Reforming capital income taxation to improve housing affordability

Abstract

New Zealand’s distortionary tax environment for housing imposes large costs on young people. Since 1989, New Zealand has taxed owner-occupied housing more lightly than other forms of capital income. In contrast, retirement savings have been taxed heavily. This combination has created a bias towards owner-occupied housing, encouraging homeowners to live in higher quality properties than they would under a neutral tax system, and bid up the price of land located near desirable amenities.

While existing, often older homeowners have enjoyed high land and house values, our generation has faced artificially inflated house prices. Distortionary capital income taxation has contributed to New Zealand’s housing affordability crisis.