Dawn chorus: Not a single new home announced
Interest deductability surprise undermined by short-termism on capital for new supply and reliance on councils and private developers to deliver; $5.8b is to buy land & pay for housing infrastructure
TLDR: The Government’s housing package was impressive on the surface and in the short term, but lacked any strategic focus or accountability around affordability. It also left an effective Government-wide guarantee for a too-big-to-fail housing market firmly in place. Bankers are already talking about the Reserve Bank having to offset the impact by lowering interest rates and removing LVR controls again.
Just as the Key-led Government failed to deal with housing because its immediate political antennae stopped it from major changes to the way Government and Councils fund and organise themselves around housing infrastructure and building, the Ardern-led Government suffers the same malaise: great political antennae, but a redundant economic and social radar for complex issues coming over the horizon.
In short, the removal of interest as a taxable expense for landlords will have the biggest impact and was the biggest surprise for investors, although I previewed it yesterday morning beforehand and it wasn’t such a shock to me. The fact that Treasury didn’t have time to analyse it suggests it was not originally proposed in November and December when the Government asked for options to consider, and that the Government felt at the last minute it needed something punchier.
The impact is also softened by the four-year phase in and the exemptions for developers and investor buyers of new homes is welcome, although the Govt hasn’t decided yet how long landlords buying new homes can keep that exemption. There is plenty of devil yet to be determined in the detail, which is likely to soften, rather than harden, its impact.
RBNZ may have to cut rates again to offset impact
Some economists suggest it could drive prices down more than 10% in the short term and have even suggested the Reserve Bank would have to remove the LVRs again to ‘rescue’ the market. This will be the real test. The Government has repeated it does not want to see prices fall of voters’ “main asset”. Ardern and Robertson repeatedly said yesterday they were committed to following through, regardless of any price falls, but its possible the Reserve Bank acts as the rescuer of first resort and last resort.
The irony of the Reserve Bank lowering interest rates again or removing LVRs to encourage more bank lending into housing to offset a Government move to discourage more lending into housing is somewhat ironic. Financial markets certainly see lower interest rates as an outcome. The New Zealand dollar dropped more than two percent over the last 24 hours overnight to 70.1 USc and local market interest rates fell around eight basis points.
“We see the policy mix as making the RBNZ’s job of driving inflation up more difficult,” BNZ’s market strategist Jason Wong said this morning.
“With lots of moving parts it’s hard to get specific with numbers, but the direction of influence from here seems clear – lower house prices, higher rents, less future monetary policy tightening required and less growth in housing debt going forward,” he said.
A morally hazardous market
The fact that the inflating the housing market to make consumers and small business owners feel wealthier is now the key way to stimulate the economy simply reinforces the dominance of housing as a factor in our macro-economic apparatus, our investment choices, our social fabric and our political debate. It’s too big to fail and too big not to use, hence the growing confidence of investors that they can’t lose, because politicians and bankers need a strong housing market too much.
The moral hazard issues abound, just as they do in international asset markets because central banks and Governments have acted repeatedly over the last 20 years to rescue financial markets and use asset prices as a way to stimulate growth.
Half what Treasury suggested
The 10 year bright line test will have a slower and smaller impact. It’s disappointing the Govt didn’t take up the Treasury’s suggestion to make it 20 years.
The $3.8b infrastructure fund is good because it’s grants and not loans like Bill English’s $1b loan fund, which didn’t unleash many new homes. It also doesn’t answer Council complaints that ongoing maintenance and operational costs are as big a disincentive, and this package doesn’t deal with that.
Councils need a share of GST or income tax to really start believing they benefit from population growth. Expect more council complaints about being bullied by the Beehive, especially around the National Policy Statement for Urban Development encouraging intensification of near-CBD suburban land.
The extra $2b for Kainga Ora to buy land parcels will help it create more large integrated developments, but may put upward pressure on land prices.
An effective guarantee
The big picture though is government is still giving home owners an effective guarantee they won’t have to give up the 25% rise in prices since COVID. The market only ever ratchets up, never down.
Also, there’s no vision or accountability on what improvements in affordability the Govt wants to achieve, because ‘moderate house price inflation’, which is the vaguely stated aim, means incomes will take decades to catch up. An announcement of a price to income multiple reduction target or a lowering of rents as a share of disposable income for the poorest quintile of the population would have given it real heft.
No new houses announced
There was actually no new announcement of an increase in the state house building program and the implication is the Government still sees the private sector solving a problem of building and selling affordable housing, where there has been market failure for at least three decades. The delivery of all these new homes is still dependent on council cooperation and private developers.
It also has no obvious connection or synergy to the Government’s transport spending. There remains no coherent plan to build medium density homes close enough to work, school and play to cycle, walk or use much more frequent, reliable and affordable buses and trains. That would require massive public investment in reconfiguring roads for cyclists and walkers, and the creation of dedicated bus lanes, many, many more buses and rail lines for the main routes.
Elsewhere in our political economy
Two to three years ago, an investor who purchased a property with a $600,000 mortgage was paying 5% or $30,000 in tax-deductable interest, got a tax refund of $10,000 leaving a net-cost of annual $20,000
Today, with reductions of interest down to 2%, that same investor now pays $12,000 net annual interest, but the Government has taken the tax-refund away
Investors have no reason to increase rents. Those claims are scaremongering
Anyone recall landlords crying a river at the RBNZ reducing their interest costs by 50% over the past 2 years?
In 2020 median prices went rom $628K to $745K or +1.4% a month. In 2021, first two months, to $780K, +2.3%/month. Anything less than that for the rest of 2021 has got to be a success. The calculations for buyers have just changed dramatically, starting in two days time. Scaring away a quarter of the market has got to have an effect. Probably sales volumes will slow first, but investors with several houses, losing money every month on each of them (or facing that prospect very soon) will surely have some kind of incentive to sell. It's still not clear to my why rents would increase.