PProperty speculators have become public enemy number one in New Zealand’s rampant housing affordability crisis. Those who buy, sell and rent multiple properties have become wealthy at the expense of those in the middle and bottom of the market, who are paying high rents and struggling to buy decent housing.
Therefore, it is not surprising that the housing announcement made by Prime Minister Jacinda Ardern and her colleagues on Tuesday focused firmly on dominating investors who drive prices up, with the most important elements of the package designed to affect investors. with greater fiscal responsibilities.
The economic objective is to cool the rise in house prices. And the political goal is to blame the real estate crisis on investors.
The first weapon in this assault on investors is a de facto capital gains tax: Those who sell investment property must now pay taxes on the proceeds from the sale of their home if their investment is sold within 10 years in instead of only five. This has already received the most publicity. It has been especially controversial because the party ruled it out in the electoral campaign in last year’s general elections.
Labor’s second tax weapon against property speculators is far more surprising and significant: the end of the ability to claim tax deductions for the cost of interest on investment property mortgages. Previously, investors who rented houses could use their interest costs as any business expense and claim them against the tax they paid. This has made home investments particularly attractive commercial projects. Some see this cancellation as a subsidy, and that it has allowed investors to bid higher prices than those who buy houses to live.
By abolishing the deductibility of interest for these investors, the government has taken on the powerful lobby of the owners. But the movement will be very popular.
The investors themselves have only helped the government sell the new policy by shouting loudly about the injustice of the loss. But Green MP Julie Anne Genter’s response on Twitter to “Cry a river” is likely to have hit the mark for a wide section of the public who want radical action to fix the housing market.
No one saw this particular policy coming, possibly because it was a last-minute addition to the government’s package of measures. Although the overall package took many months to prepare, official documents show that government departments did not have time to analyze the effects of this particular policy. Given the mounting pressure to deal with the crisis, it seems likely that Ardern and his ministers felt the need to bolster today’s announcement with something stronger than originally planned.
Policy can be effective. A general consensus is developing among analysts and economists, as well as among homeowners, that this particular measure will make real estate investing much less attractive. A good proportion of homeowners are likely to drop out of the market or at least buy fewer rentals as a result. This could have a significant impact on home prices – there will be more properties available for sale to owner-occupiers. ANZ chief economist Sharon Zollner says the change “will have a chilling effect on investor demand” and therefore a “massive” impact on prices.
This leaves progressives with much to celebrate in today’s announcement. Finally, there could be a respite for first-time home buyers who are struggling to enter the market, as more rents are likely to be available for sale and investors’ purchasing power declines.
Conversely, however, it could drive up rents, with homeowners looking to recoup costs and fewer rents on the market. Therefore, an unintended consequence could be that those at the bottom of the housing market are left in a much worse position. New Zealand has a serious homeless crisis, which could be made worse by this policy.
The bottom line is that there is a massive housing shortage and today’s announcement won’t do enough to change that. Hitting real estate speculators hard could have a significant impact on house and rent prices, and it might be electorally smart, but much more needs to be done than this.
Dr. Bryce Edwards is a resident political analyst at Victoria University of Wellington, New Zealand, where he is Director of the Democracy Project.
George is Digismak’s reported cum editor with 13 years of experience in Journalism