Risk of 'abrupt stop' in housing market, economist says
Tuesday, 23 March 2021
New Government policies intended to shift the balance of the property market more in favour of first-home buyers risk bringing it to a “more abrupt stop” than intended, a leading economist says.
A range of new measures were announced on Tuesday, including $3.8 billion for infrastructure, an extension of the bright-line test that means some investors pay tax on their gains when they sell properties, and the removal of interest deductibility.
This last point will be important to many investors.
Until now, they have been able to claim back the interest cost of a home loan against the rent received on the property, significantly reducing their tax bills. Put simply, if they earned $20,000 a year in rent from a property but paid $12,000 in home loan interest, only $8000 of the rental income would be subject to tax.
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Under the new rules, the whole $20,000 would be.
Deductions will not be allowed on properties bought after March 27 from October 1. The amount that can be claimed on properties bought earlier will be reduced to zero over a period of four years.
ANZ chief economist Sharon Zollner said that was a “massive” for the Government, because it was risking upsetting a large voting base.
The fact it was retrospective would mean large numbers of people would experience an increase in their tax bills. “That’s brave … that could change the maths. It’s a pretty significant levelling of the playing field.”
She said it would probably mean more money went into other investments, which could boost financial markets.
“On a macroeconomic level, it’s very difficult to engineer a soft landing from a vertical take off … the risk is that they cause a more abrupt stop in the housing market than they were intending. And the housing market is the New Zealand economic story right now.
“In my view it’s well worth sacrificing a bit of economic activity at this point to head off house prices that are doing so much damage to our society, and also our economy in so far as a boom and bust cycle is extremely unhelpful and that had been looking more likely by the day.
“But the risk is that they overachieve and the economy is still pretty vulnerable. A New Zealand economy with house prices going backwards looks and feels pretty different. But to be honest the prices have got so out of whack with incomes that house prices falls had been starting to look inevitable. Better to fall from a roof than a plane.”
Some investors might rush to sell, fearing a market crash, she said, but others might decide to stay in the market assuming the rule change would not stick. “There’s less incentive to buy a property now.”
Infometrics economist Brad Olsen said the policy announcement was a “good start”. “No announcement the Government could make was going to change the housing market.”
The money for infrastructure would be important because that had been a significant hurdle in getting building moving. “The Government has been told there was a problem there and has acted on it.”
He said he would expect to see investors quitting the market. The change to deductibility rules would change the equation for some people. “A few will be ringing their accountant to see what this means.”
NZ Property Investors Federation president Sharon Cullwick said she estimated that the deductibility change would mean an extra $6000 a year in tax for the owner of a $600,000 house. But as interest rates rose, that amount would increase.
“Every investor that runs their investments as a business will be looking at their financials,” she said.
Some small-scale investors would decide it was not worth buying, she said. Cullwick said it was likely to mean fewer rental properties available in the market for middle-income families.