Feb 16
New Zealand's Addiction to Land Speculation is its Forever Weakness
— Deceit, Speculation, and Mistrust has long characterised New Zealand’s approach to land-use.
Many New Zealanders are surprised that affordable housing for all is an internationally agreed upon human right and their perceived right to speculate and make tax-free capital gains on real estate investment is not.
In most aspects of society New Zealand acts in good faith but the way it has run its land-use policies has such a long history of deceit and speculation that win-lose outcomes have become the default setting.
New Zealand’s mis-management of land-use is so imbedded that honourable win-win solutions are not understood, and New Zealanders are unfamiliar with better ways to manage land-use. This lack of understanding prevents New Zealand from replicating land-use success stories from overseas (such as, Singapore, Japan, Germany, Vienna’s land bank for public good, etc.).
Not understanding the tools for changing land-use has prevented New Zealand cities from reducing their climate change emissions (my hometown of Christchurch is a particularly bad example) and it may prevent New Zealand from adapting to a more dangerous warming world.
Solutions that could have addressed the inequality aspect of the housing crisis have only been partially delivered upon. Meaning New Zealand risks slipping into a classist society based on inherited property wealth.
Currently, New Zealand over invests in property speculation that has win-lose effects to different societal groups. The win-win option of switching capital flow investment to other commercial opportunities has not been chosen and New Zealand’s productivity performance continues to drift behind others.
The North Island’s recent flooding from Cyclone Gabrielle highlights that extreme storm events are becoming more common as the world gets warmer. New Zealand needs better spatial planning and infrastructure provision to manage increasingly volatile water catchments. New Zealand will need to reconfigure its built environments as it retreats from at-risk areas. Central government, local government and the property development community will need to work together better — there will need to be a collective response. What form should this take? What are the underlying principles? Hopefully this article illustrates some of the issues.
It is obvious that the recovery from Cyclone Gabrielle, managed retreat, and greater land-use resiliency infrastructure investment will be expensive. The Reserve Bank Governor has injected some realism into the government-spending-versus-inflation political nexus by explaining that if increased spending is needed then it should come from increased taxation or from spending cuts elsewhere — the government should not borrow to spend. The reason for this advice is because fiscal policy needs to assist monetary policy to bring down inflation. This means the Cyclone recovery will be different from earlier disasters, like the Covid pandemic and the Christchurch and Kaikoura earthquakes which used debt as a recovery tool.
Who should pay? Collectively land owners have benefited from past infrastructure provision and they will benefit from future spending. Land owners should contribute so that prosperity is evenly shared. Yet this will not automatically happen. It will take a cultural shift that even large disasters in the past have not budged.
As long as New Zealand believes that increases in the value of scarce natural resources — like land — belong to the individual title holder and this gain should be free from taxation or any return to the common good then New Zealand will continue to mis-manage land-use. Added to this mismanagement issue, if land is scarce (such as well located urban sites) and has monopoly characteristics — possibly artificially so, due to planning restrictions or a lack of a infrastructure funding mechanism then the exploitation possibilities are that much higher. If landholders continue to successfully defend a culture where land-use costs are socialised whilst benefits are capitalised then shared prosperity is not possible.
In Christchurch 80% of the buildings in the city centre were destroyed twelve years ago by a series of earthquakes. The rebuild has been slow, as can be seen in the above picture. A significant reason for this slowness is taxation on buildings is high and taxation on speculative land banking is low. Stupidly land bankers are protected, and builders are penalised.
It shouldn’t be hard from examples like the above to understand why investors in New Zealand focus on land speculation and hoarding real estate rather than investing in more productive opportunities. New Zealand cannot afford to let this nonsense continue yet cultural change is hard, especially when it has had many generations to establish itself.
The bad faith institutional behaviour started in early settlement times as far back as the late 1830s with ‘native tenth reserves’ which if they had been honoured in good faith would have established a win-win precedent. But this did not happen — repeatedly prosperity was not shared and the culture of speculating on real estate dominated.
The Nelson Tenths: counting the cost of a 180-year old broken deal
The seeds of this bitter harvest were sown in 1839, when the private New Zealand Company breached its own standards in a sale agreement between the company and tangata whenua Māori in Whakatū.
The company was operating with the understanding, established by the company itself, that Māori were the owners of the land; that the company would not survey or purchase land Māori were actively using for living, cultivating, harvesting or burials; and that one tenth of all land bought from Māori land-owners would be reserved to benefit Māori.
This tenth was a crucial part of the deal, as the concept the company proposed was that the growing prosperity of the settlers’ land would also enrich mana whenua, and that enrichment constituted part of the payment for the land.
