[Editor’s note: Is ‘tackles’ too generous a term for the new suite of Labour policies intended to address New Zealand’s housing woes? In his recent BayBuzz magazine article, Mark Sweet wrote of Housing in crisis. And indeed, no one is happy with the current situation (except perhaps current residential homeowners) and it appears fewer still are thrilled with the Government’s plan … it’s being attacked from all sides. Perhaps it’s worth noting the political maxim regarding complex issues: if everyone’s upset, you might have found the right answer! In any event, here’s Mark’s ‘take’ on the Government’s package.]
The new legislation to control housing market is triple pronged – discouragement of investors, assistance for first home buyers, and a $3.8b fund for residential infrastructure.
Targeting investors is recognition that 2020 saw 30% of housing stock purchased by that group, fueling the inflation of prices in a demand-led market.
The most controversial change is taking away a landlord’s ability to include mortgage interest as a tax deduction. The rationale is that landlords had an advantage over owner-occupiers who could not deduct interest. Investors could capitalise their tax advantage and outbid others – $5000 tax free at 5% is $100,000.
Along with increase of Loan to Value Ratios and the Bright Line test being extended to ten years, the Government has dampened the speculative element, that is, those investors who weren’t in the business to provide accommodation, but to profit from capital gain.
If the changes work, and investors fall from the market, and sell up, house prices should stabilise, or fall. A correction of 10% would be back to December 2020 values.
A long-term benefit of investors being discouraged from the housing market is money being diverted to more productive investments in agriculture, manufacturing, and technology. (Currently NZ housing stock value is $1,300 billion. The NZ Stock Market value is $190 billion)
Investors argue providing rental housing is a business and they’re being treated unfairly. IRD agrees and didn’t support the anomaly. Landlords passing on the cost of the changes by increasing rents is likely. $5000 is an extra $100/week, average 20% increase. With demand for rental accommodation at a peak, a sharp increase could see the Government introduce a rent freeze, as it did during Covid lockdown, and controls into the future.
An incentive for investors is that the restrictions do not apply to new builds, reinforcing the message that providing housing is encouraged, taking it from existing stock is not.
One wonders how much Government considered the ‘Covid effect’ when framing the legislation. The extraordinary demand for housing in 2020 wasn’t predicted by any agencies. The sharp increase in investors is likely because in 2019 overseas travel saw $9 billion leave the country, and with borders closed, money spent on travel had to go somewhere. Up market car dealers have benefited too.
How this plays out politically for Government is hard to predict. Those most hurt are investors and low-income renters. The former are more likely to support parties other than Labour, so loss of votes is minimal.
Of greater concern politically is a fall of say 20% in house values coupled with mortgage interest rate rises. Recent buyers, especially first home owners, could be left with negative equity and prohibitive interest payments. This has happened with housing bubbles the world over. We are not exempt.
My hope is the housing market flatlines for a least five years, in which time the balance between demand and supply is corrected, and that in the future, enabling of sufficient housing stock is imbedded in Government policy with cross party support.