Focus Government 'cracking down' - on housing 'speculators' - Forsyth Barr
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SPECIAL REPORT | Thursday 25 March 2021
focus
Government
‘cracking down’
on housing
‘speculators’
This week the Government released a policy package to address
New Zealand’s “housing crisis”. In our view elevated house prices is
principally a supply issue — the population has grown quickly, and the
provision of new homes has failed to keep pace. The policy package does
include some initiatives to help supply, but the focus is on the
demand-side, specifically targeting investors who own around 35% of
New Zealand’s residential properties. It seems likely these policies will
encourage some investors to switch from housing to other asset classes
and, at very least, cause house price growth to slow. Ultimately though,
more supply-side solutions are required.
SPECIAL REPORT | Thursday 25 March 2021
The problem
New Zealand house prices have soared and we now have some of the most expensive house prices in the
world.
H O U S E S E X P E N S I V E VS . H I S TO RY: H O U S E P R I C E S / H O U S E H O L D D I S P O SA B L E I N CO M E ( X )
7
6
5
4
Long-term average 3.4x
3
2
1
0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
Source: RBNZ, REINZ, Forsyth Barr analysis
H O U S E S E X P E N S I V E V S . I N T E R N AT I O N A L : H O U S E P R I C E S /
HOUSEHOLD DISPOSABLE INCOME (PER SQUARE METRE)
40%
35%
30%
25%
20%
15%
10%
5%
0%
Israel
Japan
France
Italy
Sweden
Finland
Chile
Ireland
Iceland
Denmark
Norway
Austria
Canada
Spain
Estonia
Poland
Germany
Brazil
Australia
Slovenia
Portugal
South Korea
Switzerland
Hungary
Latvia
Belgium
Greece
Russia
Luxembourg
New Zealand
Slovakia
Turkey
Lithuania
Mexico
Netherlands
Czech Republic
United Kingdom
South Africa
United States
Source: Compare the market, Forsyth Barr analysis
Page 2
In our view, the surge in house prices largely reflects:
1. Supply not keeping pace with demand due to restrictions on land use (only just over 1%
of New Zealand’s land is used for housing), increasing costly regulation, and other factors. Lack of
supply is evident throughout the country.
N O T E N O U G H H O U S E S F O R S A L E : H O U S E S A L E S V S . H O U S E S AVA I L A B L E F O R S A L E
60,000 11,000
10,000
50,000
9,000
40,000 8,000
7,000
30,000
6,000
20,000 5,000
4,000
10,000
3,000
Available listings (s.a.), lhs Sales (s.a. 3m MA), rhs
0 2,000
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: REINZ, RBNZ, interest.co.nz, Forsyth Barr research
Booms in New Zealand house prices have typically coincided with booms in population – in the mid 1990s,
early 2000s, and since 2013. When population surges sticky supply can’t adequately respond.
H O U S E P R I C E S B O O M W H E N T H E P O P U L AT I O N B O O M S : P O P U L AT I O N G R O W T H V S . H O U S E P R I C E G R O W T H
2.5% 25%
20%
2.0%
15%
10%
1.5%
5%
1.0%
0%
-5%
0.5%
-10%
Change in population (yoy) lhs Change in house prices (yoy), rhs
0.0% -15%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: Statistics NZ, REINZ, Forsyth Barr research
Page 3
SPECIAL REPORT | Thursday 25 March 2021
…Many first home
buyers are turning
to the Bank of
Mum and Dad…
2. Falling mortgage rates enabling borrowers to service larger mortgages. We have published the chart below
before – it shows the cost to a home buyer of servicing an 80% mortgage on the average New Zealand
house. As mortgage rates have fallen, house prices have risen. Since 2008 the cost of servicing the
mortgage as a proportion of income has been broadly stable.
COST OF SERVICING A MORTGAGE
45% 12%
40%
10%
35%
30% 8%
25%
6%
20%
15% 4%
10%
Mortgage payment / household disposable income, lhs
2%
2-yr mortgage rate, rhs
5%
Assuming 80% LVR, 25 -year mortgage, two -year mortgage rate
0% 0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: REINZ, RBNZ, interest.co.nz, Forsyth Barr analysis
Page 4
…housing affordability
is the number one
concern amongst
New Zealanders…
Looking through this mortgage serviceability lens you could argue housing affordability has not worsened
(albeit it does mean borrowers will hurt if mortgage rates rose). What has become more challenging is the
house deposit. At the beginning of last decade the required deposit equated to around 90% of average
household income. Today it is has increased by a half to 134%.
Many first home buyers are turning to the Bank of Mum and Dad – a 2018 report showed that more than
half purchased homes with the help of their parents. But this option is not available to all. Rising house
prices can contribute to greater inter-generational inequality.
