Economic Institute slams Treasury policy advice

:  Parliament's Finance and Expenditure Select Committee

Parliament's Finance and Expenditure Committee last week heard (Earlier Politik got the date confused and said the meeting was today)a withering condemnation of the new Government's proposed crackdown on foreign house buyers from the New Zealand Institute of Economic Research.

The NZIER is usually regarded as an authoritative independent body with high credibility.

But its submission opposing the Overseas Investment Amendment Bill is one of the toughest critiques of more than 200 which are generally opposed.

The NZIER is particularly critical of Treasury’s advice to the Government on the Bill which it says was completed in haste, “which precluded any degree of empirical analysis on the costs, benefits and risks associated with the proposal.” 

It suggests that Treasury’s advice supporting the legislation was the product of political pressure. 

“We have a great deal of sympathy for Treasury,” it says. 

“It was effectively railroaded into delivering a Regulatory Impact Statement (RIS) to implement a proposed legislative change with which it likely disagrees, and it would have been very difficult from a relationship perspective for Treasury to develop a RIS that explicitly advised against the new government’s proposal.” 

In fact, the Treasury advice does suggest changes to the Bill --- in particular to the tight definition of who will be elegible to buy residential land in New Zealand. 

This has been a contentious aspect of the Bill with a number of “people with Chinese names” opposing it. 

The Bill proposes that residential land buyers will need to be ordinarily resident here if they hold a permanent resident visa and have been living in New Zealand for at least a year and have been present in New Zealand for at least 183 days in the past year.

Treasury favours extending this to allow overseas people with a strong commitment to reside in New Zealand to buy a home in some circumstances

But the NZIER, noting that the Bill is intended to reduce pressure on the housing market to make it easier for first home buyers to get a house says: "We understand why Treasury has written a Regulatory Impact Statement (RIS) that contains very little evidence.

“We too would like it to be easier for first home buyers to get into their own home.

“But none of these things detracts from the fact that, from an economic perspective, this Bill is a poorly-designed solution to a poorly-defined problem.”

The submission is particularly critical of Treasury's failure to analyse the problem it is setting out to solve.

“The problem definition in Treasury’s OIA Bill RIS falls well short of best practice. 

“In fact, it is almost non-existent. 

“ It contains almost no information or empirical content. 

“It merely states that the new government has a stated policy commitment to “ban overseas speculators from buying existing houses” and the RIS is all about how to implement the political proposal. 

“This is effectively Treasury waving the white flag from a policy analysis perspective. 

“It seems clear that Treasury was not asked to analyse whether the proposal makes any economic sense based on first principles.”

It lists a series of questions which it believes Treasury should have asked:   

  • What empirical evidence is there that overseas speculators are pushing up house prices in New Zealand?
  • Which countries’ speculators are having the greatest influence?
  • In the absence of empirical evidence, recognising the limitations of existing LINZ data sets, how reliable is the anecdotal evidence on the role of overseas speculators in artificially inflating house prices?
  • How significant is this inflationary effect, compared to other potential drivers of house price inflation, such as supply-side constraints and land availability?
  • Why is home ownership ‘better’ for Kiwis than renting? (i.e. what is the welfare loss to Kiwis attributed to the current legislative framework?)
  • What does the desired ‘future state’ look like, and how likely is the proposal to contribute to this state?  

“Without at least initial answers to these questions, it is very difficult to judge whether the proposal will make any material difference to home affordability for Kiwis at all,” it says..

However, Treasury argues that the Bill will benefit the New Zealand public. 

“We expect less upward pressure on house prices during periods when the housing market is out of equilibrium, and foreign capital would otherwise flow into New Zealand seeking to buy houses,’ it says. 

“Other potential benefits could include an increase in the stock of new residential property. 

“However the nature of these benefits is unclear.” 

The plain fact is that submissions opposing the Bill are unlikely to make much headway with the Committee on which the Coalition has a majority of members. 

As Trade Minister David Parker continually makes clear, the Bill and the crackdown on foreign house buyers is a central plank in his “sale” of the Comprehensive and Progressive Trans Pacific Partnership agreement to the Labour party and to the left in general. 

He says it is about a restoration of sovereignty to New Zealand. 

The NZIER does offer one slight hint of support. 

“There is almost no evidence at all to justify the ban of foreign buyers of existing homes proposed under the Bill. 

“In lieu of such evidence, in our view, the Bill’s provisions – if passed – should be applied with flexibility, rather than bluntly applied to all investors from all countries to all investments. 

“We wonder if there is scope for any exemptions – perhaps by region or type of investment – in the regulations.” 

The answer to that, given the political pressure behind the Bill, is “probably not”.

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