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MORE ON HOUSING

Two days after my recent piece highlighting the “Reddell solution” to cooling the ridiculously over-heated housing market, the Government came out with its housing policy announcement. It had three main features.


First, it extended the “bright-line test” from five years to 10. Whatever the merits of what is in effect a capital gains tax for cooling investor interest in housing, this was a breach of a quite explicit pre-election commitment not to extend the bright-line test.


Second, the Government announced that it would remove the right to deduct the cost of borrowing when used to fund existing, but not new, houses, thus breaking one of the most fundamental principles of taxation – the ability in determining taxable income to deduct the costs of generating that income. In doing this, the Minister said he was “closing a loophole” because deducting interest was not available to people buying their own homes. Well of course it is not available to people buying their own homes – people buying their own homes are not taxed on the benefit they derive from living in their own homes (though one minor political party has advocated that they should be taxed on such imputed income). So in no sense is the ability to deduct interest in calculating a person’s tax obligation a “loophole”.


Third, the Government committed nearly $4 billion for additional infrastructure to assist in the provision of more housing.


And the result? Understandable outrage at broken election promises and the bastardisation of the tax system, a suggestion from some commentators that the package might result in higher rents (as landlords seek to recover the impact of the non-deductibility of interest), and with a few economists suggesting that house price increases might moderate somewhat from their previous predictions. But not the slightest sign that house prices might actually decline in a meaningful way, or even reverse the increase of the last 12 months.


I’ve seen some people suggest that rapidly rising house prices is the inevitable consequence of our very low interest rates at present. And certainly, with interest rates on both term deposits and mortgages at historically very low levels, the desire to buy something more tangible, like shares or property, is entirely understandable.


But while very low interest rates can explain an increased level of interest in property ownership, it doesn’t explain why house prices in New Zealand are wildly out of line with house prices in other countries, almost all of which also have historically very low interest rates.


Matt Burgess, Senior Economist at the New Zealand Initiative, had an article entitled “Planning is the externality” in the recent weekly newsletter of the NZ Initiative. He noted that since 2000, house prices have gone up by 39% (on top of general inflation) across all the countries of the OECD. The worst-performing countries include the United States (up 46% since 2000), the UK (85%), Australia (119%) and Canada (159%). But the very worst country was New Zealand, where house prices have risen an astonishing 177% faster than general inflation since 2000.


He notes that since 1991, when the Resource Management Act was passed, house prices in New Zealand have risen by nearly 10% per year faster than general inflation. “The OECD average for the same period was 1.5%. New Zealand has made it too hard to build a house.”


“In theory, urban planning promises to bring better knowledge, information, data, theory and methods to land use. In practice, planning is the know-nothing recent graduate from the University of Whatever who declines your request to put a turning bay on your property because that would affect the aesthetic appeal for passers-by. Your family will just have to reverse out onto the four lane urban motorway. For thirty years, the RMA has led to nonsense like this for the crime of trying to build a home.”


And the scary thing is that if the recommendations of the Randerson report were to be adopted by the Government – and all the indications are that they will be – the situation will get worse, not better.


I have no idea what will eventually produce a more sensible situation – perhaps higher interest rates will eventually force borrowers who have taken on enormous levels of debt relative to their incomes to sell, and that could produce a sharp downturn. But as somebody much wiser than I am once said, something which can’t go on forever – such as house prices rising several times faster than incomes – will eventually come to a stop. That could be very unpleasant, though hardly more so than the huge financial strain placed on first home buyers and renters by the current situation.


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30 Comments


Tom Spratt
Tom Spratt
Apr 12, 2021

The way I see it is that Auckland's are the most visible rapidly rising house prices. Probably due to population density. We all know it is a supply side problem but Auckland is unique in that close to 50% of it is sea water. Pretty sure you can't build houses on it, or the inner harbour islands. If you draw a 20km radius circle from the CBD you'll end up with a west extremity of the Scenic Drive, a northern extremity of the Okura river inlet, an east extremity of the western end of Waiheke, and a southern extremity of Manukau City shopping centre. Rangitoto, Motutapu and Motuihe islands are non-residential. So housing land is in short supply, regardless of…

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alanw
alanw
Apr 12, 2021

The Randerson RMA review committee consisted entirely of those clipping the ticket on the backs of those trying to do things. Utterly useless and certain to make things worse.


Restore property rights to owners and create tradeable rights to sunshine, privacy and protection from polluting infringements. Then let the market to its work.

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Ian Boag
Ian Boag
Apr 12, 2021

So you are Robbo. What to do?


There was no detailed drawn out analysis by Treasury or anyone else about the wisdom or consequences of the wage subsidy. Had to be done right now.


RB then chipped in with lots of cheap money. Remember RB independent of government


House prices headed for the sky. Rents will follow prices like night follows day. So while this is hard on FHBs it is brutal on the much larger number of renters. With prices heading skywards the government therefore needs a way to make property investment less attractive. another "now" problem. So the decision was to axe interest deductibility - aka the government subsidy of house investment leverage.


This may cause some further…


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Max Ritchie
Max Ritchie
Apr 11, 2021

If a government wants to introduce a CGT then it should do so, preferably with a mandate. The PM has ruled this out. Bringing in this change to accepted tax policy and calling it “closing a loophole” is devious and dishonest.

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Ian Boag
Ian Boag
Apr 11, 2021

the ability in determining taxable income to deduct the costs of generating that income.


Investors who will be affected by this as it ramps up over the next 4 years typically have about a 60% mortgage. With deductible interest costs, that amounts roughly to zero cashflow. Blind Freddie can see this is a capital gain play - as much leverage as you can keep afloat for no ongoing cash outlay. "Taxable income" - yeah right.


I have no problem with investments based on future capital gains. But for as long as said gains are tax-free then deductibility of associated costs is a bit rich. Incidentally if an investor wants to set up this sort of thing under the new rule…


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Robert Anderson
Robert Anderson
Apr 13, 2021
Replying to

You could use the same argument for vintage cars, paintings, stamps, old bottles and all manner of things. Leverage is about taking on the risk, doing the management and a thousand other things like dealing with arsewipe tenants. Should one do that for nothing? Being abused, being treated like scum by the various local bodies and the tenancy laws and the Tenancy tribunal.

Will you allow us a rebate if the value of the property was to go down and they do. Had that in Rotorua a few years back and in other places. Did we ask for the state to refund our money or top up our interest payments?

If you are going to be fair then you would…

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