Is land tax the answer to housing affordability?

They say: John Key recently hinted at introducing a land tax on non-resident property owners as a solution to rampant speculation that has pushed housing unaffordability to new heights in Auckland.

The Prime Minister’s suggestion has been attacked by Labour, with leader Andrew Little saying a land tax would be ineffective and “we should just regulate and restrict sales to non-resident foreign buyers of residential property”.

Labour is wrong. A land tax could achieve the goals of decreasing speculation and increasing housing affordability in a far simpler, cheaper and economically beneficial manner than any other proposal on the table.

To understand the merits of a land tax, one needs to appreciate its unique benefits and how it really does strike at our economic system’s core maladies.

The current boom in Auckland has many drivers. Strict planning laws that restrict both vertical and horizontal supply of space to live and work, a flood of cheap money fuelled by historically low interest rates, and foreign investment certainly play important roles. But at its heart lies the unique economic nature of land and the fiscal advantages enjoyed by those who own it.

Auckland’s current woes are often characterised as being the product of a “housing boom” or “housing bubble”. This is a misnomer because what increases in value is land, not the physical structures on it. Unlike the value of houses, shops or offices which can only be maintained by constant application of labour, the rise in land values has nothing to do with its owner’s individual exertion.

Land values rise in response to government investments in infrastructure and increasing economic opportunities (which often drive population increase). We all have seen what happens to land values near new public transport links, universities, work opportunities and tourist attractions.

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