RISING REQUIRED HOUSE DEPOSIT
140%
120%
% of average household income
100%
80%
60%
40%
20%
Assuming 20% deposit on the average house price
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Page 5
SPECIAL REPORT | Thursday 25 March 2021
…A $3.8 billion Housing
Acceleration Fund to help
fund infrastructure…
Source: REINZ, RBNZ, interest.co.nz, Forsyth Barr analysis
More Government housing policies
According to market research firm Ipsos housing affordability is the number one concern amongst
New Zealanders.
S U R V E Y “ W H AT W O U L D Y O U S AY A R E T H E T H R E E M O S T I M P O R TA N T I S S U E S FA C I N G N E W Z E A L A N D
T O D AY ? ” ( F E B R U A R Y 2 1 )
Housing/price of housing 60%
Poverty/inequality 28%
Inflation/cost of living 24%
Healthcare/hospitals 23%
The economy 23%
Climate change 21%
Crime/law and order 16%
Unemployment 14%
Environmental pollution/water concerns 13%
Drug/alcohol abuse 13%
Transport/public transport/infrastructure 10%
Household debt/personal debt 9%
Petrol prices/fuel 8%
Race relations/racism 8%
Education 8%
Issues facing Maori 6%
Immigration 6%
Population/overpopulation 5%
Taxation 4%
Defence/foreign affairs/terrorism 1%
0% 10% 20% 30% 40% 50% 60% 70%
Source: Ipsos, Forsyth Barr research
Addressing the problem is not easy. Successive governments have tried and failed. The KiwiBuild scheme
introduced in this Government’s first term is a case in point – it aimed to deliver 100,000 houses, but to
date only around 800 have been completed (including a number built in the wrong place and sold below
cost due to lack of demand).
The most notable policies from this latest package include:
• (The most surprising and significant) a removal of deductibility of interest on investment properties,
“potentially” excluding new builds. In effect, this is equivalent to an additional tax on property
investors. It will apply to properties purchased from 27 March, and be phased in over four years for
owners of existing properties.
Page 6…It’s hard to be specific
about what the impacts of
these new policies will be…
• Extending the bright-line from five to 10 years for existing properties, meaning capital gains tax will be
applied to any house sold within 10 years except for a person’s main residence. The bright-line for new
builds will stay at five years.
• A $3.8 billion Housing Acceleration Fund to help fund infrastructure.
• Government has also asked the Reserve Bank to consider prohibiting investors’ access to interest-only loans.
A shifting landscape for property investors
Many who have invested in property as part of their long-term retirement plan are probably feeling
aggrieved. They’ve been labelled as “speculators” by the Government, and the investing rules have
continually shifted.
• The initial two-year bright-line test was introduced by the National government in 2015. It was
extended to five years by the Labour government in 2018.
• Since 2019 investment property has been ring-fenced for tax purposes, meaning property expenses can
only be offset against property income (and not other taxable income).
• Last year the government reintroduced tax deductibility of depreciation for commercial properties (it
was removed in 2011/12) as part of an economic stimulus package. It was not reinstated for residential
property.
• Recently the Reserve Bank announced macro-prudential policy changes including a 40% deposit
requirement for property investors from May this year.
Now the bright-line test is being extended further, and interest tax deductibility removed.
House prices likely to slow, but policies are no silver bullet
It’s hard to be specific about what the impacts of these new policies will be. We expect the following are
likely:
• Investor demand for existing property will fall, and we could see a shift to other asset classes such as
shares, commercial property, and new house builds.
Page 7SPECIAL REPORT | Thursday 25 March 2021
…Addressing New Zealand’s
housing unaffordability is
clearly not straightforward…
• Growth in house prices will slow. We already expected this would
happen near-term given house prices have largely capitalised in the
large drop in mortgage rates, the doors are shut to new migrants, and
the imposition of stricter loan-to-value (LVR) borrowing limits. The risk
of house price declines has increased.
• Further support for New Zealand’s construction boom. Funding
for infrastructure is positive – many local councils are capital
constrained. Housing investment will likely be directed toward new Matt Henry
builds – in 2020 investors purchased around 40k homes, a similar Head of Wealth
number to houses built. But the industry is already stretched. We Management Research
expect its ability to expand rapidly from here is limited.
• Where possible, investors will push for higher rents. The supply of
rental properties may fall.
• The housing market has been one of the hottest parts of the
economy. The measures to curb house prices eases pressure on the
Reserve Bank, and may make it harder for it to meet its inflation
targets. Medium and long-term interest rates and the New Zealand
dollar fell after the policy announcement.
Addressing New Zealand’s housing unaffordability is clearly not
straightforward. We do expect the new demand-side policies will
moderate growth in house prices, but ultimately a solution requires
more houses to be built (including freeing up land and providing
infrastructure) and/or slower population growth. We will watch with
interest to see if the Government has the appetite and aptitude to
address these tougher issues.
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