The only effective way to solve New Zealand's housing affordability crisis is to reform the tax system, says Westpac chief economist Dominick Stephens.
"The supply mantra advocated by successive governments is politically palatable, but it won’t work so long as the tax system continues to favour property ownership," he says.
In Westpac's latest Home Truths publication, Stephens is now forecasting house price inflation of 10% by the middle of this year. The Reserve Bank, in its most recent Monetary Policy Statement issue a week ago sharply revised upwards its house price inflation forecasts and is picking a peak of 7.7%.
Last year Westpac put itself out on a limb by predicting that New Zealand house price inflation would reach 7% in 2020. But its prediction of a sharp upturn in the market has come good.
And the hot start to the year the housing market has made means that 7% pick has already been achieved.
Stephen's says the housing market’s behaviour over the past year is an example of how financial factors can trump physical supply and demand in the housing market.
"Over the past year New Zealand construction activity has ramped up substantially while net migration has steadily declined. However house prices have still shot higher.
"We think that has been due to a big reduction in interest rates combined with the cancellation of earlier plans to introduce a capital gains tax."
With Labour having ruled out any CGT while Jacinda Ardern is leader there currently appears little prospect of New Zealand revisiting the whole question. National vociferously campaigned against CGT.
But Stephens says reforming the tax system is the only effective way to solve NZ's housing affordability problem.
"Policies designed to encourage building small houses, such as Kiwibuild, are a positive step for society at large," he says.
"But those small houses will tend to be bought up by landlords so long as they receive tax deductions for interest payments and maintenance while usually paying no tax on capital gains.
"Meanwhile first homebuyers will remain out in the cold paying tax on their incomes and savings as they work towards raising a deposit."
Stephens says while the Westpac economists are now picking 10% house price inflation by the middle of the year, they are not expecting a repeat of the hot market of 2016.
"We predict that the pace of house price inflation will soon start easing off as rising fixed mortgage rates gradually crimp the market.
"Another prediction we made last year was that the most obvious turnarounds would be observed in the previously moribund Canterbury and Auckland markets. That has been more-or-less borne out.
"The whole country is now singing from the same house-price song sheet. Over the past few months house prices have increased at a more even rate across the country. Auckland is actually now among the faster-rising regions. Prices in Canterbury are rising, although to date this has been slower than many other regions."
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Depends what you mean by "housing affordability". If interest rates were a lot higher, house prices would be a lot lower. But the monthly mortgage repayments (which is what I define as affordability) would probably be about the same. The deposit however would be a lot lower.
So you mean you'd have a lot shorter time needed to raise the deposit, and then pay down the mortgage? That sounds a lot more affordable in real terms. Payments X the length you are making them for matters. otherwise the easy way to affordability is the 50, 80 or 100 year mortgage..
Weird. Now Westpac economists are sounding like they're social commentators while clipping the ticket on all the money that they're privileged enough to lend into existence for NZ's gigantic property bubble. It's almost indirectly suggesting "credit-driven bubbles have nothing to do with us. It's all the gubmint's fault with their wrong-headed taxation policy. We're just the good guys who keep the wheels turning."
When he was Minister of Finance the good Dr Cullen lamented that he would much prefer NZrs to be investing in equity securities and such like, rather than property. Only a few days later his protege Cunliffe crashed the Telecom share price. Sure that action may have been a necessary evil, but it wiped $millions of a blue chip cornerstone investment for thousands of shareholders. So given that sort of risk, is it any wonder that those that have the means and energy to invest into property do so? So far it beats hands down any other investment in terms of security, return and profit. There it is. QED.
CGT is not retrospective and it will not hit the boomers in the pocket only the younger generations of house buyers. Is that what they want? A double whammy could happen as CGT restricts the free flow of property listings, I think we have seen that with the bright-line
If not a land tax or CGT, there is still the case for TOP's wealth tax, as conjured by Gareth Morgan:
https://d3n8a8pro7vhmx.cloudfront.net/garethmorgan/pages/95/attachments…
"I hope the right people are held accountable when this ponzi housing economy eventually implodes."
Last time the people responsible (banks mainly, IMHO) got bailed out. Got their millions of dollars in bonuses too. So I wouldn't hold my breath about anyone being held accountable.
And the one they got right was also filled with "exit clauses".
We're pretty confident that house prices will increase by 7% next year, but the evidence is by no means conclusive
More data will be required before we can draw any real conclusions about which way the market is heading.
Um, sell a house at a 10% premium? To be fair that’s a valid point. Availability of credit is a material driver in price expansion. It’s certainly not an improvement in underlying fundamentals. When it comes to housing assets, it does seem more of a case “what will the bank lend me...”
"...but it won’t work so long as the tax system continues to favour property ownership". Agree. But also contributing factors is not enough residential infrastructure spending, as well as various councils sitting on their hands with zoning & regulation. Oh, and the stupid cultural preoccupation that Kiwis have that investment = house.
Reforming tax system only way to reduce property prices. Got to be having a laugh.