The proposed tenths rule is very similar to the Japanese voluntary land reallocation practice — which I have previously written about in the context of how Japan has reconfigured land-use around new railway lines and used land sales to help fund the infrastructure provided. This infrastructure funding tool works because local landowners essentially trade some of their land in return for better infrastructure and amenities which services the land they keep. This raises the value of their landholdings above what they previously owned. Whilst supplying an increase in well located land to the market. It is a way that incumbents and newcomers can align their interests to achieve a ‘win-win’ outcome. The basic premise of this proposal is prosperity is shared. But that didn’t happen in New Zealand as can be seen in the wealth statistics of Māori versus New Zealand Europeans.
In 2015, Stats NZ found that the median Pākehā had $114,000 in wealth — compared to $12,000 for the median Pasifika, $23,000 for the median Māori and $32,000 for the median Asian.
Since 2015 — including under the Jacinda government — the wealth gap between New Zealand Europeans and Māori has widened further. For example, by 2018 the wealth gap between the median Pākehā and Māori had grown by almost 17 percent to $109,000. Given the explosion of house and land prices because of the monetary and fiscal response to the covid pandemic the wealth gap will have widened even further.
The early Pākehā settlers when they purchased land rarely gave legal title to Māori for the agreed upon ‘tenth’ reserves. They reneged on the land sale agreements to in-effect steal land. An underlying reason for this deceitful behaviour is land speculation was a dominant cultural practice — there was a kind of Ponzi scheme of early settlers gaining title to land by any means possible so they could profit from the next wave of settlers. False advertising to attract immigrants was endemic — the New Zealand Company claiming Wellington had plenty of flat land, navigable rivers and a tropical climate where bananas grow for example.
The very existence of the New Zealand Company only makes sense in that it intended to profit from land speculation. Their good intentions of sharing prosperity would not survive against their greedier speculative instincts.
When Māori became mistrustful and refused to sell their land this was one of the triggers for war against Māori and even more of their landholdings were stolen (often from non-combatants or those who fought for the Crown). In the subsequent years into the 20th century the Native Land Court focus was on divesting Māori from there remaining landholdings rather than assisting them with the prosperous development of them.
For Māori, generations of this pattern of behaviour have made them deeply mistrustful of Pākehā governing institutions. This has been partially redressed by Treaty of Waitangi settlement payments. What has not been addressed is the cultural effect this deceitful behaviour has had on New Zealand’s wider society — the unconscious and institutional biases that prevents shared prosperity land-use policies from being chosen. This is important because as the saying goes — culture trumps strategy, every time.
A win-lose pattern of deceit, speculation and mistrust was established that continues to this day. Initially between Māori and Pākehā in the 19th and 20th century but now extending to those with property wealth versus those without.
For periods of time New Zealand has had more enlightened land-use policies. The Canterbury province in effect had a public land bank which they used to fund major capital works like the Lyttelton rail tunnel. The 1890s Liberal government instituted a nationwide land value tax which raised the holding cost of land not put to its best use, which would have reduced land speculation and help speed up the transition from large wool estates to smaller yet more productive dairy and lamb farming units (NB: this nationwide land value tax was whittled away with various exceptions and finally abolished in 1990). The first Labour government in the 1930s to 1950s built state houses where the rent was a fixed proportion of the average wage. Even Michael Cullen’s creation of KiwiSaver in 2006 can be seen as an intervention to wean New Zealand off its addiction to speculative property investment.
Unfortunately, none of these interventions have been long lasting or fully transformational because vested interests fought back so that speculative property investors were able to socialise infrastructure costs onto others whilst ensuring the resulting increase in land prices and gains from land supply shortages remain tax free.
This is extremely costly to the social structure of New Zealand. There is a thought that the rise of populist extremism in New Zealand has a root cause in society poorly managing a changing world and the consequent rise in wealth inequality. For example, the fully grown man living with his parents because he cannot afford his own home who seeks an answer on social media becomes vulnerable to rabbit hole conspiracy theories (it is easy to whip up scepticism, denial, and alt reality thinking).
It is my contention that New Zealand institutionally has not learnt how to move on from its culture of deceit, speculation, and mistrust in its thinking about land-use policies. This means government initiatives like implementing a wealth tax (the efficiency and inequality benefits of switching more of the tax burden from income to land are overwhelming), KiwiBuild, the proposed co-governance reforms, three-waters reforms, Auckland Light Rail, and so on, were not thought through from first principles and consequently have become politically difficult to deliver.
