Allowing New Zealanders to sell their homes to foreigners benefits New Zealanders

Jamie Whyte

Winston Peters has apparently convinced David Cunliffe that when foreigners buy New Zealand property they make New Zealanders worse off. Mr Cunliffe has announced his intention to adopt Winston Peters’ policy of banning foreigners from buying homes. Even John Key is now saying he will look into the matter.

There is no need to. Mr Peters and Mr Cunliffe are wrong: allowing New Zealanders to sell their homes to foreigners benefits New Zealanders.

To see why, start with the benefit to New Zealanders that occurs when one Kiwi buys a house from another Kiwi. To make the matter simple, suppose Kiwi John buys a house from Kiwi Jane for $500,000.

John must value the house more than the $500,000 he paid for it, otherwise he would have been unwilling to swap this amount for the house. Suppose the maximum he would have paid is $510,000. Then he benefits $10,000 from the purchase, this being the difference between the $500,000 he lost and the value (to him) of the house he gained.

Similarly, Jane must have valued her house at less than $500,000, otherwise she would not have been willing to swap it for this amount. Suppose she would have sold it for no less than $490,000. Then she benefits $10,000 from the sale, this being the difference between the $500,000 she gained and the value (to her) of the house she sold.

So the total benefit of the transaction to Kiwis is $20,000, split evenly between the buyer and the seller.

Now suppose instead that a Foreigner Fred had out-bid Kiwi John. To do this, he must have paid at least $510,001 since, by hypothesis, John was willing to spend up to $510,000. What is the benefit to New Zealanders in this case?

Well, John is where he started, still with his $500,000 and no house. He gets 0 benefit from the sale of Jane’s house to Fred. But Jane’s benefit has risen from $10,000 to $20,001. In other words, the total benefit to New Zealanders has increased by at least $1. (In reality, the net gain will usually be in the thousands.)

Some will be tempted to say that when Foreigner Fred buys the house Kiwi John is $10,000 worse off because he has lost the $10,000 benefit he would have got if Fred had not bid. Fine. But then you must say that, in the initial case, where Fred does not bid, Jane is $10,001 worse off because she has lost the extra $10,001 she would have got if Fred had bid. So the net result ends up the same, with New Zealanders being better off when Fred bids.

And let’s not forget the benefit to Fred, who must have valued the house at something more than $510,001 to have paid this for it. Fred is not a New Zealander, of course, but he is still a human being and his welfare should still be a matter of concern to civilized people.

As this example should make clear, Mr Peters’ policy simply creates a transfer of wealth from Kiwi house sellers and foreigners to Kiwi house buyers, and one that makes New Zealanders worse off as a group. The cost of this transfer is not worth incurring, if only because, over the long run, house sellers and house buyers are the same people.

Indeed, the policy is so economically ludicrous that I suspect its real motivations lie elsewhere. To mangle Samuel Johnson’s famous saying, xenophobia is the last refuge of the political scoundrel.

ENDS

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