“This is a big, complex, long-standing challenge that will require continued, bold intervention over a long period of time,” Robertson said of his plan last week.
There is a lot of hype around the announcement. House prices in New Zealand have been rising at an alarming rate for months.
In February alone, the median house price across the county increased by $50,000 – in Auckland, it was $100,000, or $25,000 a week.
“I’m not going to ever say or concede that what’s happening in the housing market is okay; It is not,” Prime Minister Jacinda Ardern said last week.
She went further: “We don’t want to continue to see the exorbitant house price growth that we have seen across the country in the last few months.”
She made similar comments in mid-November last year: “It [house prices] just cannot keep increasing at the rate that it is”.
But they did, and then some.
Now, Ardern is pinning her housing hopes on the new packages the Government is intending to push out between now and the Budget, in which a major housing supply announcement is expected.
But Robertson and Ardern have been careful not to give too much ahead of this week’s announcement
Although it will contain some housing supply measures – the major focus will be on the demand side.
Economists agree that an extension of the bright-line tests is essentially an inevitability.
But there is likely to be a number of initiatives which may surprise.
According to Robertson, it will contain: “A mixture of both incentives [for investors] to go elsewhere and disincentives within the housing system”.
Ardern was sending similar signals at her post-Cabinet media conference last week.
“We’ve got to do multiple things to make sure that we are encouraging people to build and encouraging people to look at alternative investments that contribute to our productive economy.”
This appears to be a signal that the Government is gearing up to announce ways of enticing people to put their money into other investments.
Senior Infometrics economist Brad Olsen said changing incentives on who can, or can’t, get into housing is important and demand-side policies like this cannot be ignored.
“But we can’t help direct who does or doesn’t have housing, unless we have the houses to choose from,” he said, adding that much more focus needs to be on housing supply.
The focus for many will be on what will happen with the bright-line test extension.
The bright-line test is similar to a capital gains tax (CGT) on housing. It means people have to pay tax on any gains on property if it’s sold within five years.
There are, however, a number of exceptions – such as an exemption for a family home.
It was first implemented by National but Labour extended it from two to five years.
Robertson confirmed last year that he had asked officials to look into how well the bright-line test was working.
Former top Reserve Bank official, now independent economist, Michael Reddell, said an extension of the bright-line test is “almost a done deal”.
But he is not convinced it will be a silver bullet to New Zealand’s housing woes.
Quite the opposite actually; it will be a “problematic measure” as it would lock in homeowners’ gains for as long as possible, he said.
He added that if someone is looking at paying tax on a property, they’re more likely to hold on to it for longer as the sale “crystallises the tax liability”.
He gives the example of when Australia implemented a CGT in 1986 – those rules stated that all houses purchase after that date are liable for the tax.
Reddell said there are still people holding on to those pre-1986 assets, who will sell because they don’t want to put themselves at risk of being liable for the capital gains tax.
Although PwC partner and tax expert Geof Nightingale agrees the bright-line tax extension is a highly likely move for the Government, he isn’t convinced it will substantially move the dial on house prices either.
“I see plenty of people investing in rental property, but I don’t see lot of genuine speculators – people who buy for six months and flip.
“It [a bright-line test extension] might have a very muted affected but really I just think people will hang on to their houses for 10 years, not five – I’m not convinced it will have a major impact.”
Another option on the cards is for the Government to give the Reserve Bank further debt limiting powers in the form of debt-to-income (DTI) restrictions.
Reserve Bank governor Adrian Orr wants to have DTI limits in his toolbox, but Robertson has been hesitant.
He told Parliament last week this would be a “tricky issue” when it comes to first-home buyers.
“If those debt-to-income ratios were applied broadly, I think there might be more inequity in the housing market.”
Reddell agrees: “Who’s a debt to income ratio going to hit hardest? It’s going to hit hardest first-home buyers.”
This is because those looking to get on the housing ladder traditionally have less equity and lower incomes than those looking to buy a second, or third, house.
“It will just compound the difficulties for those people starting out.”
Even Orr agrees that first-home buyers would likely be worse off debt-to-income limits were imposed.
Both Reddell and Nightingale agree that the fundamental issue is around supply.
“The policy response has got to be into freeing the land and allowing greater density, finding ways to reduce compliance costs, building consenting, finding ways to reduce construction costs,” Nightingale said.
“If you could get more houses into the market, then eventually the prices will stop rising, or come down.”
Reddell said the Government needs to do more than just build new houses.
“[It needs to] provide critical commitments that land prices will be lower in the future.”
Although there will be some elements of a supply-side response this week, Robertson has already signalled the main supply-side package will be unveiled in this year’s budget.
“These will build on the Government’s housing programme that has seen us build more houses than any government since the 1970s,” Robertson said.
Source: Read Full Article