What our new Government means for housing

Housing Market Written by John Bolton, Nov 3 2017

I’ve fielded several calls about the election and the various sound bites appearing in the media since, with the obvious question, what does it mean for housing?

Let’s start with the idea that the Government runs the country. The fact we didn’t have one for a month and nothing notable happened answers that for you. People just get on with their lives.

There is a big machine in Wellington and it takes time to do anything. Bureaucracy has an amazing knack for slowing things down. Businesses are hard enough to lead and that’s with everyone pointing in the same direction. Any change from the status quo will need to be resourced and prioritised, and new Ministers brought up to speed with their portfolios.

I suspect we will get a few quick wins and then NZ Inc. will close-down for the Summer!

Housing is a priority, as it should be, so let’s go through the policy and what it means.

I like the idea of a rental warrant-of-fitness to ensure minimum standards. Healthy homes have much wider benefits for society. It will come at a cost and there is a likelihood of landlords being granted up to $2,000 towards insulation. Some landlords might struggle to fund the maintenance of their properties.

Banning foreign speculators from buying existing homes makes sense but it won’t make a difference – it’s tokenism. For years, our policymakers have struggled to understand how capital comes to NZ. It is usually held by NZ residents on behalf of family overseas, so the non-resident rule won’t change this. Besides, any issues have largely disappeared with NZ banks already tightening credit policy to foreign buyers.

Pushing the bright-line test out to five years will catch more tradespeople doing a build and flick. It’s an elegant way of widening the capital gains net without bringing in a capital gains tax. It will also help reduce avoidance where people are developing and selling properties where the owner is extended family.

Lastly, the ring-fencing of tax losses for property investors. This will prevent investors from offsetting investment property losses against personal income and will be phased in over five years. For investors who have low yielding (“capital growth”) properties it will mess up the economics and reduce their cash flow.

Personally, it wouldn’t impact on my investment decisions as I’ve never counted on tax losses. But investors will often be sitting on annual losses of $15,000-$20,000 so the loss of cash flow to them will be noticeable.

It’s not uncommon to transfer personal home debt into an LTC to make it tax deductible and maximize the offset. This won’t make sense as much and may encourage owners to sell surplus property rather than hold.

However, none of these changes will influence credit policy, which is already tight. The impact of the new policy will be on property investor demand. More investors will sit on the fence and wait for better fundamentals, so I expect the investment property market to soften.

On the other hand, the new Government appears to be fiscally neutral (or mildly expansionary.) It will spend more on infrastructure and housing as well as free first year tertiary education, increasing investment in healthcare and an ongoing increase in the minimum wage.

Auckland is likely to stay buoyant with the construction sector supporting GDP growth. We’ll need to be careful that the Government doesn’t end up competing too hard with the private sector for resources – there’s a lot of investment planned.

With a softer fiscal policy and a weakening NZ dollar it could put a bit of upward pressure on interest rates, but only minor, if at all. I don’t see inflation any time soon, with a macro trend around technology driven deflation.

There will still be reasonable immigration into Auckland. We’ll need a ton of builders and other tradespeople.

The Kiwibuild scheme is promising 100,000 affordable houses over 10 years of which 50% will be in Auckland. We’ll see more innovative construction orientated towards affordable housing in the $500,000 to $600,000 range. It will be simple housing largely catering into a market that hasn’t been able to buy.

With interest rates staying low, ongoing population growth, and low unemployment, I’m expecting house prices to stay reasonably stable and subdued.

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