Economist calls for “rational” fiscal policy to fix house price bubble

The real estate price bubble resumed amid the COVID-19 pandemic after a hiatus from 2017 to 2019 – and this time, it was driven by a lack of “rational” fiscal policy, according to political economist Keith Rankin.

Rankin said it is rational to respond to price signals. However, he believes that the government was simply watching as much of the money it could and should be borrowing flowed into the secondary housing market, rather than responding to lower interest rates rationally.

With the government committed to reintroducing a 39% tax rate on high marginal incomes, Rankin suggests that it should do the following:

• Replace the lower income tax brackets with a basic universal income (BUI) of $9,080 ($175 per week) per year to all economic citizens: resident citizens, resident permanent residents, and other people presently resident in New Zealand with working or student visas.
• Increase jobseeker and assisted living benefits by $25 per week, as well as accommodation supplements across the board by 10%.
• Place a substantial “stamp duty” tax on all second homes, all rented homes, and all homes owned by trusts.
• Introduce a “good landlord” voluntary warrant of fitness for rented houses and exempt complying landlords and trusts from the new stamp duty.

“The BUI and benefit increases, in an economy such as that in New Zealand at present, would soak up much of the money otherwise flowing into the bubble economy. [It] would also free up labour supply – especially for young people presently constrained by the requirements of conditional benefits,” Rankin said.

He added that the stamp duty would create a disincentive for speculative “investor” money to flow into the real estate market, while the landlord warrant could address the emerging problem of slum housing in the cities.

“The improved fiscal policy suggested is a case of win-win, immediately easing the stresses of daily life in today’s uncertain times, while also defusing the out-of-control real estate market. I am not confident that the government will choose this or any other win-win option. Rather, I believe they will choose a lose-lose option; continuance of unnecessary economic insecurity and escalating house prices,” Rankin concluded.