The Government has been talking about the core elements of its housing package, which it announced yesterday since November last year.
POLITIK was briefed then by a Beehive source that Treasury was working on a package that would involve extending the brightline test and eliminating the tax deductibility of interest payable on investment properties.
Yesterday, four months later, and with the Corelogic House price Index moving 7.6 per cent from November to February, the Government has finally confirmed both those moves.
But despite having four months, Treasury and Inland Revenue, in a Regulatory Impact Statement released yesterday, said they had not had enough time to look at the impact of removing tax-deductibility of investment property interest payments.
Westpac, on the other hand, is in no doubt and is forecasting the move will lower house prices long term by 10 per cent and probably more in the short term.
Overall, the measures announced yesterday, which also include $3.8 billion for housing infrastructure and changes to first home buying subsidies for couples together earning under $150,000, have drawn a mixed reception.
Westpac economist Michael Gordon says the tax deductibility move will reduce house prices by 10 per cent in the long term but may have a more drastic effect in the short term.
Kiwibank, on the other hand, says the moves will have little impact on house prices.
But Westpac offered a more convincing argument, and the Real Estate Institute seemed to back them up.
“This is likely to exacerbate concerns around investing in rental property and may see investors considering whether they can get better returns elsewhere,” said Wendy Alexander, the Real Estate Institute’s Acting CEO.
There were questions last night as to whether landlords would seek to recover what would be increased direct and also indirect costs by raising rents. But if the Government can at least stall house price inflation, it will be happy enough.
Even Michael Gordon’s prediction of a 10 per cent fall takes prices back only to Last August.
The Government moves seemed to catch the Opposition somewhat flat-footed, with their main argument being that the extension of the brightline test was a capital gains tax by any other name.
That was true, but oddly they didn’t really exploit the argument that when they introduced the tax in 2015, it was designed to limit the short term “flipping” of houses by speculators, but now the Government is wanting it to be a tool to lower house prices and act as a disincentive for property investors more broadly.
Nevertheless, the crackdown on property investment will be widely welcomed, particularly by first home buyers.
The conventional economic argument about lowering house prices is a simple Economics 101 proposition; increase the supply, and prices will start to fall.
The core of the package announced yesterday is the extension of the Brightline test out from five years to 10.
That means any investment property sold within ten years of purchase will incur income tax on the excess of the sale over purchase price taxed at the owner’s marginal tax rate.
The original Brightline tax was introduced (hurriedly) by the Key Government in its 2015 Budget to address what was then largely an Auckland problem of rapidly rising house prices spurred on by a high turnover of investment properties. Treasury estimated that 52 per cent of all property sales in Auckland were of houses that had been owned less than two years. The tax applied only to properties sold within two years of purchase.
But Treasury, in .a Regulatory Impact Statement in 2018, warned that extending the time out to five years – which Finance Minister Grant Robertson proposed – risked capturing investors who had no intention of “flipping” their property early for a quick gain.
The Statement could offer little in the way of firm advice on the potential impact of the extension because of a lack of empirical data.
The extension was thus primarily a political move.
“The extension of the previous government’s bright-line test will help dampen property speculation and make homes more affordable.” Revenue Minister Stuart Nash said in February 2018 when the change was announced.
There was no hard evidence from Treasury to support that Statement.
And similarly yesterday, Treasury and Inland Revenue produced a Regulatory Impact Statement which was at best sceptical about the Brightline extension.
In an impact assessment, the two agencies said the proposal adopted by the Government to extend the test to 10 years, with new builds exempted, would have about the same impact on housing affordability as doing nothing.
Moving the term out to 15 or 20 years and not allowing for the new build exemption would have had a better impact on affordability.
“In the time available, the Treasury has not formed a view on whether a 10-year bright-line test is preferable to the status quo,” the statement says.
“The Treasury does not recommend providing an exemption from the extended or existing bright-line test for early investors in newly constructed homes.
“An exemption comes with additional administrative and compliance costs, and over time reduces the coherence of the tax system.
“While increasing housing supply is important, the Treasury considers there are likely to be better ways to directly support supply, for example, through an explicit subsidy for developers.”
The Statement does not even address removing the tax-deductibility of interest payments on investment properties.
“Given time constraints and lack of analysis, the Treasury does not recommend progressing the interest deductibility proposal without further analysis,” it says.
“The Treasury recommends further regulatory impact analysis and consultation be undertaken before final decisions are made on this measure. “
But Westpac economist Michael Gordon, in an analysis of the Government’s moves, suggested that the tax move was the killer app in the whole package.
Gordon says financial factors – rental yields, mortgage rates and tax – explain most of the variation in house prices over time, with factors such as housing supply playing a more indirect role.
The other key insight is that different groups of buyers vary in terms of their willingness to pay for a house.
Leveraged buyers are different from unleveraged buyers, and investors are different from owner-occupiers.
“This means some judgement is required about which group is the marginal buyer – that is, which of them dictates the market price,” he says.
Gordon says that the tax move announced yesterday would swing that advantage from the leveraged investment buyer, able to tax deduct interest to the owner-occupier who is unable to tax deduct the interest they pay.
“A rough suggests that their average willingness to pay is about 10% below current prices, which suggests that house prices could fall by that much in the long term,” he says.
“That in itself is not particularly onerous – it would bring prices back to where they were four months ago. However, there could be a much greater decline in the short term while the housing market realigns itself.
“Without interest deductibility, property investors will need to see a higher rate of return to justify their investments.
“That could mean higher rents, although that will be constrained by tenants’ ability to pay. The more likely way is that highly leveraged investors will sell out – at a reduced price – to owner-occupiers or less-leveraged investors.”
If that happens, the Beehive will be very happy, and whether the Brightline test works or not will be irrelevant.
But there are questions about the long term issue of supply.
Waikato University Economics Professor Scrimgeour said overall, there would be a modest number of people who were helped by the package.
“The more restrictions that are in place, the less likely people are going to want to invest in constructing new housing,” he said.
“The Government should focus more attention on facilitating a step-change in housing supply.”
Infrastructure NZ was worried that the sector was already over-stretched.
“Pleasingly, the Government has committed a very significant $3.8 billion to overcome infrastructure barriers to new housing developments and provided a further $2 billion debt facility to Kāinga Ora,” said INZ’s CEO, Hamish Glenn.
“However, while this investment is urgently needed and will be widely welcomed, there is a risk that new investment starts competing with existing commitments to the NZ Upgrade programme, shovel ready projects, rising three waters commitments and other critical initiatives.
Kiwibank Chief Economist said the most effective measures announced yesterday were aimed at demand; “New Zealand’s housing market desperately needs an injection of affordable, sustainable homes,” he said.
“We’re short 80,000 homes.
“The Govt’s announcements today falls short. It’s merely a drop in the leaky bucket.”
Politically it’s a gamble. The Government has promised this package since shortly after the election. What is clear from the Treasury regulatory Impact statement is that it has proceeded either against or without official advice for much of what it has done.
But if it does what Westpac believes it will do, then it will be a major political triumph for Ardern and Robertson.