OPINION

The housing conversation is hijacked by single issue politics. The reality is that New Zealand's unaffordable housing has roots in decades of poor and inconsistent policy making.

In Generation Rent, Selena and I scoped the complex combination of drivers and solutions to the housing crisis.

One tax issue needing urgent attention is the practice of negative gearing, which overwhelmingly benefits the rich.

Negative gearing is a practice in which an investor borrows lots of money against their rental investment, which lifts their mortgage payments sufficiently so that their outgoings exceed their rental income. Its not surprising to see nearly two-thirds of lending to investors is interest-only.

READ MORE:

* Cheaper house prices, better way of life draw Australians

* Tommy's says Wellington property market may be peaking

This creates a tax loss, which they offset against their other income, thus reducing their tax bill. This practice is most lucrative for those on high incomes, who get a bigger tax benefit because the income they have "removed" from the system would have been taxed at the top marginal tax rate. Figures obtained by the Labour Party shows residential tax breaks totaling $560 million in 2015.

There are of course legitimate reasons to count the costs of running a business, such as renting out property, for taxable income purposes.

But we propose that instead of the current system, the returns from an investment property should be quarantined or ring-fenced, so that they can be offset only against the same investment.

So if an investment property makes a loss one year, this is carried forward until the property does make a profit, or is offset against the capital gain (if the property was bought with an intent to benefit from capital gains) when the property is sold.

This would ensure that residential investment properties stand on their own merits – as either genuinely profitable or unprofitable exercises – rather than hiding behind a tax shield.

If the discussion on property taxes in New Zealand were truly open, we would also broach the subject of imputed rent.

Imputed rent, is essentially the rent a home owner would have paid if they had rented their house rather than bought it.

In some countries, the implicit rent that the home-owner pays to his or herself is taxed. The Organisation for Economic Cooperation and Development (OECD) recommends that its member countries tax imputed rent to equalise the tax incentive to own versus rent.

But while imputed rent is taxed in Iceland, Luxembourg, Netherlands, Slovenia and Switzerland, it has been deeply unpopular in other countries such as the United Kingdom, where it was abolished in 1963.

It is also difficult to administer, as the tax authorities need to establish what the rent should be, a task requiring regular review and updating, although in some countries they have instead opted for an inflation index to adjust the rent figures each year.

While we do not think an imputed rent tax is palatable or likely, a discussion on the issue, as a part of wider tax reforms, would help educate the public about the way the tax system is biased towards the relatively affluent home-owning class, while the poorer renting class miss out.

The housing conversation in New Zealand needs to broaden beyond a simplistic and naïve approach. We need to have a much wider conversation about the way we have an unequal system, that is tilted towards property ownership and investment. With falling home ownership rate to the lowest level since 1956, the time is surely now to show some leadership, even when it comes to unpopular things like taxing property fairly.