Kiwibank economist Jeremy Couchman says the Government’s big housing package contains one superb idea that is already under-resourced
After all the build-up and hype, the Government’s policy response to the current housing crisis was a mixture of tweaks around the edges, some welcome changes, and a pinch of surprise.
The Government aims to tip the balance of the housing market away from investors towards first-home buyers. Unfortunately, the changes don’t address longer-term structural issues.
We have a significant shortage of affordable homes (we estimate the shortage at 80,000 homes) and housing supply in Aotearoa is simply not fast enough to respond to demand pressure.
The boldest move was the decision to eliminate investors’ ability to reduce tax bills by deducting interest payments. Interest deductibility is an element of the tax system, for property investors at least, that encourages pushing debt to the limit. And in a housing market downturn – yes, they do happen from time-to-time – investor debt is far riskier to carry than owner-occupied debt.
For investment properties purchased from March 27, interest payment deductions are gone. For all others, interest deductibility will be phased out over a four-year period. The other major tax change targeted at investors was the expected extension of the bright-line test on property sales from 5 years to 10. Investors will have to hold on to properties for at least 10 years or pay income tax on any gains made on the value of the property (a stealth capital gains tax).
Taken together these tax changes will make some current and potential investors re-evaluate the case for investing in property. Rents may be lifted to compensate for investors’ perceived losses. Rent rises though are limited by what the market can bear, which in turn is dependent on tenants’ income. Encouragingly, the changes to the bright-line test exclude new builds. Nudging investor demand into new builds will help boost supply.
Also announced is a $3.8bn Housing Acceleration Fund, a fund that local councils can access to build housing-related infrastructure. And an infrastructure fund is universally seen as a good idea given the debt constraints faced by our largest councils. Unfortunately, it’s a superb idea that’s already under-resourced. The nearly $4bn earmarked is merely a drop in a leaky bucket, and is unlikely to have a meaningful impact on infrastructure investment or housing supply.
Moreover, there is no detail on support for the mountain of upgrades required for existing local infrastructure. The deficiency in existing infrastructure is one barrier to the intensification in our largest cities. Upgrading existing infrastructure will mean more homes can be built closer to the productive hearts of our cities. Nevertheless, the fund is a step in the right direction. It is important to grow the fund, so it can truly accelerate councils. The greatest challenge developers face is finding viable land to develop, and getting council consent to develop. “Accelerating” the consent process is what’s needed.
Income and house price cap increases to the Home Start Grant and First Home Loans for first home buyers, are also changes in the right direction. However, the income caps of $700k in Auckland and $650k in Wellington and Queenstown are still likely to be seen as well below market, given the lack of supply of property in these price ranges. The $2bn increase in Kāinga Ora borrowing allowance for land purchases is encouraging. The agency has a good track record of building homes for the vulnerable locked out of the private rental market. And we need a meaningful increase in the social housing stock, not just the retrofitting of existing homes.
We don’t believe the above changes are likely to have an immediate cooling effect on house price growth. The return of Loan-to-Value Ratios (LVR) may not be having as much of an impact on investor activity as previously thought. The recent surge in house prices has only boosted investors’ equity on existing portfolios. We had expected some developments on the approval of Debt-to-Income (DTI) and interest-only lending restrictions on investors. But this still looks to be in the pipeline.
The RBNZ is expected to make an announcement in May. The RBNZ however still needs to be given the green light on DTIs from the Minister of Finance. Meanwhile,we are forecasting annual house price growth will peak at 25% across the country in the June quarter. But house price growth is still expected to remain in double-digit territory by the end of the 2021, eroding some of the changes made today to help first home buyers. Over the medium term, the Government’s tweaks to demand should add some coolant to the market. Mortgage lending rates are on track to rise next year. Rising mortgage rates will highlight the impact of removing interest payment deductions.
Major changes needed to boost supply were absent in the Government’s announcement. The housing market crisis has been decades in the making, so a panacea was never on the cards. We expect to see more from the Government on addressing the supply side. We know it has started turning the creaky wheels of Parliament on the long road to reforming the Resource Management Act. The high cost of building in NZ is another area worth investigation, particularly given the need to build affordable, efficient and sustainable housing.