House prices to rise post-election, more so if National win, experts say

Monday, 14 August 2023

Those hoping for a turnaround may be out of luck.

House prices will start rising again after the general election regardless of who is in power – that is the consensus opinion of a bank economist, university economist, and a large developer.

This was due to Labour turning the taps wide open on migration and neither party currently having any stated intention of easing it off again or a realistic solution for building enough homes to keep up with the added demand.

All three experts also agreed house price increases would be marginally larger under a National government, with reasons including National’s decision to renege on previously-bipartisan housing intensification rules, the party’s intention to roll back the bright line test, and the return of a key tax advantage to investors by reinstating mortgage interest deductibility.

Auckland University professor of economics Robert MacCulloch said levels of immigration looked likely to remain high under Labour or National.

“They are estimating immigration will be about 100,000 this year, well that’s 2% of the population, and most of them will be going to the urban centres,” MacCulloch said.

He said National’s decision to walk away from the bipartisan Medium Density Residential Standards (MDRS) rules would be another main driver of price rises.

The standards gave developers assurance they would be able to build three homes up to three storeys on most residential plots in the country’s main urban areas.

University of Auckland economics professor Robert MacCulloch believes nimbyism is behind Luxon’s decision to back out of the MDRS.

National were all for the standards when it passed into law in December 2021, including during the third reading of the bill, by which time Christopher Luxon was the party’s leader.

Then in May, Luxon made a surprise announcement that his party was “wrong” to join the bi-partisan commitment, prompting National’s housing spokesperson Chris Bishop to rush out a new policy aimed at building on greenfields sites on the outskirts of cities, and giving councils the option to opt-out of intensification requirements.

National would force councils in major towns and cities to zone for 30 years’ worth of growth immediately.

MacCulloch put Luxon’s reneging on the MDRS down to nimbyism (a not in my backyard mentality).

“The folks in Epsom were giving Luxon an extremely hard time because, you know, they didn’t want these four-level things going up in their back garden, that’s I think one of the main reasons it was done, it was threatening the Nats support base,” he said.

“Withdrawing from that in combination with the high immigration, it seems largely a return to the Key-years.”

MacCulloch was not buying Bishop’s statement’s that the party would create competitive land markets by “smashing urban limits”.

“I don’t buy it because we invited out the world’s leading urban economist about seven years ago, Ed Glaeser, he founded urban economics.

“He’s more a fan of cities going up instead of out.

“With going out you have issues of infrastructure, roading, commuting, and some of those problems can be great when you’re talking about an hour's drive out of Auckland.”

In 2017, Auckland Council estimated the average infrastructure cost of greenfield developments were $146,000 per household, a figure Bishop previously acknowledged would have gone up.

MacCulloch described National’s other investor-friendly policies, such as the reduction of the bright line test from between five and 10 years to two, as slight “red herrings” when it came to being drivers of house prices.

“Even countries that have capital gains on properties and have more unfavourable tax treatment of properties, they still often have property price bubbles, and very high increases on property prices, so it’s hard to answer those questions.”

Westpac senior economist Satish Ranchhod disagreed, and said National’s investor-friendly policies would have a material impact, pushing prices higher.

House prices likely to rise post-election, regardless of who wins, Westpac senior economist Satish Ranchhod says.

He said the Covid years proved the housing market was more complicated than a supply and demand equation, given prices rose 42% during a period of stagnant population growth.

He said the real dictator of prices was financial incentives.

“That’s what the lesson from the last couple of years was. When interest rates were low, that’s a big incentive for both owner-occupiers and investors to get into asset markets like housing.

“Now we are in an environment where interest rates are a bit higher, but if those factors that have discouraged investors over the last couple of years are eased off, we are likely to see them coming back, and that will certainly be a factor that boosts prices.”

Since a Labour Government law change that took effect in October 2021, investors have been progressively losing their ability to deduct mortgage interest payments from rental earnings.

Labour argued this tax advantage enabled investors to outbid first home buyers by taking on larger debts, which they could then use to keep their tax bills low.

National has pledged to return the tax advantage, arguing it was a central premise of tax that you tax profit, not income.

That was another argument MacCulloch did not buy, given the largely-tax free profit investors have enjoyed due to a lack of capital gains taxes in recent decades.

Westpac were currently predicting a 5 to 7% house price rise in the year after the election, Ranchhod said, which was also partly down to interest rates being close to peak, which would increase buyer confidence.

National have to-date refused to say whether the party would scrap the Labour Government introduced foreign home buyers ban.

Ranchhod said if this rule were scrapped, it was likely to lead to more demand, which would have an upward effect on prices, although compared to other factors like interest rates, it was hard to judge how big this effect would be.

Sam Stubbs is the managing director of the Simplicity KiwiSaver fund, which is in the process of attempting to build 10,000 build-to-rent homes, making it one of the country’s largest developers.

He also predicted prices to rise again, and his reasoning was similar to McCulloch’s.

“It’s economics 101, it’s just supply demand, so if this Government has turned on the immigration taps, which it has, we’ve got a net 65,000 more people than we did last year, and there’s nothing that National are saying which indicates they’ll have any but pretty strong immigration.

Simplicity KiwiSaver Fund founder Sam Stubbs says a recession is likely, which will likely lead to lower interest rates, which will likely lead to increasing house prices.

“If you look at the housing consent numbers, they simply don’t meet demand.”

He was also critical of National’s decision to renege on the bipartisan plan, a move he said was likely to put some developers off committing to large projects.

“A housing project is basically a five-year project, if you don’t have policy certainty over at least that five years you’ll be discouraged from engaging in it, because you’ve got to commit a fortune for these things to actually get built,” he said.

He said it was hard to say whether the MDRS or National’s proposed replacement policy would lead to more homes being built, but the uncertainty created by National was unhelpful, and with Auckland already being the fourth or fifth-largest city in the world by land area, building on farmland at the city fringes was not the way forward.

National’s plan to dial back the bright line test might have a small effect to push up prices, but Stubbs expected this to be limited, as most investors bought to hold long-term.

Stubbs said a recession looked more likely, which was likely to push interest rates down, which would also probably add to the chances of price rises.

“You also now have clarity there’s not going to be a capital gains or wealth tax in the near future, so that just means the same old tax advantages on buying properties remain, so there will be no one spooked out of the housing market.”

“We basically had 40 years of under-building houses, and that’s basically because the state hasn’t built enough.”

Stubbs said the solution to the housing crisis was for National and Labour to collectively sign up to a multi-year agreement with private developers to buy large numbers of homes that could be built quickly, or for more KiwiSaver schemes to get involved in building.

“You have to create a very long term view here, and one of the problems with changing all of these policies is that it basically discourages developers.”

“There’s a hundred billion dollars of KiwiSaver money running around, I think Simplicity are the only KiwiSaver building houses with that money,” Stubbs said.