Can New Zealand Fix Its Housing Crisis?

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Can New Zealand Fix Its Housing Crisis?

In the final quarter of 2020, 40 percent of all property sales in New Zealand were to people who owned multiple properties already.

Can New Zealand Fix Its Housing Crisis?
Credit: Unsplash

New Zealand’s government will spend $3.8 billion on accelerating the pace of new house builds and introduce a suite of policies intended to curb property speculation in New Zealand’s housing market, which has become the least affordable amongst the 36 wealthy OECD nations.

“New Zealand’s housing crisis is longstanding and will take time to turn around. The last thing our economy and homeowners need is a dangerous housing bubble, but a number of indicators point towards that risk,” Prime Minister Jacinda Ardern said Tuesday.

“This package contains both urgent measures and long-term solutions. It seeks to deescalate the current risks in the housing market while setting in action a pipeline of affordable new homes to be built over the coming years,” she said.

The changes include the doubling of the bright line test for taxing residential property gains from five years to 10, the removal of a tax “loophole” for property investors, and loosening income criteria for first home grants.

Last year, Ardern herself touted New Zealand as a “safe haven” for investment. But since then, returning Kiwis and investors who parked their funds in real estate have contributed to pushing house prices up 23 percent in just 12 months, far ahead of wage growth.

Ardern said Tuesday that property investors are now the biggest share of buyers and that more than 15,000 people who already own five or more properties bought another property last year.

In the final quarter of 2020, 40 percent of all property sales were to people who owned multiple properties, and from June to November 2020, the amount borrowed by investors increased by 116 percent. 

“The main point today is that the government has come through with some actual policy, which we’ve been waiting on for quite some time,” said Brad Olsen, a senior economist at Wellington-based economic consultancy firm, Infometrics.

“The key to addressing the housing crisis is increasing housing supply and so the $3.8 billion housing acceleration fund, designed to get more infrastructure in the ground quicker, is a welcome change,” he said.

Former top Reserve Bank official Michael Reddell, now an independent economist, doesn’t share Olsen’s enthusiasm. The policies “will do little or nothing” to address the fundamental problem of land use restrictions, he said.

“New Zealand is a country with a lot of land but very tight restrictions on what can be developed and where,” he said. “This announcement is effectively an attempt to paper over the cracks rather than deal with the fundamentals.”

Reddell said while the Resources Management Act (RMA), the main piece of legislation that empowers land use restrictions, is expected to be overhauled in the next two to three years, “the consensus is that those changes are not likely to make much difference.”

Olsen agreed that overhauling the RMA is not the silver bullet a lot of people make it out to be, but added that the government is working to “free up more land,” it’s just a “very, very slow process.”

“What’s important today is the infrastructure spending announced,” said Olsen. “Once you free up the land, it’s very hard to develop on unless you have the services going there. We need to free up more land, we need to increase the structure and at the end of the day, we need to build more houses.”

Elected on a promise to fix the housing crisis by building 100,000 homes over 10 years, Ardern found out the hard way that there is no quick fix. Just 800 homes have been built since 2017, a fraction of what she’d hoped. 

“While there is no silver bullet to housing, there is a need to load every bullet, every idea that the government has and fire it,” said Olsen. “We need action on housing, right away.”

Reddell said the new policies could have the unintended effect of shifting favor away from landlords who are highly leveraged to investment funds, such as pension funds and superannuation funds, who are not nationally leveraged.

“It’ll tend to be a housing market that’s more owned by those sorts of funds rather than by highly leveraged funds. That’s good for financial stability, but on the other hand, it also entrenches the advantage for people who’ve already got money instead of those who are borrowing to try and get ahead.”

The impact on first-time buyers and renters has long been a divisive conversation in New Zealand, but the issue peaked earlier this month, when new sales data showed the median house value rose NZ$50,000 in just one month. Nearly 1 percent of New Zealand’s population is classed as “severely housing deprived,” almost twice that of neighboring Australia.

Reddell said if the shift manages to bring down prices for first-time buyers, that would be a reasonable compromise but “there doesn’t seem to be any strong expectation of that… All the government is talking about is slowing the rate of increase.”

Apart from the interest deductibility change, which means investors can’t offset the cost of the interest they pay on their mortgage against their tax bill, the remainder of the package doesn’t differ much from existing policies. 

“In the last 15 years, governments have banned tax depreciation on houses, imposed tough loan to value ratios, imposed and twice extended the bright line tax, ended loss-offsetting, imposed new regulatory burdens on landlords, and [introduced] the foreign buyers ban,” said Reddell.