A confused person's guide to the latest housing policies

by The Listener / 18 May, 2017
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Photo/Getty Images

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Voters can be forgiven for being bewildered at the contradictory browbeatings so prevalent in this election year’s cacophony on housing.

One party’s evidence of a crippling market shortage of affordable housing is another’s glorious sign of rampant economic success. We are told that governments can do more to level the investment playing field to make housing more affordable, but we’re warned that such interference might cause homebuyers and, worse, renters even more pain.

Fortunately, there are two navigational aids for finding our way through the maze of mendacity and exaggeration. The first is pure demography: the unexpected and apparently unstoppable population growth, concentrated heavily in Auckland, simply has to be housed. The task for voters is to determine which party or parties can be relied on to get that housing – and, just as important, supporting local infrastructure – built fastest and most efficiently. National has promised 34,000 new Auckland houses over 10 years, and Labour’s KiwiBuild 50,000 houses in Auckland over the same period. Alas, voters still await details of the fiscal and labour-force mechanics that would support either pledge.

The second navigational aid for harassed voters is the fact that housing is a market and, like any market, goes up and down. Much of this election’s housing claim and counter-claim is based on outdated data and assumptions about that market. What was true when it was booming becomes increasingly irrelevant now the market in Auckland is slowing and possibly even falling.

This is especially important in light of Labour’s new policies to crimp the tax advantages for property speculators. Most controversial is its proposed phase-out of landlords’ ability to claim tax deductions for investment losses on rentals. Loss-claiming is a boon for speculators seeking to reduce their overall tax liability. It can also be handy for modest-scale landlords, including the electorally influential mum-and-dad investors. But as with any investment decision, tax rules, which frequently change at the margins, are surely a poor determinant of whether an investment is sound. And in any case, when the market changes, so does the investment dynamic. A slowing market loses upward price elasticity over time, so property owners will have to absorb extra costs and losses rather than raising rents.

Yet the property investors’ lobby groups are still using arguments that reflect boom-market realities. They warn that unmitigated tax losses under Labour would be passed on to hapless renters,  even while market conditions make that less and less feasible. Then they warn that under Labour’s regime, some landlords will simply quit the business of providing rentals – as if that were an argument against it. Yes, landlords may quit, but if they do, the houses won’t disappear with them. They’ll simply become owned by others, who will either live in them or let them. Housing will not be adversely affected, just the affairs of some erstwhile owners.

Even the special plea that this is a “staff of life” sector, affecting the very roofs over people’s heads, is not sufficient reason to go easy. On the contrary, decades of highly favourable tax treatment accorded to residential property above any other form of investment have contributed to the painful and economically destructive market distortion politicians are now, horribly belatedly, struggling to correct.

Labour further suggests barring non-residents from buying – but not building new – property, which few dispute will help cool and also enlarge the market. It might also tax-incentivise domestic investors to build rather than buy rentals.

Some will see all this as the left seeking to punish the wealthy. Perhaps so, but with these proposals, Labour has merely joined a chorus of remedial urging led by the Reserve Bank, the International Monetary Fund and other prudential institutions concerned about the housing market’s distortions.

To give credit where it’s due, the market is cooling thanks in part to an earlier slate of interventions by both National and the Reserve Bank, including minimum deposits. Investors complained bitterly about those, too, though most of them are still in business. Should their prospects of profit or capital gain wither, they will simply have to cash up and shift sectors, just as some would if interest rates shot up from their historic lows. This is part of a healthy market cycle, not a result of state persecution.

And as a silver lining, the money investors once sank into bricks and mortar may just find a more economically productive home.

This article was first published in the May 27, 2017 issue of the New Zealand Listener.


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