Politics / Comment & Analysis

Housing policies: Tilting towards supply, away from landed gentry

11:58 am on 24 March 2021

Analysis - The Labour government announced a suite of new housing policy measures aimed at curbing investors, enabling serviced land supply, and increasing subsidies for first-home buyers.

Political parties had previously been too afraid to make such changes but the political calculus is changing as more adults are found renting, Shamubeel Eaqub says. Photo: RNZ Insight/Eva Corlett

These allow the government to increase serviced land supply, discount sections for social and affordable housing, and clamp down on investors and push them towards new builds.

They are constructive and buy time before other workstreams which are the big fixes: RMA reform, infrastructure financing, and banking supervision.

These policies are a good tactical move, but the politics may not land well. The landed gentry will hate it; disenfranchised renters and aspiring homeowners won't see cheaper houses soon enough.

Structural shortage and increasing supply

New Zealand has a structural shortage of housing - we simply do not supply enough land, infrastructure and homes where we need them. This has been exacerbated by ever-increasing amounts of easy debt increasing prices, property investment-friendly tax settings, and a low productivity construction sector driving the cost of construction higher.

A new $3.9 billion infrastructure fund and $2b for Kāinga Ora to develop and sell sections are big deals. They could conceivably release 80,000 serviced sections over the next decade. This is a big deal - given the current shortfall of housing is between 60,000 and 90,000 dwelling by my estimates.

Kāinga Ora was previously required to sell land at market price, but can now discount for social returns. It can now sell sections at lower prices for social and affordable houses that are retained for that purpose (for an agreed minimum period).

Kāinga Ora is already tasked with the biggest statehouse build programme since the 1940s. But it needs other supply urgently, with over 22,000 households on the public housing waitlist.

Discounted land and redirecting the $350m Housing Response Fund to underwrite some developments could finally see serious acceleration of social and affordable Build-to-Rent (BTR) properties.

This could quite possibly be the most important and lasting legacy of these initiatives.

The infrastructure money will be welcome in many fast-growing or small communities that can't afford new infrastructure. But they will come with conditions like speeding up adoption of the National Policy Statement - Urban Development (NPS-UD), which allows way more density and supply.

These will help accelerate serviced land supply, but these resources are finite. RMA reform and infrastructure financing needs to be sorted out more permanently.

Pulling the rug out from under investors

Foreign investors have been banned since late 2018 and net migration has slumped since the Covid-19 induced border closure a year ago. But house prices have boomed because of historically low-interest rates and mortgage lending uninterrupted by the pandemic. Lending to investors surged too, as the RBNZ relaxed its earlier loan-to-value restrictions.

Without foreigners to blame, the focus has now shifted to already announced changes to the RBNZ's mandate to take house prices into account in its financial stability deliberations.

More will happen in this space through this and coming years, which will limit how much money banks can lend, how much of that to mortgages, how big the mortgages can be relative to incomes, and how they lend to investors. These were not part of this suite of announcements, but the long term will have a huge impact - even as far as bringing house prices down.

New policies also extend the bright-line test from five to 10 years - where tax is payable if an investment property is sold in that time. The tax is payable at the marginal income tax rate, which is much higher than capital gains taxes used in many OECD countries. This will only apply to new investors, and new builds will keep the five-year bright-line test. This is to deliberately push investors towards new builds.

Removal of interest expensing will be a blow for leveraged property investors. While described as a loophole, it is not. Rather interest payments are a legitimate business expense, but for residential property that can be the main expense, unlike other businesses where it is a minor expense.

For a 80 percent mortgage, the interest payments for the median NZ house would make up 70 percent of all expenses, compared to just 6 percent for businesses.

Very few businesses can borrow so much; more like 30 percent of asset value.

Residential property investment enjoys the largest tax benefit from interest expense.

For residential investors with low debt levels, their cash returns will fall, but remain positive. But highly geared investors will make losses that will need to be paid for from other income. They will also be able to borrow less in the future.

Recent highly geared investors who cannot cover the cash expenses may need to sell, but long-term investors will not be much bothered by this.

Their returns have largely come from capital gains to date anyway.

The new rules will be phased in overtime, so there will be no big rush of distressed sellers. It is unlikely to bring house prices down.

If investors sell, the houses will not disappear, rather will be sold to a less leveraged investor or to a new owner-occupier.

No houses are harmed in this transaction, and claims of reduced supply are exaggerated.

But the new rules will reduce future investor demand.

The government is proposing exempting new builds. It is not clear how, but if adopted it would be another deliberate redirection of investors towards new supply.

The exemption will need to be carefully designed, ideally retained as a rental aligned with the bright-line test. This would incentivise build-to-rents, which are common in Europe and the USA.

If new builds are not exempt, then new supply may be lower than otherwise the case and would push up rents and house prices.

The attack on investors is ballsy.

Something political parties had been too afraid to do. The political calculus is changing. More than half of all adults rent, and a smaller, richer and greying group own more and more houses.

'Generation rent' may finally be getting some political clout against the landed gentry.

In future, these policies may see-saw with ideologies of the government of the time - but the long uninterrupted spell in the sun for property investors is over.

First-home buyer grants

First-home buyers will get more subsidies. Income and price caps will be raised, which had both been overtaken by rapidly rising house prices. It makes political sense to do so, but it will only add more demand to buy houses.

Around 13,000 additional buyers may qualify for the grant, but banks are reluctant to lend to them. Those lucky enough to buy a home with a grant may account for 10 percent of annual sales. This will boost prices of cheaper homes for sale - before a rinse and repeat increase of thresholds will be needed. It is politically necessary, but a distraction from stuff that will work.

Buying time; tilting everything to supply

The new housing policies are a tactical package to do something to build more homes and dampen down investors. They buy time, before the long term fixes are in place.

Success for me will be measured by how many new serviced sections are delivered to social and affordable houses - those bearing the worst of our decades' long housing crisis.

*Shamubeel Eaqub is an economist at Sense Partners.