Matt's Frequency Series (Opinion) - Property, Where to From Here?
Property, Where to From Here?
Today was a good day on the property front. The good news was that the Government had removed some uncertainty around tax policy, just several days ahead of date where interest deductibility drops.
We will get to this in a moment but first a quick look at how the governments have been on the wrong side of housing for the last 30 years to aid in the discussion.
Twenty-seven years ago today my sister bought her first house. My father commented that he could now die happy, all his kids had houses.
I guess the things he saw in house ownership were that it was somewhere to call home, the stability that security of tenure brings, compulsory savings from repaying debt, and insultation from inflation.
Just three years earlier the government had taken the opposite financial bet. In the mother of all budgets the decision was made to step down from direct ownership of public housing, and to instead provide a rent subsidy to anyone who could not afford to pay for their own rental.
So effectively the government “shorted” the housing market, betting against rising property prices and rents. That “bet” has continued to be taken by each of the 10 terms of government since. The cost of losing that bet is the rising cost to the government of the Accommodation Supplement. A quick google shows that costs around $1.7 billion dollars a year. That is a cost we all have to pay for. I’m not sure how we would measure any collateral damage across the three decades.
Back to today’s news!
OK, pretty much every day there is good news that property prices are rising, but this was different.
The announcement was that a new build will be anything where a code of compliance is issued after 27 March 2020, around eighteen months ago. Also announced was that the interest deductibility period for new builds will be for twenty years from the code of compliance, and that the deductibility will be transferable to a new owner. So some sweeteners there to balance up the additional taxation these measures involve. The extra tax is expected to amount to $800m a year.
So great news that there is some more certainty. Not so good that this is still only by press release, and still isn’t supported by legislation. On that basis I’ll avoid trying to go into detail of what is still a half-time score.
There is an old political and PR trick of trying to define the choices so that you are on the side of motherhood and apple pie. I mean surely no one is against motherhood and apple pie right? You might have seen a great example of this in the full-page newspaper ads by Google. If I recall correctly there was a picture of Mum and her adult daughter with their apple pie recipe in an email on the ipad. Google proudly announced that this morning they had secured the inboxes of how ever many billion people and the family recipes were safe. That firmly positioned Google on the side of motherhood and apple pie.
It was a bit disconcerting to see landlords being tagged as both “speculators” and “the enemy of first home buyers” when all these tax changes were first announced. The standard principles of interest deductions for businesses were also loudly trumpeted as a “loophole”. When these terms are generalised for a set of people, the general public gives in the apple pie PR trick mentioned above and immediately assumes that only good is being done in cracking down on these people.
We also saw a little bit of a softening of that stance today. Finance Minister Grant Robertson was quoted saying that “Tax is neither the cause nor the solution to the housing problem”. He then went on to say he still sees this as levelling the field for first home buyers.
Meanwhile quite a number of economists and property commentators have been saying the RBNZ moves to reduce high LVR borrowing is a clear disadvantage for first home buyers, with some going further suggesting the RBNZ policy is pretty inconsistent and not supported by a factual case. I’ve pointed out to a few newer home buyers that lenders are already required to check that first home buyers (and others) can afford their loan if interest rates go up. It is called a servicing interest rate, and it currently runs around 6% depending on which bank you are dealing with. Our banks are also pretty solid. By international standards our banks don’t run high risk trading and they are also well capitalised. You may have seen the amusing mock psychiatric diagnosis of the RBNZ by a former staffer based on the recent RNBNZ announcements.
If we look at the bigger picture around housing shifts, we can see four clear factors.
Factor one Restrictive land use policies are a clear factor. Economist Croaking Cassandra shows us that house prices rise much more slowly in US states that have an abundance of land and relaxed zoning.
Factor two The absence of standards for rental tenancies may have contributed also. You might gear up and pay more when you are pretty sure you don’t need to maintain your house. That has largely been addressed by the Healthy Homes legislation which is now working through the nations rental property portfolio.
Factor Three Rampant migration that took the team of four million to a team of five million in such a short period has been a factor. That leads to a shortage of houses. Too much money chases too few goods.
Factor Four Interest rates have been about as low as they have been for years and years.
These are all long-term problems and not easily fixable in a moment. Anyone think it is a good idea to continue to run a short on the housing market?
Meanwhile we continue to help people with property, whether it is structuring up, working out your long-term plan, picking up finance, or getting the deal away. If you would like a hand with any of these things please contact us today!