Vancouver and Auckland have much in common. Both are beautiful harbour cities. Both are prosperous. Both have phases of enhanced population growth due to surging immigration. Both have municipal policies that limit new construction. Both are attractive to foreign capital.

House prices have sky-rocketed relative to incomes in both cities. Demographia’s 2015 survey of housing affordability ranked Vancouver as having the third most severely unaffordable housing market across 368 housing markets in nine nations. The median house price in Vancouver was 10.8 times median income. Auckland was ranked fourth equal with a 9.7 multiple. Demographia defines any market with a multiple of at least 5.1 to be severely unaffordable.

Demographia classifies a housing market as affordable if the multiple is no more than 3.0. Wendell Cox, a principal of Demographia, reports that from World War II until the 1970s “virtually all metropolitan areas in Australia, Canada, Ireland, New Zealand, the UK and the US” had multiples of 3.0 or lower. The multiple in Ireland is near 2.8.

Mr Cox reports that in the 12 years for which these surveys have been conducted, every housing market found to be severely unaffordable has also been subject to “strong” land use regulation.

Well, few problems are so bad that they cannot be made worse by a further dose of “strong” regulation. A natural impulse is to blame the high prices on foreign buyers. Official estimates indicate that in June and July this year foreigners bought 5-10% of the houses sold in the metro area of Vancouver.

Say no more. From August 2 this year, those buying residential property in the Vancouver area who are not permanent residents or Canadian citizens have to pay a hefty new 15% tax on the value of each transaction. That would amount to $C300,000 on the $C2 million cost of a typical detached house.

It is too early to say what its enduring effect will be. One real estate company reports that average home prices have been falling since March. By mid-August the average price for sales of detached homes was 7% below its value three months earlier. More dramatic reductions have been reported but turnover has been abnormally low.

Vancouver ‘solution’

Some informed opinion considers that any downward effect on the average house price will be temporary. Average prices will rise in 2017 and 2018.

But there are other measures in the wind. Simon Fraser University real estate finance specialist Andrey Pavolv lists a proposed tax on empty Vancouver homes, a Revenue Canada crackdown on tax evasion and tighter bank mortgage lending restrictions. When the Vancouver housing market does crash, he sees a 50% price drop as being “entirely likely.”

So, what about Auckland? Local journalists have urged a similar tax and Gareth Morgan has reportedly recommended taxing the owners of empty and near-empty houses.

Their main argument appears to be that demand measures are justified because supply-side measures will take too long to bring down prices. Well, sufficiently “strong” price regulation could indeed bring down observed prices. But that would be at the expense of home owners and shouldn’t the policy objective instead be to ease a housing shortage?

Lower house prices through regulation don’t put more people in homes. To the contrary, they could reduce the incentive to build houses.

Restrictions on foreign purchases reduce the wealth of New Zealanders who could have got a higher price by selling to foreigners and renting until the boom is over. It is not irrational to rent for a period; many do.

Mr Morgan suggests house prices are too high because too many houses are vacant. But is there any evidence that foreign buyers contribute disproportionately?

He says he owns several homes but can’t be bothered renting them out. But why is that a problem? Many New Zealanders have holiday homes that are vacant for much of the year.

Ghost houses?

Another category is New Zealanders working overseas for a limited time who don’t want strangers living in their home. Houses, like farmland, cars and other assets, can be unused or under-used for many valid reasons.

Census 2013 figures indicate Auckland has fewer unoccupied homes as a proportion of total homes than any other region except Nelson. At 6.6%, Auckland’s 2013 ratio was lower than in 2001 and 2006. There is no obvious problem there. Shamubeel Eaqub recently dismissed the claim “ghost houses” are contributing to Auckland’s skyrocketing prices as “bollocks.”

Both proposals illustrate the impulse to urge government to deal with the adverse effects of intrusive “strong” regulation by piling on yet more intrusive regulation. The urge is to deal with symptoms rather than causes.

Another possible argument for taxing foreign purchases is that it might reduce speculative buying. But how much of the buying by foreigners is speculative compared with buying by locals?

Foreigners may buy homes for themselves or their student children to live in. Some may buy for non-speculative investment portfolio diversification. Some may be protecting legitimately obtained wealth from corrupt expropriations in their home countries. Some will be buying for unsavoury reasons, perhaps to “launder” money obtained illegally in their home countries. That last category is troubling but it is not exclusive to housing or to foreign criminals.

In any case, trading is not the same thing as speculation and not all speculation is bad. People buy and sell houses as their circumstances change. Most would not regard themselves as speculating. Conversely, those who don’t trade because they think prices are going to rise or fall, are speculating.

What about first home buyers? If desired, they can be helped by specific measures that do not discriminate against foreigners. In short, it is important that policies address causes not symptoms.

A final thought is reciprocity. New Zealand can’t oblige other countries to reciprocate.

But if New Zealanders working in Australia want to be able to buy homes in Australia on the same basis as Australians, practising what one preaches at home has some merit. The same goes for New Zealanders working in other countries.

Bryce Wilkinson is a senior fellow at The New Zealand Initiative