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Ripple effects - proposed housing policy

November 28th, 2017.


The new government, their proposed changes to policies, and their effect on landlords/investors, what does it all mean?

The election has blown over, our political environment has been set for at least the next 3 years, and the term under Labour seems like it will be influential for property owners/investors with the fact it was such a hot topic in the campaign.

To re-cap on our previous newsletter, I am primarily focusing on the property/rental market, the economy and how this will impact us as investors.

From this perspective, the Labour party plans on the following changes, which I’ve grouped together based on what I anticipate being points that share a common effect:
 
  • Extend the Bright Line rule from 2 out to 5 years
  • Stop investors offsetting tax losses against other income sources
Much of NZ wealth is held in housing, which means that changing tax policies relating to this would have significant effects. The first will be relatively easy to measure, with the idea that tax revenue relating to properties which fall inside this can be easily evidenced, what will be more difficult will be measuring how much this changes the speed in which house prices rise in boom times, on the assumption that speculators contribute to this and extending the bright line rule will make this less attractive. Secondly, ring-fencing losses will have more of an impact on those who are highly leveraged.
 
  • Implement Healthy Homes Guarantee Bill
  • Abolish 90 day no-clause terminations of tenancies
  • Increase 42 day notice period for landlords from 42 days out to 90 days
  • Limit rental increases to once a year
  • Ban letting fees
Taking away the fact that some of the above points make property investment itself less attractive, there are still underlying fundamentals which mean property should ideally remain relatively stable from an asset perspective, particularly when looking at major centers. However, when looking at rental returns, the above would indicate to me one thing – higher rents. As read here by Pedersen’s Property Management, the rising cost of compliance means that owning rental property is more expensive – and like any business venture, the costs are ultimately placed on the customer (in this case, the tenant). That being said, I have no issues with the idea of making housing better for tenants, I think realistically everyone deserves to live in a home that allows them to be healthy and warm.
 
  • Build 100,000 affordable homes over 10 years
  • Apprentice policy to take on circa 4,000 young people for on job training in construction fields
  • Remove urban growth boundaries in Auckland
  • Substantially increase number of state houses
The above points relate almost strictly to increasing supply. Economically speaking the imbalance of supply and demand is what drives unaffordable housing. Labour’s goals are ambitious, to say the least, but are definitely aimed in the right direction on this front. Kiwibuild aims, with the private sector to partner up and build affordable homes, the obvious conflict here being that the private sector are profit-oriented where as the key for Kiwibuild is ‘affordability’. Increasing supply in a general sense would have a slowing effect on the appreciation of assets, however while the capital injection of $2bn would cover a lot of the financing side of things, in reality there is further competition between Kiwibuild and the private sector for a labour market which already has a shortage. As stated by ANZ in November’s Property Focus, this gap will need to be filled with migration, which runs directly counter to Labour and NZ First’s stated aims.

To counter this problem, the Dole for Apprenticeships Scheme will assist in boosting the number of construction workers, noting however that the apprenticeships aren’t limited to the construction industry alone.

Lastly, freeing up more land for housing development should lower the price of land, however rising construction costs are likely to minimize (not counter) the overall likelihood of a reduction in values of land with dwellings on them.
 
  • Ban foreign purchasers from buying existing homes
A couple of weeks ago I attended a seminar held by ANZ where the senior economist Philip Borkin mentioned words that we have heard before in economic cycles – “this time is different”. Borkin continued to relay positive trends in the economy and how this relates to the prices of properties and their ability to hold their values amongst an inflated market. Should this be the case and demand for houses staying at similar levels to where they currently are, or potential increases in demand for new builds relating to policies such as banning foreign buyers from buying existing homes, means we have an even further requirement for the supply of new housing.

That being said, creating an artificial demand for new housing would potentially lead to an oversupply in boom times, which would then have detrimental effects in future downturns.

In summary the supply of homes will struggle to reach an equilibrium with demand. I would expect that in the short-term we would see a plateau in house prices while there is uncertainty in the political space, particularly around how exactly these changes will affect us. The fundamentals of population growth, low interest rates, a constrained supply market underpin asset growth, on the contrary, tighter credit markets and affordability counter-act this. One change which will likely have an effect on all of the above will be an expected reduction in LVR restrictions in the coming years.

This is both a time to be cautious but also be wary of suffering too much “paralysis by analysis” as well. If you’d like to discuss further feel free to give me a call on  486 4719 or email me at ryan@krispedersenco.nz.

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