New Zealand is stuck in a phase of institutional inertia with risk adverse politicians and officials. As MP Chloe Swarbrick commented about Auckland’s recent floods — “there has been a complete abdication of responsibility… I’ve definitely seen over the past few years that we have continued to build out our bureaucracies at every single level of Government to effectively be super risk-averse… The point here is that the individuals who are in the business of calculating risk warned politicians that there was flooding risk on the horizon amid the growing prominence of intense weather events — and very little was done.” I would argue that despite an expansion of governance bureaucracy that their ability to deliver genuine change has been reduced to a ‘yeah-nah’ cultural response.
How to move forward? Obviously shared prosperity is critical, and I would say that sharing includes with future generations. New Zealand needs something that the Irish economist David McWilliams calls Cathedral Thinking.
The people who built Europe’s gothic cathedrals knew that they wouldn’t be around to see them completed. They were building for people yet to be born. This is what we need to build livable cities right now.
An important aspect of Cathedral Thinking is its commitment to practical excellence. It may have taken time — but Cathedrals were delivered. They weren’t an abstract concept talked about by the professional management class in a far off capital city or an undefinable marketing term to gaslight the masses — cathedrals existed in real life (IRL) and they were the best buildings man could build at the time. Land use policy reform should deliver that same on-the-ground excellence that benefits future generations.
Shared prosperity is also more about predistribution rather than redistribution. As the bible preaches — it is better to teach someone how to fish than to give them some fish. Predistribution has the same ethos. It is about ensuring the conditions are such that more people can achieve prosperity rather than redistributing the prosperity after the fact.
If predistribution and shared prosperity are achieved then the social determinants of poor health (plus poor education and other important social indictors) will be reduced. This is a significant advantage of predistribution. It reduces the need for redistribution.
A further part of the win-win shared prosperity concept is community land value capture to fund common good infrastructure that provides a land supply that everyone can share the benefits from. There are different techniques of value capture, such as, land readjustment, public land banks, and land value tax — that all have a Georgist aspect about them.
Georgism is an important economic philosophy dating back to the self-taught US economist — Henry George. He described in his book Progress and Poverty (most published book in the 1890s other than the bible) that property rights lack a justifiable moral claim in situations where the value is unearned i.e. not the result of someone’s labour. George advocated for democracy and human rights to counter the natural tendency of capitalism to become entrapped by vested interests and inequality. He is most well-known for promoting land value tax.
Georgism describes the political-economic divide as not between labour and capital or between big government/high taxation versus small government/low taxation, but the divide is best described as supporting both labour and capital and opposing the unearned increment gained by landowners and monopolists.
Stephen Hoskins, a New Zealand Georgist advocate was recently interviewed on an Irish economic podcast discussing YIMBYism and land value tax (LVT) in a show titled — Reframing the housing crisis. This podcast expands on the importance of Georgism to the problems that New Zealand, Ireland, and elsewhere currently face.
It is hard to see another policy-area more needed in New Zealand than land-use reform. Failure or success will affect our safety in a volatile warming world, it will affect our social fabric, and our future shared prosperity.
The government’s Resource Management Act (RMA) reform process has eased some planning related land-use restrictions — minimum car parking requirements were eliminated, taller and bulkier buildings around high frequency public transport was upzoned, and in the largest towns and cities building three stories and three dwellings on most sites was allowed. But the reform process did not consider alternative infrastructure funding options, incentives for local government to create better district plans, or how taxation affects land-use. Because the full range of relevant factors have not been considered it is debatable how effective the RMA reforms will be. Especially as New Zealand’s underlying culture remains unchanged. Land bankers, NIMBYs and similar vested interest groups seem as powerful as ever. It is quite possible the recent good intentions to reform land-use will face a cultural backlash causing them to be rolled back like previous land-use reforms.
Hopefully the cultural backlash is not effective. There are signs that New Zealand could go further with land-use policy reform. Some of New Zealand’s smaller political parties have interesting reforms in the land-use and property wealth space.
The ACT party proposes central government shares some of the construction related sales tax with local government as an incentive for local government to implement better land-use policies.
The Green Party proposes a 1% wealth tax on those with a net worth of greater than $1million.
The TOP party have the most insightful and comprehensive land-use and housing affordability reform package — especially with its tax switch proposal of a $6.35bn income tax cut that is funded by implementing a nationwide land value tax. This proposal would significantly reduce land speculation and help speed up changes to land-use that are needed for environmental, equity, and productivity reasons. See here for the full economic analysis of how this tax switch would affect individuals and groups — notably someone with the median combination of income and land wealth would enjoy an annual net tax cut of $1,300. Those groups like Māori with less than average wealth will of course receive a larger tax cut.
