Analysis of NZ Housing Policies - NZ Government's Muddled Thinking, Tribalism and Virtue Signalling

The NZ Government announced a collection of planned new policies to designed to 'tilt the balance towards first-home buyers'. I believe the Government is sincere in its concern to tackle the issues.

However I believe the likely outcomes of these policies will be the total opposite of advantaging first home buyers. It's quite possible these policies will disadvantage both:

• the long term renter (circa 35% of kiwis) and
• the first home buyer.

I am not an investor in rental property.

Looking forward I can see its quite possible that due to these policies:

• rents will significantly increase, due to passing on of lost tax deductions on interest costs
• the supply of rental accomodation will reduce as some investors cash out to invest in other ventures (where business funding costs continue to be tax deductible). Less rental inventory also fuels rental increases.
• it will remain very difficult for first home buyers to save deposits given their income
• first home buyers will continue to struggle to secure mortgage finance, due to the significant sums required to be funded vs their income
• The pace of supply of new home building may increase but not significantly and certainly not sufficiently to address the supply shortage.
• Some investors will invest in new homes (interest costs on new homes purchased as a rental investment will be tax deductible). The Government is signalling and motivating investment money to move to new house builds.
• There will continue to be a significant undersupply of skilled tradespeople, putting a significant curb on new house build growth potential.
• We already have significant demand and massive undersupply of houses. Since the rate of supply of new house builds isn't going to increase (much if at all) and with investors being encouraged to invest in this segment, then new home prices will increase.
• First home buyers will find themselves competing to buy new homes against investors who used to be able to chose to invest in the whole market. Now investors are being driven to only buy new homes (due to the tax deduction/cashflow).
• Overall house prices aren't likely to fall much, if at all. Since the underlying massive undersupply remains and since new house prices are likely to be driven up. Most new houses will predominantly be built at the affordable end of prices, but sold at relatively higher prices in that segment. Which in turn creates pressure for price increases across the entire market.
• New houses, sold to investors, at higher prices also translates into higher rental costs.

So first time buyers will face higher rents, resulting in lower saving rates, increasingly higher house prices, increased competition for new homes and continuing undersupply of new homes.

Renters face higher rents, and maybe more new houses to rent, maybe.

Without doubt we have a serious problem with massive under supply of housing, inflation in the price of houses and rental costs. We have a significant under supply of the skilled tradespeople to build the houses needed, at the pace needed, to lessen the problem. The costs of building materials are comparatively high in NZ. There are circa 22,000 people on the State Housing wait list alone. Ordinary kiwi's (65% are home owners) have a considerable amount of their wealth tied up in property.

Had the Government actually so far built the 20-30,000 houses it previously promised then the supply situation wouldn't be so dire. Prior Government's lack of action also contributed to bringing us to the current state of affairs. This note isn't a political party comparison, it's a quick review of the new policies.

The announcement to invest in infrastructure seems in principle to be a very good idea, in fact something the Government ought to be doing as a matter of course. However the lack of detail and the prior track record does leave some significant questions and worries about delivery on such promises that I hope will be answered as this aspect of the policy takes more shape.

The housing shortage and escalating prices problems are complex, systemic, long term and very very hard to tackle. I don't suggest I personally have any magic beans or a single simple idea that might easily resolve these problems. But I can see some quite obvious likely consequences that these policies are going to back fire.

I believe the Government is sincere in its concern to tackle the issues, but to me key aspects of the policies seem more based in tribal ideology ( a haves vs haves not mentality) which greatly lacks any logical backing or thinking about the likely consequences (intended and unintended). This is partly evidenced by the fact the Government proceeded with aspects of the policies against the advice of Treasury and IRD.

Describing a long established tax deduction for a business expense as a 'loophole' seems politically motivated and designed to 'blackball' landlords / property investors and virtue signal the Government is somehow getting money or some unfair advantage back from 'big bad landlords and property investors'. This emotive language is intended to pre-frame any criticism of the policy as bad people defending a very bad thing ie a loophole which is currently being 'exploited'.

Lost tax deductions are likely to increase rental costs. Let's take an example of a $700,000 property purchased as a rental investment. [This example is greatly simplified and ignores other costs and expenses on the property, it's simply illustrative]. You need about $140,000 (20%) deposit and a mortgage of $560,000. Let's say the interest is 3% per annum. Roughly that's $16,800 per annum in interest costs or $323 per week. Assume $500 per week rent. At a 33% tax rate the additional tax cost to the landlord, if interest isn't deductible, is about $2508 per annum. If all that is passed on to a tenant (who say is on 25% tax rate), then the tenant has to earn an extra $3,344 (before tax) to pay for the rental increase. In the current environment Im not seeing hopeful first home buyers getting $3,000 pay rises.

It is true kiwi's do not get a tax deduction on their own home mortgage interest. However that is simply because they are not running a business or providing a service from that property, nor are they incurring any income from the property that is otherwise taxable and from which a deduction might be made. They do enjoy tax free gains on any increase in value of their home.

I found it astounding and disingenuous that the Minister can't see (or more likely prefers not to publically agree) that significantly increasing the costs to a landlord will most likely cause rental increases. High school students can understand such simple consequences that if you increase the main costs of a business that will likely cause an increase in the price of the products or services. The Minister made some vague waffle about landlords having to understand we (ie they) have to solve the problem together (translation, he 'hopes' landlords won't increase rents and will suffer these costs). That was right after characterising a lawful tax deduction as a loophole (with the underlying agenda of it being a bad thing), ie he insulted landlords and then promptly suggested they could eat the increased costs. How likely is that? The consequences of such tribal, us and them, politics is more likely to result in the other group simply looking after its own interests. Passing on costs in this case.

It was laughable that the Minister suggested tenants can just 'go elsewhere' if rents go up. Elsewhere to where exactly? Try telling that to the people already desperately looking for a home to rent in Auckland.

The Government seems to completely ignore the irony that the potential net effect of these policies will be higher rent costs, fewer rental properties and higher competition for new builds, resulting in higher prices for new builds. Meanwhile saving deposits and obtaining mortgages remain out of reach for so many and we continue to have massive under supply of homes for the next what 10 years?

Now I'm no expert and I could well be wrong. So far I've heard nothing from the Government that would suggest to me that these highly negative consequences aren't a real possibility.

https://www.newshub.co.nz/home/politics/2021/03/tax-expert-unhappy-with-government-housing-package-expects-less-rentals-higher-rent.html?ref=ves-vid1