The Long Term Effects of Capital Gains Taxes in New Zealand

This paper develops a model of the housing market incorporating a construction sector, a rental sector, and a housing demand sector to examine the long term consequences for the housing market of different types of capital gains taxes. The sector is based on an overlapping generations model of the economy that included a detailed representation of the credit constraints and tax regulations affecting households.

The model suggests that capital gains taxes will raise rents, increase homeownership rates, rebalance the housing stock towards smaller houses, and increase the net foreign asset position.

The implications for welfare are much less clear, however, particularly for young low income households that will face higher rents.