has made a life and is raising a family in New Zealand but has to rush back to Canada (for example) because of a parent’s health emergency. If you stayed out of country for 183 days helping your parents, you’d lose your rights to buy a house here in the next year.

My wife and I have lived here since 2003 and have been permanent residents since 2005. If one of our parents fell ill and one of us needed to take a half a year off to go and help, and if we had to downsize our house to make it all work, we would be in a horrible spot.

But don’t think about me – think about some other Canadian living here for whom you feel some sympathy, or a permanent resident from some other country entirely. It would apply to that person too.

And the ban is hardly restricted to places experiencing a housing crisis. If a foreign student finished a degree at the Southern Institute of Technology in a field with skills shortages, she could likely get a work visa but couldn’t buy a house in Invercargill.

It might sound reasonable to you to make any of these people jump through hurdles with the Overseas Investment Office, but it is nonsense. Just imagine if we put the same barrier in front of any non-Auckland New Zealander wanting to move to Auckland. Someone moving from Invercargill to Auckland puts more pressure on housing markets than anyone moving to Southland from abroad – why should only the foreigner, already accepted by Immigration New Zealand, have to prove her worthiness to own a house? If you wanted to buy a house in my old home town of Winnipeg, the Canadians wouldn’t force you to produce an assessment of whether it’s in Canada’s national interest. Not being crazier than Canada is usually a pretty good rule.

But it gets even worse. Suppose you hate foreigners so much that all that collateral damage doesn’t much matter. But won’t somebody think about the Kiwis?

The Bill as written will mess up residential construction.

Suppose you planned to put up an apartment tower in Auckland, with some units being sold off the plans to overseas buyers intending on renting them out after construction. When those foreign buyers who provide the capital that gets the apartment tower built in the first place are kicked out of the market, who’s going to pony up the money instead?

If the apartment developer counted as a foreign person under the Act, it would be forced to sell all of the apartments within a tight period after construction completed. If apartment prices stumbled mid-development, the developer might really prefer to be able to rent out some of those units instead for a couple of years before selling them off. Being forced to sell in a hurry makes projects riskier and requires that they provide a higher return on investment to compensate.

CDL Land, a company that develops subdivisions and is majority foreign-owned, warns that Overseas Investment Act consenting processes under the new Bill will bog down new construction projects.

It isn’t just limited to ‘foreign’ companies, either, and it isn’t just limited to housing.

Fletcher Building is counted as an overseas entity because more than 25% of its shares are owned by overseas investors. They own a lot of residential property that will be deemed sensitive – and not just to develop and sell. Their submission pointed to properties likely to be classed as sensitive residential land but currently used as retail stores and show rooms, as environmental buffer zones around quarries or manufacturing facilities, or even as temporary accommodation for staff. That show home in the new development that the developer keeps for a few years as a model of the homes being sold off the plans? They’d be forced to sell it shortly after completion. It doesn’t make sense.

The Electricity Networks Association pointed out that key lines infrastructure often requires purchase of residential land. Any electricity distributor that is more than 25% foreign owned would have to jump through hurdles proving that the small substation servicing a new housing subdivision passed the Overseas Investment Office’s net benefits test. It is absolutely pointless and will do nothing to improve housing affordability. And it will also mess up telecommunications infrastructure in the same way.

Duncan Cotterill highlighted the case of an orchard purchased by foreigners in a sale previously approved by the Overseas Investment Office. The Kiwi manager lives on the property in a house that was part of the sale – and is now residential land owned by a foreigner. Is the owner allowed to let the manager keep living there, or does he need to tear it down? Could the owner build additional staff accommodation if the orchard expands? Is it banned altogether, or would they have to jump through hoops at the Overseas Investment Office to make repairs or alterations?

Go and read through the other submissions. It isn’t just corporations and law firms saying this is nonsense. NZIER provided an excellent summary of the issues. Nelson and Queenstown Lakes District Councils opposed the ban. Victoria University Law lecturer Eddie Clark described the implementation of the ban as “genuinely awful”.

Maybe some perfect ban on overseas ‘speculators’ that you have in your head wouldn’t have any of these problems. But that isn’t what the government has proposed. They might be able to fix some of this in the Select Committee process but a lot of it might be unfixable – we just don’t know, with legislation produced in this much haste, what other unintended consequences might follow from this broad a ban. Broad bans cannot anticipate every eventuality.

Xenophobic election campaigns lead to badly drafted legislation with stupid unintended consequences that will do real harm, and not just to foreigners.

New Zealand has to be able to do better than this.

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