Property speculators have become public enemy number one in New Zealand’s rampant housing affordability crisis. Those buying, selling and renting out multiple properties have become wealthy at the expense of those in the middle and at the bottom of the market, who are paying high rents and struggling to afford to buy decent housing.
It is no surprise therefore that the housing announcement by Prime Minister Jacinda Ardern and her colleagues on Tuesday was firmly focused on reigning in those investors driving up the prices – with the most significant elements of the package designed to hit investors with increased tax responsibilities.
The economic goal is to cool down rising house prices. And the political goal is to lay the blame for the housing crisis firmly at the feet of investors.
The first weapon in this assault on investors is a de facto capital gains tax – those selling investment properties now need to pay tax on their house sale profits if their investment is sold within 10 years instead of just five. This has already got the most publicity. It has been especially controversial because the party ruled it out on the campaign trail in last year’s general election.
Labour’s second tax weapon against property speculators is much more surprising and significant: an end to the ability to claim tax write-offs for the cost of interest on mortgages for investment properties. Previously, investors renting out houses have been able to use their interest costs like any business expense, and claim it against the tax they paid. This has made house investments particularly attractive business ventures. Some regard this write-off as a subsidy, and one that has made investors able to bid higher prices than those buying houses to live in.
By abolishing the interest deductibility for these investors, the government has taken on the powerful landlord lobby. But the move will be highly popular.
Investors themselves have only helped the government sell the new policy by squealing loudly about the injustice of the loss. But Green MP Julie Anne Genter’s response on Twitter of “Cry me a river” is likely to have hit the mark for a wide section of the public wanting 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 suite of measures. Although the overall package was many months in the making, official documents show that government departments were not given time to look at the effects of this particular policy. Given the escalating pressure to deal with the crisis, it seems likely that Ardern and her ministers felt the need to bolster today’s announcement with something stronger than originally planned.
The policy may be effective. A widespread consensus is developing amongst analysts and economists – as well as landlords – that this particular measure will make property investment much less attractive. A fair proportion of landlords are likely to depart the market or at least purchase fewer rentals as a result. This could have a significant impact on house prices – more properties will be available for sale to owner-occupiers. ANZ chief economist Sharon Zollner says that the change “will have a chilling effect on investor demand”, and hence a “massive” impact on prices.
This leaves progressives with a lot to celebrate in today’s announcement. Finally, there might be respite for first home buyers who are struggling to get into the market, as more rentals look likely to become available for sale, and investor purchasing power is decreased.
Conversely, however, it could drive up the price of rentals, with landlords seeking to recover costs, and with fewer rentals on the market. Hence 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 severe homelessness crisis, which might 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 property speculators hard might have significant impacts on house and rental prices, and might be electorally smart, but much more needs to be done than this.
Dr Bryce Edwards is the political analyst in residence at Victoria University of Wellington, New Zealand, where he is the director of the Democracy Project.
