Some notes on the NZ Government's new housing package

The big news in New Zealand this week was the announcement of the government's new housing package, which included:

• A $3.8 billion fund to accelerate house building;
• Extra support for first home buyers;
• An extension of the 'bright-line' test to ten years, capturing a greater proportion of house sales within what is effectively a capital gains tax;
• Removing tax deductibility of interest payments for residential landlords; and
• Additional support for apprentices.

The goal of the package is to "increase the supply of houses and remove incentives for speculators, to deliver a more sustainable housing market".

The housing market is complex, and the problems associated with high house prices and rents defy simple solutions. A package was always going to be necessary, but the various parts of the package need to work in concert. Let's take a quick look through those five bullet points and think about the effects they might have on the housing markets. I say markets (plural) because the effects may be different on the market for homes (for owner-occupiers and investors) and on the rental market.

First, $3.8 billion to accelerate house building sounds good on the surface. However, remember that the government isn't a builder of houses, and that's not what this fund is for. The $3.8 billion is to fund infrastructure such as roads and water. This will (hopefully) make it less costly for local councils to zone additional land for development, and for developers to develop the land, since presumably it means that the developers will get to pay lower development contributions. At least, that's how I assume it will work, and if that's the case, then the costs of development will fall, and that should reduce the costs of newly built houses. Some of that reduction in cost will be passed onto new home buyers in the form of lower prices. However, if there is no change in development contributions, then any effect on new house prices is likely to be a lot smaller.

Lower house prices for new builds should lower house prices for existing homes as well, because the two types of homes are substitutes - if more people are buying new builds, there will be less demand for existing homes. Lower house prices mean lower costs for landlords (because their mortgage payments, as well as potentially insurance and rates, will be lower).

Second, extra support for first home buyers is going to undo some of the price effects of the infrastructure fund. Increasing home grants (as noted here) "from $85,000 to $95,000 for individuals and from $130,000 to $150,000 for two or more buyers" is essentially increasing the size of the subsidy for home buyers. Subsidies tend to push up prices, because more buyers are going to be looking for homes, and all the effects on prices noted above will work in reverse.

Third, the extension of the 'bright-line' test to ten years will make a difference at the margin for some existing home owners. They will be more reluctant to sell within ten years, if their home has been rented out at any time. This will reduce some speculator demand in the house market, and act to reduce house prices. However, most speculators were probably being captured by the previous five-year bright-line test anyway.

Fourth, removing tax deductibility of interest payments for residential landlords possibly has the biggest effect, and is considered by many people to be the most consequential of the changes (e.g. see here). This change will reduce the 'profitability' of being a residential landlord. Investors will want to get out of the market, shifting some houses out of the rental sub-market and into the owner-occupier sub-market. This will reduce house prices, but increase residential rents because landlords will now need to cover more expenses across the year as they will be paying more tax (or, more likely, paying tax as opposed to offsetting rental losses against their other income, or carrying losses forward to future years).

Alternatively, some landlords might seek to shift their residential properties into the commercial market, especially if they are zoned in mixed-residential or commercial zones. If you rent a house out to a business to use as an office and/or workshop, it is likely that this is a commercial rental and interest would still be tax deductible. Similarly, landlords might shift their houses onto Bookabach or AirBnB, accelerating an existing trend. That is particularly likely as borders re-open and tourist flows resume. Again, that makes the house rental commercial rather than residential and interest would likely be tax deductible. It will be interesting to see what (if anything) the government tries to do to prevent this type of activity. However, to the extent that landlords move houses out of the residential and into the commercial or short-term accommodation markets, the supply of rental houses will reduce and residential rents will increase.

Finally, additional support for apprentices will only have a small effect on the housing market. More apprentices now isn't going to make much difference to the number of builders and tradesmen available now, but will do in the future.

Overall, what can we conclude? On balance, house prices are probably going to fall a little, but it depends on how much demand is stimulated by first home buyers, and how many landlords look to exit the market, rather than shifting their houses into commercial uses. Residential rents are almost certainly going to increase.

Who really benefits from this package? The government wanted to help first home buyers, and this package will likely succeed. Property developers also benefit (if the development contributions that they would usually be required to pay are reduced).

Who is paying the costs? The taxpayers is picking up some of the cost, including the increased support for home buyers and apprentices, and the $3.8 billion infrastructure package. Landlords are going to be worse off due to their higher tax liability, and many of them will no doubt be seriously considering exiting the market. However, the group that may be most hurt by this package will be low income renters. Families whose income is too low to be able to contemplate saving a house deposit are almost certainly going to be paying higher rents.

Of course, as I said earlier, the housing market is complex, and there is a lot going on. The local and global economies are recovering from the pandemic, interest rates are currently at all-time lows, and international migration (inward and outward) has slowed to a trickle. None of those situations are going to persist forever, and as they change they will also have effects on the housing market. It will be interesting to see how it all plays out.