The Government Takes Aim and Fires

by Sam Nicholls · Mar 24, 2021

The Government announced on Tuesday its plans to implement numerous housing policies as well as injecting $3.8b into a Housing Acceleration Fund in its latest attempt to curb the rising house prices and quell the volatility the housing crisis continues to bring to the New Zealand economy.

The $3.8b is an addition to the $350 million the Government has already committed to the Residential Development Response Fund and will go towards “increasing the supply of houses… that low to moderate income households can afford.” The Government plans to utilise land that is currently underdeveloped by paying for infrastructure that would make building on said land more viable.

This injection of cash, if used effectively, should start to address what is at the heart of the housing crisis that New Zealand is experiencing—there just isn’t enough houses. There hasn’t been for years. And the lack of supply has played a large part in fueling the issues the housing market faces today.

But addressing the supply problem alone won’t act as a silver bullet. In fact the Government seems to have taken aim at two other facets of this crisis.

The first is the First Home Buyer.

FHBs are being priced out of the market by record-breaking house prices—prices that are being fueled by a stronger-than-expected economic bounce-back and the ease with which investors have been able to borrow and buy property.

And the second is the investors themselves. This is the group the RBNZ is most concerned with. The speculative nature of the investors, many of whom risk being overextended, has created great economic uncertainty. Yet investors still continue to borrow from the banks, outbid FHBs, and drive up the property prices.

The Government has taken swing at both these groups:

It’s swing at the first saw the Government extend the income caps for the Government’s First Home Buyer Grant and First Home Loan from $85,000 to $95,000 for single buyers, and $130,000 to $150,000 for two or more buyers, expanding opportunities for more FHBs to enter the market.

They’ve also extended the First Home Loan price caps, meaning that FHBs can now get better access to loans when buying higher priced properties. These cap extensions will no doubt be helpful to some, but the real impact was done to the second group—the investors.

The first policy change aimed at investors came in the form of an extension of the bright-line test from five years to ten years, meaning profits from an investment property sold within ten years of buying could be taxed up to 39%.

The bright-line test for new builds will remain at 5 years and owner-occupied homes will be exempt from the tax.

This doubling of the bright-line test will make short-term residential property a whole lot less attractive to investors, and hopefully create greater opportunity for FHBs to get their foot in the property market door.

This is a controversial move by the Government (though perhaps not the most controversial of its new policies) because it breaks a pre-election promise made by Grant Robertson not to touch the tax. While Robertson will note that the housing policy had to be revisited due to the strong economic recovery New Zealand enjoyed post-Covid, and the fact that no one expected the housing crisis to escalate to the extent it has, it’s hard to view this bright-line extension as anything less than a broken promise. If you can stomach the partisan sensationalism, here’re the words coming from the horse’s mouth.

Secondly, the Government has removed interest deductibility for residential investments starting October 1.

This article puts it simply:

“Until now, [investors] have been able to claim back the interest cost of a home loan against the rent received on the property, significantly reducing their tax bills. Put simply, if they earned $20,000 a year in rent from a property but paid $12,000 in home loan interest, only $8000 of the rental income would be subject to tax.

Under the new rules, the whole $20,000 would be.”

The percentage of interest investors are able to claim as an expense is to be lowered gradually over the next four years, landing at 0% in 2025.

While the Government has described the interest deductibility as a “loophole” that needed to be closed, many have raised their voices in opposition to the new policy.

Some worry that the cost of covering home loan interest will be passed on to the tenants, raising rents and making it even harder for FHBs to save for their first home.

Others feel this policy casts too wide a net—that smaller investors with one or two properties and little day-to-day capital are lumped in with the highly leveraged, multiple-property investors that the Government and RBNZ are so rightly concerned about.

And here’s one final point worth noting: while the response to the removal of interest deductibility has been vocal, the policy has been introduced at a time when mortgage interest rates are at an all-time low, and the true weight of this policy will likely increase as interest rates do.

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