Real estate signs in Auckland's central suburbs on March 3, 2015 (Photo by Fiona Goodall / Getty Images)

CGT is dead. But there are other ways to thwart a raging property market

Many people were disappointed about the government’s abandonment of the capital gains tax plan. But is there an alternative that could still open up the property market to those currently priced out?

I’m just going to put my cards on the table – I am a supporter of a capital gains tax (CGT). I’m an old-fashioned socialist whose predictable move to the political right as I aged still left me tickling the extreme left of Labour ideology in my early 40s. I can’t imagine I’m going to move much past ‘mid-Labour’ before I’m too senile to vote. And yes, before anyone asks, we do own property, and I’m happy to pay my fair share to help equalise the shitty situation many have found themselves in.

We reside in a market where families are living in garages and cars, unable to rent a whole home and paying tax on a low income or benefit, while those who invested in property in a more forgiving market are able to enjoy an increase in capital value, tax free. Even if you don’t support CGT (Winston! Here’s looking at you, kid), you’d have to be a cold, heartless bastard not to agree that gap needs closing.

Back in February, I was lucky enough to attend the New Zealand Institute of Architects In:Situ conference. It was a brilliant few days of cutting edge design, environmentally forward thinking, and projects with a social conscience. Nestled in amongst a golden line up was one absolute gem of a speaker – Wolfram Putz from Graft Architects in Berlin. He talked about how Berlin, in the early days of unification, became a trendy but run down urban mecca, with warehouse parties launching a whole new music scene, and cheap city centre workshops and business space allowing the growth of artisans and creative industries. Berlin, like many cities across the globe, has become a victim of its own success, and just like in Auckland, the majority of the young started to be priced out – and as a result, the character of the city began to change. Unhappy with this, the local government decided to take action. They decided to divorce property ownership from the land it is built on.

Apartment buildings at Gleisdreieck Park, Berlin (Photo by Sean Gallup/Getty Images).

Okay, so let’s rewind a little. Why does land ownership matter? Because the actual cost of a property – what the bricks and mortar (or weatherboard and nails) are worth – changes only incrementally over time. I was talking to a real estate agent once about a house in central Auckland that was priced at $1.6m, way back in 2014. He said it was nuts, that the property itself – a former state house – was only worth $150k. The price of the property that the owners had bought for $325k in the 1990s was related to the desirability of the area and urban regeneration. We see examples of this all the time in New Zealand. You only have to go on a house removals website to see that the properties themselves sell for between $10k and $60k, depending on what is on offer. You can, I have been told, move a house onto a bit of land, get it plumbed in and connected up to power and internet and redecorate it, all for under $200k. But when you add the value of the land on top, the property could be priced in excess of a million, depending on where you dropped it.

It is the increase in the value of land, largely, that fuels capital gains in the property market. Coupled with the excellent tax breaks (like, no tax at all), it makes perfect sense that people should buy property to aid wealth accumulation. At the Auckland Housing Conference in 2016, one of the biggest discussion was how to separate the ownership of property from the idea of an investment portfolio – how do we stop people buying houses for business reasons, to allow more people to buy them for personal security?

The connection between property ownership and wealth accumulation isn’t new, but it is definitely reaching a crisis point. In his excellent public lecture at In:Situ (on Valentines Day – this is what I do for fun, people), lauded Dutch architect Reinier de Graaf made this very issue the central focus of his talk about ‘phantom urbanism’ – or, owning a residential building purely to make money.

“Are we dealing with urbanism as a consequence of economic growth, or are we dealing with economic growth as a consequence of urbanism?” De Graaf asked after discussing the incredible rate at which countries like China are building brand new cityscapes that don’t always go on to be inhabited – but continue to make money. “This is a recipe for building oneself out of disaster. It is a very prevalent formula.”

From the tax breaks in Greece that come from leaving a property unfinished, to the luxury apartments in Beirut that are not lived in but bought simply for their increase in value, De Graaf painted a bleak picture that is all too familiar in NZ. The most shocking example of phantom urbanism is a city for a million people in Angola that began construction in 2008 and has never been inhabited, but facilitates the transfer of wealth via oil between Angola and China (bypassing the local economy completely). But there are examples all over the world. In New Zealand, a 2016 news report found that 33,000 homes were uninhabited in overcrowded Auckland as people speculated on the tail end of the property market boom.

Suburban houses in Auckland (Photo: Getty Images).

Back to Berlin, and to Wolfram Putz, who has very clear ideas about how the model of property ownership has to change. “The system is broken,” he tells me when we got a chance to chat at the conference. “The neo-liberal economic cycle made us buy into property ownership, but we are reaching a limit of collective acceptance of what is happening to us.”

Putz explained that a bylaw in Berlin now allows the local government first refusal on any property that comes on the market. It is a democracy after all; this isn’t compulsory purchase for an outdated market rate. The Berlin city government pays good money for the property, retains the land ownership, and then sells the building – the actual living space – on the free market with a 100-year lease.

“The city buys the property at huge cost, but in the long run the value will still go up. This process is one of the tools to deal with the housing crisis. Private individuals will still make money on the buying and selling of leased property,” says Putz. “Public ownership, a careful redistribution of assets into long-term rental – this is the way the collective can regain control over property in a democratic society.”

Putz notes there are other models divorcing wealth accumulation from property ownership. He was involved in one such project in New Orleans.

Join us and get a free copy
of the Spinoff’s first book!
Find Out More

“It was just in one district, [but] we gave returning property owners a forgivable loan to use alongside their government money,” says Putz, who managed to get some of his Hollywood mates from his time in LA (think Brad Pitt) to back the loans. “We said you don’t have to pay back this loan if you keep the property for a certain amount of time. We understood very quickly that if you insert money into the market you need to put a cap on the greed.”

Putz and his team hoped that by preventing a quick turnaround of property at an inflated price in a crowded market, this cap would allow a community to develop – and that when the time period ended, that community would prefer to stay together than to sell for a cheap buck. One to watch.

My preference is the Berlin model. I believe it could work well in the crowded inner city suburbs of Auckland and Wellington. It’s not a quick fix, like CGT could have been, but it also has the benefit that it’s changing the model without anyone missing out. Current property owners still get to sell their home at the current inflated prices. The city buys the property and places the land ownership in trust. They then sell a long lease on to a private owner for a total, upfront sum that is realistic and affordable. The house continues to accrue in value, just not at the same hefty rate. The property market in the long term is opened up to a larger number of people. The rental market slows as buying a house becomes realistic, and discourages investors. The increased security relating to owning a home at an affordable price results in less transient behaviour and stronger communities, which in itself will help reduce crime and social problems, and also reduces risks related to age and ill health because neighbours are watching out for each other.

It is not a standalone solution, it needs support from other initiatives. It also comes at a price – the price of time. But it is certainly worth exploring. Implemented properly, we could see a very different market develop over the next 30 years, and know that the adults of tomorrow could experience the housing security that was part of the quarter acre Kiwi dream of old.


Love The Spinoff? The best way to support us is to join The Spinoff Members. For just $2 a week you can help us hire more journalists – and receive a FREE copy of our first book.

Related:


The Spinoff is made possible by the generous support of the following organisations.
Please help us by supporting them.