Nothing is worse than politicians running out of ideas. Or to say it in the famous words of Abraham Maslow, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”

In the case of politicians, the hammer is the power to tax and the nails are all the problems that are coming their way.

In the aftermath of the global financial crisis, financial transaction taxes were gaining popularity among policymakers. Sounds good but of course such taxes would have done nothing to prevent subprime mortgage lending. Nor would they have countervailed central banks’ cheap money policy.

Another example is sugar taxes, which have recently become fashionable. Countries such as the UK are introducing levies on fizzy drinks to reduce obesity and diabetes. The intention may be laudable but sadly there is no empirical evidence that health problems can be tackled that way.

Financial transaction and sugar taxes have one thing in common: They are the kinds of measures that politicians introduce when they want to be seen as “doing something” about a problem. These taxes have a prima facie claim to effectiveness as they look plausible at first sight. But that does not change the fact that they do not work.

Taxing things is an easy and intellectually lazy response to policy challenges. Governments can always introduce new taxes because they make it appear as if they were doing something while also raising extra revenue. Prime Minister John Key’s renewed toying with the idea of a land value tax for offshore buyers is the perfect example.

Auckland property prices have increased by such an extent that on some measures Auckland now ranks as one of the world’s least affordable cities. A median household requires 10 times its annual income in order to buy a median Auckland house. This is off the scale when the affordability ratio is about three times.

Hardly a day passes when the media do not reveal new horror stories from the Auckland property market: million-dollar homes that are wrecks, houses that get resold within months and double digit percentage mark-up, and stories about young adults unable to save enough to even afford just a deposit.

The housing market is the biggest cause of poverty and inequality of wealth. The negative side effects are clear – a decline in social mobility, the risk to financial stability and the effect on monetary policy-making. 

What can be done?

Some new taxes are possible. Labour previously proposed a broad capital gains tax. The government has already introduced a withholding tax for those who buy and sell a property within a two year period, while not making it their main residence.

On top of that, Mr Key is thinking aloud about a land value tax for overseas owners, which could apply to Kiwis and foreigners alike.

None of these taxes, however, will deal with the underlying cause of Auckland’s housing crisis. The reason is simple: Taxes do not build houses.

Translated into the policy challenge posed by the Auckland housing market, reasons could be found to shift demand: reduce demand by taxing overseas investors, empty dwellings or capital gains. Politically, such moves are quite appealing. They generate some revenue, demonstrate political action and do not require much work beyond that.

None of these measures is able to deal with the main factors on the demand side, however. Demand is driven by population growth, the trend toward smaller households and the shift from rural to urban and metropolitan living. It would require drastic, and sometimes draconian, measures to deal with these factors. Don’t expect to fix the housing market on the demand side.

By definition, this leaves supply as the more potent policy lever that should be pulled. It is also supply where New Zealand’s housing market displays its greatest weaknesses.

A history of construction activity shows the building rates of the past decade are well below their historical averages. Over the past 50 years, the average is 6.5 building consents per 1000 of population per year. This rate has not been reached since 2004.

In 2011, the rate reached a record low of 3.1. It has since recovered to 5.8 last year. These are not sufficient to house a population that is increasing at a net rate of 70,000 a year. The answer therefore can only come from the supply side. 

The New Zealand Initiative has produced a series of reports on these issues over the past four years and the recommendations are clear. What is required is an overhaul of both the planning system and the financing of local infrastructure. Positive financial incentives must be given to councils that are willing to accept the challenge of residential growth.

What isn’t needed are new taxes or pseudo-policies that only pretend to deal with the housing market. This requires supply action not demand tinkering but supply action. And it’s needed now.