Sam Stubbs is chief executive of KiwiSaver provider Simplicity and a regular Stuff opinion contributor.

OPINION: An overseas investor in housing told me recently that Auckland was the most unaffordable housing market globally.

And I’m not even sure if they had considered Wellington, which feels even worse.

Homes remain in critically short supply across New Zealand. We need to build 20,000 a year just to replace those that wear out and get demolished.

And high house prices are fundamentally an issue of supply and demand. Until we increase supply, demand will exceed it and prices will go up.

READ MORE:
* How does tax on NZ property compare to other countries?
* Taxing wealth: a necessary step, or unachievable pipe dream?
* 200k empty ‘ghost’ houses: Why and what would get them into the market?
* Should New Zealand just tax land?

And be under no illusion that this short-term house price dip will last. It can only stay that way if we build many more homes.

Otherwise, prices will trend up again because more people will want homes than there are to live in. This is economics 101.

One way to increase supply has been to buy investment properties and rent them. As many landlords know, rental homes can be a great long-term investment.

Why? Because we all need a roof over our heads, tenants nearly always pay the rent. It’s the first bill we budget for.

And capital gains have been reliable, and un-taxed, for decades, with returns for investors solid for decades.

And because rents usually go up with inflation, pension funds love it as an asset class. Globally they are now investing over $60 billion a month into owning and renting homes.

Simplicity is doing this too. It’s a reliable earner for our KiwiSaver members and provides much-needed homes for rent long term. It’s a real win, win.

But the first two years of our buying land and building homes have shattered several myths about the barriers to building more homes in New Zealand.

The biggest myth is that there is a lack of land. We’ve discovered this simply isn’t so. Large tracts of land are available all over New Zealand. In Auckland, just look at Albany and Westgate.

The myth of there being no land is often touted by stand-alone housing developers.

For their economic model to work, land has to be bought cheaply, so they can build the Kiwi dream of a stand-alone home.

But in order for this to happen, new roads, power lines, water lines, sewers and stormwater drains need to be built, at a huge up-front expense to home buyers and rate-payers.

And stand-alone homes on our city fringes are an environmental challenge. Owners have to commute more, with stand-alone homes typically requiring more heating.

The sad reality is that new suburbs generate more carbon per person than in-fill homes and apartments.

This all adds up to the Kiwi dream actually being a financial and environmental challenge for many.

So how do we solve this complex problem?

Sadly, there is no silver bullet. The lousy economics of building houses has developed over decades.

But to my mind, a big step in the right direction would be a tax on undeveloped or unoccupied land.

Why?

Any survey of who owns what in our major cities reveals that there are huge swathes of land that have been undeveloped for many years.

Tax-free capital gains, and no tax for leaving the property empty, means the (usually wealthy) owners are effectively incentivised to do nothing.

This has a huge impact on the supply of affordable homes because land stays artificially scarce and expensive.

But a tax on undeveloped land incentivises those who own it to make it productive. That would increase the supply of homes, and commercial and industrial buildings. All of which are needed in our expanding cities.

A tax on undeveloped land is common enough overseas. And, unusually, it is the one tax that almost all economists agree is fair and effective.

So how would it work?

I like the simple approach.

A 1% per annum on the rateable value of undeveloped land would be a strong incentive for owners to build and develop.

Currently, the cash holding costs for bare land are only rates, and they are typically low because it’s not been developed.

But even a 1% tax each year makes doing nothing a more expensive option.

And once we tax bare land, there would be a precedent to raise it if too much land stayed undeveloped. We would find the squeal point’ at which enough landowners would either develop their bare land or sell it to someone who will.

And with homes so expensive, it is morally questionable that owners of bare land should be helping keep it that way.

I can hear the cries of indignation from bare landowners, and they have a point. After all, they have bought it, and like any asset, it’s their decision what they do with it.

But the problem I have with that argument is that land is different than other assets. It is vital to our collective well-being that it is developed, especially where keeping it vacant forces people to live on the city fringes.

The decision by a landowner to leave the land in our cities vacant is expensive for their fellow citizens, so perhaps that behaviour should be disincentivised via taxation.

I am not usually a big fan of raising taxes, or new taxes. But having seen the property market in action, this time I am.

We need to tax the owners of large tracts of undeveloped land in our cities, incentivising them to either develop it, or sell it to someone who will.