Labour’s proposed capital gains tax has everyone talking, but most people are stressing about the wrong thing. If you do not want to pay the tax, you can simply avoid the asset. That part is easy.

The real issue is what it does to housing supply.

Medium-density homes in New Zealand are built because everyday investors buy off the plans. Their deposits unlock bank funding and that is what gets projects moving. First home buyers very rarely buy off the plans, so they do not fill that role.

If policy pushes investors out of the market, the pipeline slows. Projects stall. Supply shrinks. Rents rise. We have seen this before with the interest deductibility changes. The government ended up spending more than 400 million dollars a year housing families in motels.

Private landlords supply about 85 percent of rental homes in New Zealand. Government supply is only about 11 percent. If even a small number of private landlords exit, tenants have nowhere to go. Government cannot take them all in.

First home buyers are active right now and that is great. But they do not replace the pre-sales that fund new housing. Remove those pre-sales and fewer homes get built. It is as simple as that.

Watch the full video here: