Ashley Church: Five consequences of inept housing market fix

COMMENT: It’s not often you find property investors, commentators and economists in agreement. Quite the opposite. On any given property issue they’ll usually hold a mixture of broad ranging, often, conflicting views and – if I can paraphrase an old saying, “If you have four different property commentators in a room, you’ll get 5 different opinions.” All of which makes last week’s almost unanimous response to the Government’s housing moves extremely unusual.

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To recap, the Government announced a smorgasbord of measures with the claim that these would make it easier for first home buyers to get into the property market, with the most significant of these being an extension of the bright line test to 10 years and the removal of the ability of investors to claim the cost of interest as a tax deductible expense. The response was immediate. Almost without exception, property commentators condemned the package as naïve and ill considered and agreed that its impact on the market would be very different to that which the Government was claiming.

In fact, this unanimity was so overwhelmingly apparent that Radio New Zealand – unable to accept that this agreement might actually be the result of universal recognition of a common truth – attempted to explain it away as an “Investor-Economist Alliance” in which these parties had conspired to close out opinions which were in conflict with their collective view.

Nice try, but wrong. The commonality of opinion was testament to the fact that the consequences of these moves are so blindingly obvious that even tenant groups came out against them, recognising that they are directly in the line of fire of those consequences. Obvious, that is, to everyone except the Government, which doubled down over the weekend, desperately trying to bat off the criticisms with new and outrageous claims and, unbelievably, darkly threatening even more legislation if these changes backfire on them.

Look, I understand that this contrast in claims can be confusing, but here’s a simple question to consider. Who should you believe? Investors, commentators and economists who are immersed in this stuff constantly and who are in rare agreement over what these changes will do? Or a Government which has proved itself unbelievably incompetent in its approach to the housing market, stumbling from one costly failure to another over the past four years and consistently failing to live up to its own lofty claims? It’s that simple.

That’s not to say that these changes won’t have an effect – they will – and to quote Westpac, that effect will be “chilling”. The problem is that the effects will have nothing to do with solving the issue that the Government claims they were designed to address.

Here’s my take on what will actually happen:

1. After a short two or three-month hiatus, in which prices flatten or even lose a little of their recent gains, they’ll take off again in Auckland and continue to climb for several years. Most of the rest of the country will flatten off for a while because this is the point of the cycle where they would be expected to do so. This will have nothing to do with the Government’s moves, which will fail to make any difference to house price inflation whatsoever.

2. First home buyers will continue to be shut out of the market because the issue for them isn’t house prices – it’s the ridiculous deposits they’re required to put together to get into a home. That issue wasn’t touched in this package of reforms – yet it’s the single most serious issue facing them.

3. Few property investors will rush to build new rentals because none of the issues which would make that economically viable have been addressed – and to the extent that some do, they’ll simply be in competition with first home buyers.

4. The removal of the ability to deduct interest expenses will have an immediate effect on the supply of rentals in the market as many investors and potential investors defer buying. This will become a serious issue over the next couple of years as the number of rentals in supply stagnates – or even drops as fed-up and stretched existing investors make an exodus from the market.

5. This stagnation or reduction in the supply of rental properties will push up rents beyond the levels already caused by the policies of this Government. This will be compounded by the virtue-signalling decision to remove the ability to claim interest as a tax deductible expense – however, this won’t happen immediately as the introduction of that policy is being staged over four years.

As a result of all of this – whether you’re a home-owner, a first home buyer, and investor or a tenant - the property market will be in a significantly worse state by 2024.

- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]