CGT and home affordability

Graham Adams writes in The Listener:

As the debate over the introduction of a comprehensive capital gains tax rages in the media, it has mostly been reduced to arguing about its effect on the housing market and who would be stung by it and who wouldn’t. But one thing most commentators agree on is that it wouldn’t dent house prices significantly.
The Michael Cullen-chaired Tax Working Group said it would put only a small “downward pressure” on house prices and even Finance Minister Grant Robertson admits it would have a minor impact on affordability. 
In fact, the government’s general exclusion of the family home from any CGT regime could have the opposite effect in some suburbs if homeowners poured money into extending their houses, to bolster an investment beyond the taxman’s reach. In Australia, where family homes are generally exempt, this phenomenon is dubbed the “mansion effect”.
Interviewed on The Nation over the weekend, Jacinda Ardern seemed unaware of these inconvenient truths. Asked about a capital gains tax, she said: “There is a large group of New Zealanders — particularly young New Zealanders now — who, if their aspiration has been homeownership, [it] has just become harder and harder.”

It is extraordinary that the Prime Minister — whose “captain’s call” for a capital gains tax backfired on her so spectacularly in the 2017 election campaign — still doesn’t appear to understand the negligible effect it would have on housing affordability and is continuing to use it as a selling point.

At best there is a very small downward pressure on house prices, if any. And an upward pressure on rental prices.