COMMENT: Imagine a man sitting high up in a tree sawing off the branch on which he is sitting. Eventually his sawing will reach a tipping point and he and the branch will plunge to the ground.
I’ve just described the Government’s approach to the housing market. Since coming to power in 2017, Labour has presided over reforms which have either made no impact or have made it significantly worse.
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Some of these reforms – such as the foreign buyer ban and the rollout of Kiwibuild - appear to have been based on a genuinely held belief, however misguided, that they would make a positive difference.
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Sadly, this can’t be said of the Government’s rental market reforms, which in my opinion consist of a series of measures designed to tap into the deep-seated envy that exists in some parts of society towards Mum and Dad property investors. These measures include the ring-fencing of tax losses, the extension of the Brightline test from two years to five years and then to 10 years, a variety of inequitable reforms weighted towards tenants, the healthy homes legislation, and now, the removal of the ability to claim the cost of interest as a tax-deductible expense.
The response to this last measure has been negative, with many economists and commentators warning that it will lead to an exodus of landlords from the market and higher rents.
So how has the Government and the Finance Minister, Grant Robertson, responded to these warnings? By issuing his own warning that he will consider imposing rent controls if the predictions turn out to be correct (which they will). To be clear, New Zealand already has a form of rent control in place, with landlords already limited to one rent increase per year. What Robertson appears to be proposing is that the Government would set, not just the frequency, but also the level of any increase.
That threat should send a shudder down the spine of tenants and landlords alike. Why? Because rent controls have been shown to be ineffective in every jurisdiction in which they have been implemented. Canada, Germany, Spain, the UK and the US have all tried various forms of control with very similar results over time. An impressive body of research generally agrees that rent controls provide short-term relief to tenants but ultimately end up reducing quality and either pushing rents up further or creating a rental supply crisis – or both.
Even economists in left-leaning Sweden, warn against rent controls. One, Nobel laureate Gunnar Myrdal, has said that “rent control has in certain Western countries constituted, maybe, the worst example of poor planning by Governments lacking courage and vision”. And Swedish Professor Assar Lindbeck has said that “short of bombing, I know of no way to destroy a city that was more effective than rent control”. Likewise, Dr Gemma Burgess, from Cambridge University's Centre for Housing and Planning Research, is “dubious” that rent controls could help tenants without reducing “the stock of rental properties".
In New Zealand, the overwhelming bulk of rental accommodation is provided by the private sector. Exact numbers are patchy, but we know that there are probably 525,000 rentals in New Zealand, of which around 85,000 are owned by Housing New Zealand, local authorities and non-government organisations that provide social housing. The remainder – around 440,000 rental homes – are provided by the private sector, and the overwhelming majority of these are owned by mum and dad property investors who have, collectively, saved the country tens of billions of dollars over the past 40 years.
We also know that around 40% of Kiwis live in rental accommodation – and that this number has been consistent over several census periods despite the sharp rise in our overall population over the past couple of decades. So the demand for rental accommodation is increasing.
For these reasons, a responsible Government would be doing everything that it could to retain, and grow, private investment in the rental sector and introducing programs that make it as easy as possible for Kiwis to invest in this important sector. It would also mean avoiding initiatives which imposed significant new costs on landlords or which worsen the already precarious position associated with the cost of owning rental property.
Draw your own conclusions.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
