On face value the government’s attack on new residential landlords by denying interest deductibility has merit. The initiative will achieve its goals of lowering prices and also make it much easier for owner-occupier home seekers.
It’s difficult to argue against these steps as the current situation is crazy.
Where the government has hugely erred is saying this deductibility rule will also apply to all existing residential landlords within four years. That’s dumb (and dishonest) on a number of counts.
First, the hundreds of thousands of current residential rentals will be forced to go on the market.
That will crash all house values which is not something the two thirds of New Zealander’s owning their homes will rejoice over. In other words a stupid political move.
Second, it’s retrospective legislation which is morally reprehensible, plus a significant broken election promise of no new taxes.
Remove the private landlords who rely on capital growth as the cash returns are theoretical rather than actual and who will end up having to buy most of these houses to cater to the 25% of the population incapable of surviving on their own initiative?
The answer is the state, no less, or in other words, the taxpayer who have to a large degree been subsidised by private landlords, given the lousy cash returns.
To summarise; to end current buying fever, the initiative placed on future buyers is sensible. Conversely, extending it to all existing residential landlords within four years is mind-blowingly dumb.
What particularly irks me though is that all of this is not addressing the principal issue, namely a massive shortfall of housing stock.
I’ve written before how this could be overcome within a year by contracting one of the giant Chinese construction companies to deliver up say 20,000 homes.
Finally, there’s the old law of unintended consequences which will come into play in a big way.
Take the current large-scale boom in high-rise apartment construction.
There will be an enhanced rush of investors into these because as new-builds the interest is deductible and thus the demand impetus will drive up their values. But ultimately it will bring about an over-supply and, as always throughout history, see developers going broke.
However, therein lies another problem and that is socially, the most important requirement is not for high rise apartments but for state houses targeting low income families.
The political consequences of this non-interest deductibility will be bad for the government.
The majority of New Zealanders own their home and will have gained an enhanced sense of financial security through the recent years shortage driven value growth. They won’t take kindly to watching their principal asset sinking in value.
This is a huge windfall for the Nats. They should back the first part of the initiative because it’s worthwhile, namely non deductibility for future purchasers of existing rental homes, but undertake to wipe out the non-deductibility for existing rental home owners.
A major concern is, as investors rush to get out they will give their tenants notice so as to tidy the houses up for sale. Thousands of renting families will be on the street.
The government should rethink the second retrospective part of this initiative as it promises chaos and a worsening housing crisis.
28 Comments
I agree that the rules a rental property are purchased under should remain in place, otherwise how on earth does an investor make buying decisions?
Secondly, not all regions/cities in NZ have the same issue as Auckland, Wellington and Christchurch, causing unintended issues in those regional centres.
Thirdly, landlords discretionary income will be shifted to paying down their mortgages, and won’t be spent in other pars of the economy.
I agree to an extent but something decisive had to be done if a CGT was politically unacceptable.
A price crash would also have the effect of discouraging investors in the future. As a home owner I would still welcome a price crash if the long term effect on non-home owners positive. In fact a price crash is exactly what I have been hoping for but perhaps those wiser than I will tell me why it’s a bad idea. Brave move Labour! Hurrah!
Not to mention banks losing their nerve and foreclosing on home owners as values drop below borrowings. Some opportunities coming for those who have been patiently waiting.
Yes. I couldn’t believe it when I first heard of it.
I predict residential investors will switch to commercial assets instead.
Commercial is not for the faint hearted.
As history will show, alot of mum and dad investors are getting taken to the cleaners by commercial property syndicators. This trend will continue, until more regulation on this form of investment.
Sir Bob, thousands of renting families will not be on the street.
They will be housed alongside 10’s thousands of beneficiaries and prisoners on release in formally 4 and 5 star motels.
It is simply unbelievable how many motel blocks are leased for years ahead to this government for such purposes.
Not only are the government leasing on an industrial scale but are now purchasing outright such properties.
Currently the cost is circa $1.5 million per day.
Worse, they are paying up to 300% more than the rack rate due to the undesirable tenants being placed.
Even worse, they have turned once family oriented areas into “ no go “ areas which now resemble ghettos.
In the once gentrified area of Ahuriri / Westshore in Napier over 230 motels units have been leased to the government for the utter dregs of life.
Regular brawls, bottle throwing, obnoxious behavior and regular shootings are a nightly occurrence.
Last month alone in this small area 4 people were shot, one unfortunately an innocent staff member of a local restaurant .
This is not unique to Napier, it is happening with increasing regularity throughout New Zealand.
Little wonder our borders remain locked as incoming tourists would have nowhere to stay with a modicum of safety.
Ardern is irrevocably changing our country so it will soon resemble South Africa with the requisite high walls, barbed wire and armed security guards to protect one’s family.
A Socialist / Marxist paradise.
Spot on
The Government’s political need for tens of thousands of motel beds explains why Tourism Minister Nash is doing his utmost to keep international tourists from returning to New Zealand in large numbers. Perhaps this also explains why PM Ardern kept post-posing the Trans-Tasman bubble through the summer tourism season?
No problem Bob, when the renters arrive on the street, Jacinda will put them up in the Park Royal.
This government doesn’t care for anyone else’s options so good luck with a re-think.
Mostly good points, however complaining about removing deductibility as a retrospective change, is equivalent to someone complaining that that top tax rate was 33% when they took the job, therefore the new top tax rate should only apply to new hires.
