On March 23rd the Government announced a package of policies designed to improve housing affordability and slow down the rapidly increasing price of property. We’re here to break that down and see what the experts think.
What is the government actually trying to accomplish?
We need to firstly define what the government sees as the goal of these policies and the housing market at large. New Zealand has a housing income-to-price ratio of 6.8 and is considered to be ‘extremely unaffordable’ – particularly in Auckland where that ratio is 10.0. However, it isn’t actually a goal of the government to make a big change to this.
Prime Minister Jacinda Ardern noted in December that property is the primary asset of most New Zealanders and that she wants “sustained moderation” of prices over time. Kiwis don’t expect continuous rises in the price of typical assets but they do with property. She would therefore like to see 4% rises in property values accompanied with 5% rises in wages. This would make house prices consistently increase but not allow them to become any more unaffordable in real terms.
So instead the goal of these policies is to blunt not reverse the recent rises in property values, rises which the PM has called unsustainable.
However, the drastic rise of the housing market has been such that even if we did see a fall in house prices with these policies, even something as sharp as 10%, it would only eliminate house price gains since November.
So what is actually in the package?
The Prime Minister’s stated objective with this policy package is to “both bring down the heat and the demand but also increase the number of houses being built in New Zealand.” The policies are primarily in three areas:
- An expanded tax;
- A new fund; and
- A change to what is taxed.
Firstly, the bright-line test will be extended from 5 to 10 years. This means that an existing property bought and sold within 10 years of being purchased will be subject to a capital gains tax and any profit made on the sale of the property will be taxed. The tax doesn’t apply to your primary residence, inheritance, or a new build. Criticisms have been levied at the extension as a “capital gains tax in disguise.” Interestingly, the Treasury suggested that they extend the test to 20 years.
Secondly, a 3.8 billion dollar fund has been proposed for councils and developers. This fund aims to provide sore-needed infrastructure to better support housing construction. Political restrictions, lack of funds, and lack of ability has long been a thorn in the side for local councils, who can now hope to get the construction ball rolling.
Thirdly, they are eliminating the ability of house owners to deduct interest rates from their income tax. This has probably been the most talked about and most misunderstood change. The way it previously worked is that you only paid tax on your rental income minus the interest you paid on your property. For example, if you received $1000 a week in rent, but paid $400 in interest, you would only pay tax on $600. This will soon start to be phased out, and landlords will instead have to pay tax on the entire rental income. The intention as the PM said is to “tilt the playing field towards first home buyers” who usually occupy their own homes and “away from the rampant demand we’ve seen from speculators.”
There have been criticisms from professional landlords regarding the third policy as it will likely reduce their profitability and force them to sell some of their properties. However, it has been pointed out that that is the actual objective of the policy. Landlords have also said that this change could actually lead to landlords increasing rent to cover their increased expenses.
Will these policies work?
This all depends on what you think the objective should be. If you just want a slow-down in house prices, then it seems so. But, if you want it to be more affordable to buy houses, probably not.
We asked Dr. Ryan Greenaway-McGrevy, Economist at the University of Auckland, as to his thoughts on these policies. He believes that the property price increases we have been seeing will be eased as more houses come on the market. Unfortunately, economics is far from simple. He doesn’t expect prices to go down due to house prices in NZ being “downward sticky,” meaning that once property prices go up, they usually don’t go the other way. The 17% increase in house prices in the last 12 months means that prices going down would be a Herculean task.
ASB’s Chief Economist Nick Tuffley stated after the announcements that it would “still mean annual growth in 2021 of around 9 to 10 percent, compared to our view of 15 percent before the housing announcement”. (NZ Herald). However, after 2021 housing prices are forecast to rise 3-5 percent annually – forecasting a definite improvement to the status quo.
Every policy has winners and losers, and Ryan suggests that the winners are those on their way to purchasing their first home. Their gain will come at the expense of wealthier Kiwis. Overall benefit comes in the form of higher tax revenue, with Inland Revenue estimating an additional $650 million annually in tax from just the bright-line extension. There hasn’t been a statement about if the additional revenue will be ring-fenced for anything in particular, but Ryan suggests it will likely be used pay down debt, and mean that future New Zealanders and young people won’t need to pay back as much in the future.
But what about those of us who aren’t buying a house and instead are renting?
Even after all these much discussed policies, the housing market will likely remain ‘extremely unaffordable’ for a significant time – which unfortunately doesn’t look like it’s going to change. So how will renters be affected by these changes?
Unfortunately, it is hard to say of any definitive effect on rental prices. Prices usually change because either supply or demand shifts, which Ryan says likely won’t happen. “In order for market rents to go up, there must be a decrease in supply of rentals, like if landlords sold their properties to owner-occupiers”. But he also points out that this might all be a wash, because as rentals go off the market as they are sold, so do renters as they move into houses they now live in.
Ryan does say that rental prices could go up as landlord expenses go up. Landlords may seek to increase rents that are below the market rate, i.e. any properties with rents below what they could be charging. He notes the following: “many rentals are purposely under-priced as a screening mechanism for landlords to ensure they have good tenants.” We may therefore see rents going up in certain properties, especially with long-term tenants.
Well if all that’s going to happen, what do the experts think we should or could have done instead?
Ryan suggests three things to make housing more available and affordable:
- Reduce demand by making it harder to get a large loan;
- Increase supply by making it easier to build;
- Introduce a land tax so there is a larger incentive to build.
“Given the sheer enormity of the housing affordability problem I also think demand-side policy is called for. Here I favour constraints on credit to investors buying existing structures… loan to value ratios (LVRs) and alike.” This means reducing the size of mortgages that people can get to buy houses, meaning they’d have to have larger deposits and can’t use as much credit to buy, while still letting people borrow more money to build new houses. “I think they can be strengthened further, by, for example, requiring only cash deposits” This means that when the value of one property goes up, the owner can’t use that increased equity as a deposit to buy another house. They have to use actual money as a deposit, not just capital gain.
Further, Ryan says “I would further restrict LVRs on investors to require a 50% minimum deposit and preclude housing equity from being used. But I would keep a 20% deposit for owner-occupiers.”
On the supply side, Ryan suggests that “relaxation of land use regulations and RMA reform” would allow the construction of more housing. This would make it easier and cheaper to build while making it simpler to build in more places and build up in other areas more intensively. The other reform Ryan recommends and which he has mentioned in the past is a tax on the unimproved value of land. He says the tax “disincentivises land banking and land speculation by making it more expensive to sit and wait for prices to rise before developing”. A theoretical example could be two sections on the same street, one with an apartment building on it, the other an empty lot. The unimproved land value is worth the same, so a land tax would mean that each year they both have to pay the same amount of tax, but one makes a lot of money off their building while the other has no income. This creates an incentive for the property owners to make their land productive and get something out of it, rather than waiting on capital gain. Ryan suggests that this would lead to a larger incentive to build more houses being constructed, especially in high-value but underutilised areas. Think of the inner suburbs of Auckland that are close to the city, but have large sections and only a single dwelling.
What’s next for New Zealand then?
There is always discussion to be had on both sides of the aisle as to what the objective of housing policy should be and how it should be achieved.
However, politics will be politics at the end of the day – parties will only do what they think they can get away with. Political realities often mean that the ‘sound’ economic policy is not the winner of the day.
Time will tell how these new changes actually impact on the housing market. Until then, us Generation Z’ers have to keep our fingers crossed!