NZ Reserve Bank Governor Alan Bollard prompted predictable reactions to the idea of taxing capital gains from investment property, ranging from vigorous head-nodding by CEOs of ‘real’ businesses and sharemarket players through to naysaying by politicians anxious to avoid a voter turn-off.

My first instinct was to nod vigorously too; but then I thought - hang on - it’s still a business. You invest in an asset, you provide a service - housing - for which people are prepared to pay, and then you sell that asset. Why is it different from any business investment? One could argue that it’s the only business where the asset keeps its value, there’s a limited supply (due to lack of land with proximity to everything), and rising demand. You could make the same argument about other capital intensive, resource-constrained businesses - and indeed the government sometimes steps in to regulate returns and prices if they get out of whack. But what government is going to regulate returns and pricing in property? It’s an impossible task, because the product is the most variegated imaginable, with hundreds of thousands of small business owners, who can vote you out of office.

Interest rate control has its uses, but heavily penalises the so-called productive sector, through overvalued exchange rates. The government could intervene by making more land available, but that won’t solve the complexity of matching homes with jobs, industries, services, shops, transport and all the other things that evolve over time in symbiosis. Even in countries with plenty of development land, property has been through a boom (including those with capital gains tax, by the way).

The global property boom can be attributed to:

• The fixed quantity of land and property in desirable locations (nothwithstanding apartment conversions and infill).
• The growing huge disposable wealth of the baby-boomers (and the new rich and middle class in the developing economies.) They all understand property (or think they do) , and regard it as a ’safe’ investment, which they can relate to. So they put their disposable savings into a property and let the miracles of time and compound interest build them an asset. The demand exceeds supply and up go the prices.
• The prevalence of double income households, all chasing housing, and paying more for the same asset. (I don’t like government assistance for first-home buyers either - it has the same inflationary effect).
• As the banks know, most people will forego most other things in life rather than fall behind on their mortgage payments. And they usually won’t sell a property for less than they paid for it, preferring to let time take care of any ‘real’ losses in a market downturn.

The property market is unique. Try as I might, I can’t think of anything other than a capital gains tax to offset the bubble effect of too much money chasing a scarce asset. Don’t kid yourselves - it won’t remove the attractions of property. Look at the UK with capital gains tax and a rental investment boom. But at least it might restore a little balance.

5% excess of demand over supply- boom; 5% excess of supply over demand - crash. I think the property market will crash once the boomers start cashing up for retirement. By the way, I currently rent where I live (although I’m not averse to buying a place for pleasure). I do not own any investment property, but I do have some listed property investments.

Here’s Rod Drury’s take on the issue and David Farrar in March.