Housing affordability solutions are so Overly complex. Price is the mechanism of supply/demand. Reduced prices will easily be achieved by reducing access to credit.
Simplest way to do that - restrict term loans to 20 years, problem solved. No need for complex LVR restrictions and you won’t be indebting households for the majority of their working lives.
I'm not sure about the technical detail, but I think the RBNZs prudential supervision in the management of risk weighting on assets for residential mortgages (and how that compares to other types of bank lending) also has a big effect. RBNZ had a chance to change the investor trend away from residential property and into more productive asset classes in its recent review, but didn't and then backed down even further by setting the time frame to implement the new (much weaker than originally proposed) capital ratios out by 7 years. And the banks continue to determine their own risk weightings on mortgages, still favouring residential assets.
If a bank wanted to change their lending practices to favour lending on other forms of capital investment, they are perfectly free to do so.
Got it. I had a childhood friend who went on to become a highly succesful merch banker and on the way he taught me about investing in equities. I have to say it was one of the greatest things anyone ever did for me because its shown me so many opportunities to generate wealth all without the hassle of being a residential property investor. I think the penny is dropping for the 'landlord' class that they have infact been set up as an income stream for all the services they must consume to run an adequate rental house....book keeping...gardeners...builders...property managers...debt collectors....why bother with that crap? Thanks for your post.
Houses are under-insured & over-priced, under-insulated (freezing) and pretty damp for the most part, and often located too far away from where we work. They are an expensive, if somewhat necessary part of life. Whilst we like to think we make money on houses, the reality is that it's the banks who loan us the money make the most. Then, if we're lucky, we might make something at the end. If you don't believe me sit down & work out how much interest (only) you've paid the bank manager over your lifetime. In our case it was multi hundreds of thousands. My point is that while they are expensive things to own, many other countries similar to ours, have similar problems & in some cases, similar causes.
Personally, I would like to see an urban land tax introduced around the 1.0% mark [& just so as you know, we own multiple properties that are non ag]. Perhaps there is a rural % lower than the urban % otherwise no exceptions. Not even for Iwi. This feeds nicely into our New Millennium Democracy which I've mentioned here before & becomes the primary income source for the newly empowered NZ Regional Leadership Structure.
Why do economists persist in thinking adding taxes, in particular a CGT will lower housing prices.
Can they not just look at Australia? Taxes will never lower house prices.
Take GST off new house builds and we would save at least 15% almost immediately.
Sort out the material monopoly and there is at least 10-15%
Get rid of the shoddy workmanship and there is another 10% saved from less rework.
Get rid of the ludicrous council leeches and there is another 20% saved.
Curb immigration. More people = more demand (go figure!)
Finally get some proper town planning, along with the required infrastructure to reduce the pockets of overpriced matchboxes, and spread the demand more evenly around a given town/city.
I tend to agree, it is also so ingrained in Joe average that real estate is the only way to freedom, it will take a generation, or a large financial shock (carona anyone ?) to reset.
In the words of one of Rod Stewarts finest - it wont happen overnight, but it will happen.
Interesting the taxation regime relating to house has been much the same for the last 40- 50 plus years. And yes many years ago we had periods of house price inflation even price deflation in real terms mainly driven by short periods of looser or tighter monetary policy, cost inflation and changes in migration flows in and out of the country. However house price inflation in recent years has been unprecedented clearly driven by a sustained period of low interest rates, loose monetary policy, periods of large capital inflows via external bank borrowing or foreign buyers, high inward migration flows and a lack of supply exasperate by the RMA, councils differing interpretations of the Act and a mountain of rules relating to building in general. The idea that changes to some taxation rules is going the solve the these issues seems highly unlikely given the overall level of dysfunction.
This from Metropoles latest property update
"Owner occupiers are currently driving the Sydney property market. While investor activity has also picked up, it is showing milder gains and our experience at Metropole suggests this is because property investors are still finding it difficult to borrow because of the banks’ tighter lending criteria."
I suspect pretty similar here. They also forecast 10 percent sydney price growth to 1.25 median and that percentage will probably be replicated in Auckland in 2020. A far cry from your meltdown call, virus or not.
The LVR restrictions do seem to have had an impact on residential property investment, but they are still borrowing more than FHB's, whose surge was mainly due to lower interest rates and the threat of even higher house prices, which has come to pass.
https://www.interest.co.nz/property/103405/new-reserve-bank-figures-con…
Trouble is, the $500,000 house you could have bought in November 2019 will be $550,000 by November 2020, meaning the 20% deposit requirement increased by $10,000. For me, those sorts of increases are higher than what I'm able to save each year, so I'm actually getting further away from owning my own home, even though I'm already living a frugal lifestyle.
@mikekirk ........... you are simply crazy to think it would be a good idea to stop people leveraging to invest in anything .
Its a risk they choose to take and and in a free market they should take such risks .