You say… ‘Bad for the government’… good show, But unfortunately, very bad for NZer’s. We all pay the price one way or the other.
This grinning clown circus is trashing NZ.
The housing system is rotten to the core, and nothing more than a ponzi scheme for the banksters..
Banks have been gaming the system for decades; which is what you get when you sell the banks to overseas interests who interest is in profit maximisation; and bugger the social implications. Ex Politicians involved in their management don’t pass the sniff test, and a reflection of crony capitalism.
Locally owned banks and businesses couldnt and wouldnt abuse the customers in the same way.
A more sensible option would be to make the component of rental which is the government accommodation suppliment required to be refundable by the landlord. This only subsidies the banks, which use the subsidy to lend more.
And another oxymoron is the working for families budget, which in effect is working against families.
Its time the government went after the big boys, rather than small easy targets. Nothing but weak gutless wonders.
Why should the landlords have to refund it? Why are they more responsible for social ailments than any other sectors? You could easily argue bottle stores or TABs should refund their proportion of benefit cash.
Your argument ignores the main driver of the current price, which is (as it always is) demand exceeding supply.
Put it this way, if they didnt exist, both rentals and prices wouldnt be so high; and the ones that benefit the most are the banks.
Subsidies distort the market, and this would be a sensible way to remove it over time; and give investors time to exit orderably.
If you removed the accommodation supplement from the renters, it wouldnt work. You’d have alot of people on the street initially and then collapse the market from its highs.
I suppose inevitable something was going to bring the housing euphoria down to earth with a crash when you have a circa 1987 free for all occurring. Its kinda like the Great Gadsby meets Covid meets the Millennials meets the government money printing presses meets a human exodus to the promised land. Unsurprisingly as history shows repeatedly, it often doesn’t end well for some and very well for others. Residential property investment is a commercial business and with that comes risk, as well as changes in economic policies that directly increase that risk at times .
The social housing dilemma although intertwined in parts, is really a separate issue . Again unsurprisingly when a govt says you can keep your 3 or 4 bed new house for life , pay a max of 25% of your income as rent , people are not vacating these houses when their family leaves or circumstances change. Why would they , I wouldn’t. Que the increasing wait list , as houses are no longer recycled and people stay put.
I think these new changes will assist the development sector to get on with building affordable social housing as it is pretty hard to compete in a market where everyone is buying everything at ever increasing prices (including art , cars, boats furniture.)
Rents will rise to cover the tax rebate lost. The taxpayer will cover many so the net effect of those will be an increase in welfare payments mostly paid from the tax increase. The working poor will be hit hardest and some will lose houses and jobs. The sudden sale and price sag will allow big capitalised investers a feast as they harvest forced sellers and wait for the inevitable quick price recovery.
It doesnt work like that Alan.
People can only afford what their wages deliver. The scale of the accommodation supplement is artificially keeping rents high already.
It may hit people on the margins, but its likely they had poor or no advice that house prices always go up. They dont and a reset is very close.
Maybe the only fix to the housing “crisis” is a decent earthquake….? It seemed to get Christchurch sorted. Lots of new land released and houses built. Christchurch has lower house prices than Dunedin.
Your first paragaph puzzles me. Fair enough to tax landlords on their profit, but also applying income tax to their outgoings is so much against any conventional accounting, that it is laughable.
“Cry me a river”.- “Crocodile tears”. genter and swarbrick talking about the 70% Mum and Dad rental house owners. Arrogance.
I don’t see how making things more expensive, will reduce the price
It has never worked before
If you talk to people in the building industry they will tell you that there is a huge shortage of materials slowing current builds let alone the thousands of needed new builds.
Sir Bob, I believe you are incorrect. The average house price in New Zealand will not fall. The median household income to average house price is still under ten for all regions throughout New Zealand. Places like San Francisco, Vancouver, Sydney, Melbourne have average house prices more than ten times the median household income for years. The calculation combined with our low interest rates and acute shortage of supply will stop house prices decreasing. You may claim that those Cities have better taxations structures for residential property owners but I still believe time will prove your prediction to be too pessimistic.
Labour showed their true colours leading up to the election 4 years ago. The ‘ promise’ to build 100,000 houses was laughable, and enough voters saw through that and Labour polled accordingly..only to have WPeters exercise his vanity and ego power and put ardern in..with him pulling the strings. This latest ‘ policy’ only goes to show that labour just don’t get it. I don’t believe property ( residential etc) prices will fall. Landlords will bump up rentals, first home buyers , now they can borrow/be gifted more $$ will cause houses in the ‘first home’ category to rise in value due to competition. The only part of the policy we haven’t heard about it where are labour going to find cheap land to encourage building…if you owned some land that could be subdivided would you sell it to the govt cheap? Of course not. It will be found in the less desirable areas, sold cheaply and so we will see another labour ‘ghetto’…don’t want to embarass anyone but you know where to see the results of previous labour govt housing ‘initiatives’.
Given the wage subsidy scheme was an effective bail out of banks, what other result could there have been?
If government had not rushed in and printed money, housing would have become more affordable than ever as people would have lost their jobs and in turn had to sell their mortgaged homes.
Now we have a situation of massive debt, very low interest rates and horrendous asset bubbles. Oh and a PM who has basically guaranteed in her speeches house prices will not fall.
If someone has borrowed against capital gains on a property, those gains have been turned into a cash income and should be taxed.
That depends on what the cash is used for. and that’s not a new test it is used by the IRD all the time.