Housing Problem in New Zealand

February 4, 2023


Reforming New Zealand’s Tax System to Improve Housing Affordability


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Reforming New Zealand’s Tax System to Improve Housing Affordability

As currently constituted, the broad-based tax system of New Zealand is generally uneven, especially capital gains tax. The different capital income forms are taxed unevenly, distorting the capital income taxation. For instance, capital gains from home-owned housing are taxed lightly. Notably, there is a huge intergenerational discrepancy in housing between the older generation cohort and the millennials. Inflation of house prices has led to the housing crisis and made New Zealand one of the OECD countries with the highest rates of homelessness (Coleman et al., 2020). 

Furthermore, the current capital gains tax system makes it even harder for millennials to be homeowners. The tax system also motivates the elderly to invest more in assets such as homes since they are lightly taxed. Before the housing crisis, owning a house was not as complicated as it is today. Therefore, the elderly live in unnecessarily large-sized houses at the expense of first home buyers, largely millennials. This paper endeavors to reveal the importance of the housing crisis in intergenerational transfer, housing unaffordability as an issue of public concern, factors causing housing unaffordability, and some policy recommendations to deal with the issue of housing unaffordability.

New Zealand experiences intergenerational housing inequalities as millennials are less likely to buy homes and own property than older previous cohorts. The previous cohorts seem to enjoy the high house and land values, but millennials have artificially faced inflated house prices; in other words, the cost of buying houses for millennials is extremely high. The older generation dwells in most of the houses suited for the younger generation/families. In addition, retirees often occupy homes that they have dwelled in for most of their lives. This situation shows a big vacuum within New Zealand’s tax system that exempts house owners from capital gains tax (Mclaughlan, 2020). The taxation of capital income in New Zealand is uneven. For this reason, the tax system offers incentives to under-invest in heavily-taxed properties and invest excessively in lightly-taxed properties (Exploration & Association, 2018). For instance, homeowners are taxed lightly. 

The over-consumption of housing stock by older generation/retirees has aggravated the housing crisis among millennials. Previous cohorts continue to possess property (large-sized dwellings) once their kids leave home. Instead of downsizing to a more suitable dwelling, they retain possession of these homes even in their retirement, adversely impacting first home buyers (Mclaughlan, 2020). Distortions in New Zealand’s broad-based tax model have caused the housing discrepancy between older generations and cohorts. Since homeowners are exempted from the capital gains tax, the older generation has the freedom of remaining in large-sized dwellings. In other words, the older generation has a larger market share than cohorts regarding housing. They have over-invested in housing since deductibles from their retirement savings have also been exempted since 1989 (Mclaughlan, 2020). This cohort (older generation) enjoys large dwellings in most of their lives at the expense of millennials, making the intergenerational inequality in housing more intense. The older generation, baby boomers, owned homes before the housing crisis, while the millennials (first home buyers) are buying houses at excessively high rates. Millennials are subject to rent for longer periods; they have faced inflated house prices. 

Housing unaffordability is a huge public policy issue and should be prioritized as a public policy concern. The housing demand continues to increase with increased overpopulation. Additionally, the retirees continue to live in large dwellings since there are no plausible alternatives (Coleman et al., 2020). As retirees increase, it shows they will continue occupying large properties. Therefore, the lack of suitable options will worsen the housing crisis because of New Zealand’s aging population. In the developed world, the proportion of people aged 65 and above is projected to double between now and 2046 (Coleman et al., 2020). In the absence of more viable alternatives, 23% of New Zealand’s population will probably under-occupy large dwellings (Coleman et al., 2020). Projections show that over-occupation of housing stocks by the older generation will leave the younger generation in a housing crisis. They will spend most of their lives in rented houses due to inflated prices of houses. The inflated prices of houses raise concerns around financial vulnerabilities and affordability. Therefore, housing unaffordability should be prioritized as a public policy concern to avoid worsening the housing crisis in the future. 

Particularly, the intergenerational inequality in terms of housing affordability has widened between baby boomers and millennials. This situation’s main reason is that the baby boomers accessed the property market before the housing crisis. Still, the millennials have encountered inflated house prices, thus subjecting them the longer renting periods. How do we fix the housing crisis?

The housing crisis can be fixed by addressing the intergenerational issues related to housing in New Zealand. Major causes of housing unaffordability in New Zealand are infrastructure issues and capital taxation distortions. For instance, distortions in the tax system have caused intergenerational transfers from younger (millennials) to older generations. 



Factors Causing Housing Unaffordability

Distortions of capital income taxation

Previously, owning a home in New Zealand was not a huge issue as it is today. First home buyers have been adversely affected by the housing crisis. The housing market has become problematic as many people (millennials) live in unfavorable conditions. Notably, millennials have experienced inflated house prices, making it even more challenging to be a homeowner.  Additionally, the housing cost in New Zealand has risen faster than incomes leaving the country with one of the highest homelessness rates in the Organization for Economic Co-operation and Development (OECD) (Coleman et al., 2020). 

Distortions of New Zealand’s broad-based tax system have contributed to housing unaffordability. For a long time now, housing capital income has been taxed lightly, while retirement savings have been taxed heavily. This distortion in the tax system has raised bias towards owner-occupied housing, thus motivating homeowners to occupy large dwellings than in a neutral taxation model. Since homeowners are exempted from the capital gains tax, the older generation has enjoyed high house values, while millennials have encountered inflated house prices (Coleman et al., 2020). With the exemption of capital gains tax, Interest is currently taxed higher than owner-occupied housing. Therefore, the older generation can occupy large dwellings in suitable locations (Coleman et al., 2020). They also have larger shares in the housing market than the millennials.  Distortions in the tax system have influenced New Zealand’s housing crisis. In the absence of other plausible options to move to smaller houses, this cohort lives in large houses that they have held for the longest part of their lives. 