Lets not forget , someone has to provide the market with housing rental stock to rent , the Government ( the current one as well as prior ones) has proven to us they cannot house all renters , they simply dont have the resources or the ability .
And why should they ?
The burden on those few of us who actually are nett taxpayers would be unsustainable if the Government was the provider of housing to all and sundry .
The current state of the market is what it is , and only better supply of housing will ever solve the problem
I'm not surprised, but Stephens does not at any time mention anything about houses being more affordable in real capital terms on a like for like basis, except he says smaller houses like Kiwibuild is a good idea.
Not for him, to open up land supply, or reduce council bureaucracy, or material costs.
Nope, let's just add another cost to the system by way of taxation.
Ask yourself this, 'Do banks really want a solution that would make all housing more affordable ie cost less in real capital terms, on a like for like basis?'
And this tax that the Govt. would receive. Who is the Govt. banker again?
Well I am going out on a limb here. Tourism is over. Done. Dead. For a couple of years. This Corona virus will soon be hitting its straps in Japan, Singapore Vietnam and Thailand. Every medical scientist I listen to says nothing will stop this going pandemic now.
Tourism is and will dry up which will crush any joy in the real estate boom. I think Westpac are doing a last minute push in the hope of fueling/fooling the market for a bit longer. It wont matter if the deathrate isnt huge. The fact it is 10 x flu rates is enough to scare the bejesus out of all older folk. And its the so called baby boomers that have money, do travel. Have real estate...play monopoly. Of course if we die like flies, there could be a lot of action as our estates are sold up. But that would be -10% plus. Thats my out on a limb thought. Do hope its wrong.
I could change my name to Merde. Remember I am the one with a farm full of fatties ready for the works. No rain. No feed. No market. Yet I laugh in the face of adversity. Ho ho ho.
Will it rain. Yes. Will the grass grow. Yes. Will ppl keep eating. Yes. Now just to get the timing....
Yip. I really doubt what Westpac is saying. In our area, which is very touristy. But more local really than imported. Well the lifestyle block sales are completely flat. Very little has sold in 6 months. We looked at a neighbouring block, I thought I might retire to it. That was back in september. Its still sitting unsold. As are the half dozen places nearby. Personally I reckon they were all way over priced. So it may have nothing more to do with anything other than that. But in a market that is supposed to be flying...well...not here.
Firstly, where are you located?
Secondly, sadly for you, indeed rural properties are in the doldrums… very different from the standard houses because rural properties derive their value form what you can earn on it and that, as you know, is difficult at the moment. I also agree that many rural blocks have been overpriced, I hope you didn't buy recently
OMG. Houseworks there is nothing wrong with the business model. So long as you buy and sell on the same market all will be well. But it is a bit hairy sometimes. As for Maui. I dont want to pick on them personally. But the likes of a sheep milking business has a much bigger problem than the dairy industry has. At least a cow only has one calf. The sheep milking industry has 2 lambs or more to deal with. Imagine tapping 100s of new lambs on the head. Um no I bet you cant. And I understand Maui dont. But they have to find homes for them. So think this....they offer free lambs with a 5kg pack of anlamb milk powder to anyone that will take a bunch of lambs (one pack per lamb). So before they have produced a kilo of ewe milk, they have given away 5 kilos of cows milk powder. Love that business model. Not.
Or rear the lambs on the ewes you would rather milk into the vat. Then sell them on the store market to a bunch of farmers that want nothing to do with East Friesian type lambs because they can be hard to fatten. In other words give them away.
Like I said in another thread, diversify at your peril. Believe what you like, there are major problems with the sheep milking business model.
"...reforming the tax system is the only effective way to solve NZ's housing affordability problem."
Not the only way!
Net migration, while decreasing a little, is still massive and population growth is still very high.
Low or zero population growth reduces house price growth. Look at west coast of SI. Look at much of Europe. Look at Japan.
NZ is addicted to population growth driven economic growth which results in poor productivity and high house prices.
Time for a political party that takes the population problem seriously.
ABSURD.
We simply have a case of very low interest rates (asset price appreciation) & too much demand (very high per capita immigration rate) and too little being built (inelastic RMA).
Changing the tax approach is needed, but only shifts the balance between rentals and home ownership and doesnt address the demand/supply imbalance.
Evidence of this is Christchurch where Selywn & Waimak Districts have provided relief valves and price appreciation has been limited vs the rest of NZ. Verses Auckland & Queenstown with very limited supply growth and excess demand.
Well? nothing to be fuss about, it's already been suggested albeit silently by the RBNZ govt. - it's all about credit, credit, credit, loan, loan, loan, spend, spend, spend - a friend recently, just borrowed to purchase a car, and yip, it against his current borrowed house loan... value of appreciation. Tax, yea naa.. who will be interested on that? no-one, suicidal, it's highly untouched current economic reality.. only crazy will tackle the bull by the horn. If it does exist? - how many of us want to be friend with this lunatic?
can they make up, their mind ?
https://tmmonline.nz/article/976516384/housing-market-boom-won-t-last-l…
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