The Hurdle for Property Investors Has Been Raised

• The Government announced its latest suite of new measures to tackle the rampant housing market. From scrapping interest deductibility to a stealth capital gains tax, the hurdle for investors has been lifted. On supply, the Govt has left us waiting.

• There’s enough momentum in the housing market to see prices peak at 25% by the middle of the year. Growth should cool but remain in double-digit territory by the end of 2021. The Govt’s announcement however does add downside risk to our forecast.

• An unintended consequence of the Govt’s announcement could be rent hikes as landlords try to recoup losses. But rent hikes have their limits.

Here’s our take on current events

Last week, the Government announced its latest suite of new measures to tackle the rampant housing market. Monthly house price growth has averaged 2% since the lockdown was lifted. For many regions, house prices have grown by over 20% in the past year. Growth of such strength is unsustainable. Policy decisions are desperately needed.

The boldest move was the decision to scrap 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, 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 capital gains tax by stealth). Taken together these tax changes will make some current and potential investors re-evaluate the case for investing in property. Encouragingly, the changes to the bright-line test exclude new builds. Nudging investor demand into new builds will help boost supply.

The headline announcements target property investors, aiming to tip the balance of the housing market towards first-home buyers. Unfortunately, the changes do not address the longer-term structural issues. We have a significant shortage of affordable homes (shortage at 80,000 homes ) and housing supply in Aotearoa is simply not fast enough to respond to demand pressure. The Govt has announced a $3.8bn Housing Acceleration Fund, a fund that local councils can access to build housing-related infrastructure. An infrastructure fund is universally viewed 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. And as our Senior Economist, Jeremy Couchman, writes for Newsroom, 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.

We don’t believe the new measures are likely to have an immediate cooling effect on house price growth. The return of Loan-to-Value Ratios 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 however still needs to be given the green light on DTIs from the Finance Minister. Meanwhile, we are forecasting annual house price growth will peak at 25% across the country in the June quarter. And house price growth is still expected to remain in double-digit territory by the end of 2021, eroding some of the changes made to help first home buyers. Over the medium term, the Government’s tweaks to demand should add some coolant to the market.

Our Chief Economist, Jarrod Kerr, features in the first two episodes of the Spinoff’s new podcast, When the Facts Change. Alongside Bernard Hickey, Jarrod delves deeper into the housing affordability crisis and unpacks the Govt’s policy announcement:

• Episode 1: Can NZ’s housing affordability problem ever be solved?
• Episode 2: Unpacking Labour’s new housing package.