Low Supply to Demand Ratio

High demand than supply has also caused housing unaffordability. Although New Zealand has a record-high approval of building consents and development, this is not enough to meet the higher housing demand resulting from population growth over the past six years (Coleman et al., 2020). New house constructions are not meeting this rising housing demand, especially in areas lacking the urban infrastructure to boost new developments, for example, within Auckland (Coleman et al., 2020). The demographic most impacted by these market conditions are the millennials, majorly the first home buyers. The low supply/demand ratio can be fixed by building more houses. 


Infrastructure Issues

The central government of New Zealand has high relative power and influence on public policy. Infrastructure issues constrain local and councils from approving developments (Coleman et al., 2020). Councils have no significant sources of income apart from rates. Efforts to expand housing in New Zealand are blocked by various factors such as perverse incentives and restrictions experienced by local and regional councils. Among the perverse incentives is the infrastructure issues. To fix infrastructure issues, councils will have to lower expenses on local projects or increase rates, or do both. However, even maintaining existing infrastructure is proving hard. 


Property Laws

Property laws such as the Resource Management Act (RMA) also influence housing unaffordability. It is considered to be a restriction to housing development. 


Policy Recommendations

Capital Tax Gains

There are various forms of capital income taxation: tax-exempt-exempt (TEE), exempt-exempt-tax (EET) and tax-tax-exempt (TTE) (Allan, 2020). New Zealand taxes capital income from housing on a TEE basis, meaning that income used to buy a house is taxed when earned, but capital gains and imputed rent are not taxed. A neutral tax model would ensure that retirement savings are taxed on a TTE basis and tax all capital gains on an accrual basis. It would also call for taxing the imputed rent from owner-occupied housing. 

Currently, millennials are required to make large deposits for house purchases. This issue can be addressed by allowing people in the millennial age bracket to make house purchase deposits according to their income (Coleman et al., 2020). The intergenerational discrepancy can be addressed by introducing capital gains taxes to homeowners. This policy will discourage the elderly from owning large dwellings and leave them for their kids or sell to millennials. Capital gains taxes will discourage over-investment in homes and mitigate benefits enjoyed by the elderly. Notably, the distorted tax system for housing in New Zealand makes it hard for millennials to own homes.

Taxes on income from homeowners, which are currently lightly taxed, should be raised. In the same vein, taxes on assets like interest-earning securities, which are currently highly-taxed, should be reduced (Exploration & Association, 2018). This policy/initiative can be achieved by introducing a capital gains tax on homeowners’ income and excluding the inflation element of interest income from tax (Exploration & Association, 2018).

As the International Monetary Fund reported, capital gains tax (CGT) is one of the policies the government of New Zealand should consider to restore confidence in the housing market (Coughlan, 2021). The capital gains tax policy ought to include measures to support financial stability and raise the housing supply. Capital gains tax could lower the urge to over-invest in residential property. It is reasonable to note that reforming capital income taxation will reduce housing unaffordability. 

 The tax distortion can be mitigated by introducing an investment system that encourages young people to make savings for future use without imposing a higher tax on them. The tax distortion can be addressed by modifying the KiwiSaver model, thus lower house prices. KiwiSaver could be based on the EET taxation model to provide people with another tax-friendly investment. This kind of investment could reduce the bias towards owner-occupied housing. This could motivate people to make more savings in KiwiSaver rather than saving in other ways. KiwiSaver could lower housing demand and house prices without affecting the economy. 



All in all, we can reasonably conclude that there is a huge intergenerational discrepancy regarding the issue of affordable housing in New Zealand. The adversely affected generation by housing unaffordability is the Millennials as house prices are inflated. The baby boomers were able to buy homes before the housing crisis; at this time, housing demand was not higher than supply. At the other end of the spectrum, millennials have been subjected to longer renting periods as it is currently hard to own a home. Unfortunately, large houses that are supposed to be occupied by younger generations like millennials or younger families are occupied by the older generation.

As recommended, one of the outright initiatives to mitigate this intergenerational discrepancy is downsizing the elderly from their over-consumed/large dwellings to small and suitable homes. The absence of capital gains tax has made the older people over-invest in property markets and retain unnecessarily large houses at the end of their life cycle. The capital gains tax distortion should be removed and instead provide incentives to encourage the elderly to move to smaller dwellings. 


Allan, L. (2020). Reforming capital income taxation to improve housing affordability. Policy Quarterly, 16(2), 23–25. https://doi.org/10.26686/pq.v16i2.6478

Coleman, A., Karacaoglu, G., Hett, S., Thompson, H., Mclaughlan, R., Wilson, N., Allan, L., Blaschke, P., Stephenson, J., Barth, J., Bond, S., Diprose, G., Orchiston, C., Simon, K., Thomas, A., Gifford, H., Boulton, A., Cvitanovic, L., Neuwelt, P., … Jenkins, K. (2020). Listening to Voices of the Future current challenges. 16(2).

Exploration, P., & Association, P. (2018). Tax Working Group Public Submissions Information Release Release Document September 2018 PEPANZ Submission : Future of Tax Introduction. 9(September).

Mclaughlan, R. (2020). Downsizing property among the older generation: a means to free up New Zealand’s housing stock.  Policy Quarterly, 16(2), 16–20. https://tewaharoa.victoria.ac.nz/discovery/fulldisplay?docid=alma99179386349602386&context=L&vid=64VUW_INST:VUWNUI&lang=en&search_scope=MyInst_and_CI&adaptor=Local Search Engine&tab=all&query=any,contains,Intergenerational living New Zealand&offset=0


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