Tuesday was an interesting day in New Zealand politics.
The Government released a series of what I thought were quite radical policy changes affecting the housing market.
Having spent the past three decades practising law and the last two decades being involved in Local Government I believe I have a reasonably keen sense of how the housing market operates. Every week I deal with individuals and couples buying their first home, couples upsizing, couples separating and sorting out the carnage, and older residents downsizing and heading to the last stop before they shuffle off this mortal coil.
The past decade has been pretty intense. First there was the recovery from the Global Financial Crisis, which was caused by greed and the insane actions the corporate world would take for a quick buck. In the US of A the merchant banks should have been treated in the way the Capitalist system requires and left out to wither and die. Instead they were put on state sponsored life support and survived. The market stagnated at the time.
In Aotearoa we had the decimation of the construction industry caused by leaky homes, the sugar rush caused by having to rebuild our second largest city twice, and pressure caused by opening up the borders to people with lots of money. Immigration surged, a housing stock deficit appeared and suddenly working class people, especially in Auckland, found that the kiwi dream of owning their own home was just a dream.
House prices took off. And at the same time the last National Government started selling off state houses. With a growing population but with state house numbers declining things became really strained.
If you want to have a graphic appreciation of why we are in the situation that we are in this graph taken from the paper Stocktake of New Zealand Housing prepared by economists Johnson, Howden-Chapman and Eaqub for the Government in 2018 summarises things well.
And at a time of increasing population the Government decided to decrease state housing numbers.
Just remember in June 2011 New Zealand’s population was 4.384 million. By September 2017 it was 4.836 million. Scarily the current population estimate is 5.112 million.
And the problem with an ageing population is that the number of houses required increases as the number of inhabitants per house decreases.
Things were getting that bad that in 2016 National introduced the two year bright line test on residential sales excluding the family home.
Fast forward to today. The changes made by this Government are the most radical I can ever recall being made. Pushing the bright line test out to five years makes it a fairly comprehensive capital gains tax. It is not a new tax, National introduced it and Labour has extended it.
One change attracted attention however and National decided to go full cray on it. Previously the scenario was that if you bought a house, sold it 6 years later but had lived in the house for less than half of the time you had to pay tax on the profit. This has now been changed so that if you rent it out for more than one year then you pay tax on the increase that relates to the period it was rented out, not for the full period. The incidence of the tax will increase but the amount paid will decrease. Tax will not be paid in the capital gain on the family home as long as it is the family home. This has not stopped National from misrepresenting the situation and talking about Police Officers being transferred to Invercargill.
Landlords are not taking the changes well, particularly the change in tax rules so that paid interest is not tax deductible. This places home owners and landlords on an equal tax footing with both groups now paying interest from after tax earnings.
I presume the complaining landlords are the same people that complain about dole bludgers and people expecting to get something for nothing. They just cannot see that these criticisms apply especially wrong to them.
Like this guy:
— nzherald (@nzherald) March 24, 2021
My rough estimates are that he has at least $12 million in rental properties (using average Auckland prices) and approximately $500,000 in mortgage debt. If he is earning a modest $550 per week average rent for each property he will have gross earnings of $350,000 per annum. After he sells one property he will have 11 houses, no debt, and again presuming that the sold property was rented for the average Auckland rental he will be worse off than he was before. All this so he can give the Government the middle finger.
Of the other announcements the announcement of a $3.8 billion infrastructure fund for Councils has been welcomed by Local Government. I anticipate Auckland Council eyeing up a significant amount of this fund. National announced something similar in 2016 with a billion dollar fund. The difference was that National’s was an interest free loan that had to be repaid, Labour’s version is a grant. One was worth up to $50 million a year. The other is worth $3.8 billion.
The Green Party’s Julie Ann Genter has these comments about the announcements:
These announcements are a step in the right direction and signal the Government is beginning to front up to the inequality driven by property speculation, but it needs to go further, faster to meet the scale of the housing crisis.
“We welcome the Government identifying and closing a tax loophole which allows investors to deduct mortgage interest costs from their taxable income. This will go some way to discouraging property speculation.
“The increase in infrastructure investment to support new homes must focus on building environmentally sustainable and accessible homes and communities, rather than increasing car-dependent urban sprawl, so people can live in the places where their work, study, and family are.
“The Kāinga Ora debt limit should be increased by $5 billion to actually support Kāinga Ora to build at least 5000 new homes every year, integrated with frequent public transport and active transport connections.
The comments about Kāinga Ora debt levels should be considered further by the Government. The current problem however is building capacity rather than funding. In parts of Auckland including Mt Roskill, Mangere and New Lynn there are major redevelopments occurring. They always take time.
The Government’s announcements were to urgently address an out of control housing market. I am sure that work on longer term responses will continue.
As for criticism that first home buyer grants do not go far enough the problem always has been that they were inflationary. Pitching the grants at the lower quartile for purchase price and having an income limit was appropriate. Otherwise they would be subsidising lawyers buying million dollar homes.
The last few days have been interesting. The right and greedy landlords hate it. Elements of the left are attacking the policies as being too timid or not concentrating on areas even though it is clear that the Government is already working on these areas.
For me I think that the the announcements should be taken to address the urgency of current market conditions. And I believe the Government pushed them as far as it could.