Unintended consequences from
Government’s moves on property
I have some sympathy for our Government as they try to slow our overheated domestic property market. This crisis has been 30 years in the making. The perfect storm of limited supply, high construction costs, population growth and a tax system that has supported property investment have together created the perception that property can only increase in value. And when you add in record low interest rates, it should be no surprise that New Zealand is now recognised as being one of the least affordable countries1 in which to buy a home.
With so many factors supporting property prices, you have to pull exceptionally hard on any single lever if you are going to have any chance of slowing the market.
Last month, the Government announced its latest 'broadside' on property as part of its housing policy statement. The extension of the Brightline Test from 5 to 10 years was somewhat anticipated – however, the progressive removal of the deductibility of interest as a business cost was a surprise.
The labelling of property investors as 'speculators' and the description of a legitimate business expense as a 'loophole' seemed to be playing to their support base at best and wilful disregard for the truth at its worst.
Commentators2 have suggested that these changes could lead to a 10% reduction in property prices over time. However, with so many other supply constraints remaining, how enduring any downward pressure on property prices will be, remains to be seen.
For many New Zealanders, ownership of rental property has been an integral part of their retirement planning. I have never been a big advocate of rental property, but the part that 'mum and dad' landlords play in housing the 1 in 3 Kiwi households3 who rent is an essential role in our economy.
My worry is that the political environment has caused the Government to take quite drastic action with this change in the tax treatment of interest costs. This could perversely increase rental rates as landlords try to maintain the yield on their property investments with the loss of interest deductibility. Perhaps the Government is hoping that property investment would continue, but would be directed towards new builds where the new rules are less constricting.
It may have only been a few weeks since the announcement, but I have already seen capital that was destined for the property market being directed into alternative areas.
The problem with trying to change perceptions is that our beliefs tend to be anchored in our past. As New Zealanders, we have tended to be transfixed on property and popular culture has reinforced many of those beliefs through TV programmes such as 'The Block NZ'.
The fact that we live in New Zealand means that many of us are already exposed to property by virtue of owning our own home. To me it seems illogical to continue to over-invest (beyond the roof over our head) in any asset class which shows many bubble-like attributes.
There was a time when building a diversified portfolio of assets – which included shares, fixed interest and property – was an involved process. It was the preserve of relatively few New Zealanders. However, this is no longer the case and it is now easy to access the advice necessary to design and build a globally diversified portfolio of investments. Such a portfolio is not only capable of exceeding the returns produced by property alone but also allows access to a predictable income stream which can be either compounded or received as supplementary income.
The issue of housing affordability in New Zealand is not going to be solved overnight. When governments take the kind of interventionist action contained in the latest Housing Policy Statement, it is always the unintended consequences that worry me most.
In investment terms, it introduces risks that are hard to quantify. In such an environment, advice and diversification are critically important.
With so many factors supporting property prices, you have to pull exceptionally hard on any single lever if you are going to have any chance of slowing the market.
Last month, the Government announced its latest 'broadside' on property as part of its housing policy statement. The extension of the Brightline Test from 5 to 10 years was somewhat anticipated – however, the progressive removal of the deductibility of interest as a business cost was a surprise.
The labelling of property investors as 'speculators' and the description of a legitimate business expense as a 'loophole' seemed to be playing to their support base at best and wilful disregard for the truth at its worst.
Commentators2 have suggested that these changes could lead to a 10% reduction in property prices over time. However, with so many other supply constraints remaining, how enduring any downward pressure on property prices will be, remains to be seen.
For many New Zealanders, ownership of rental property has been an integral part of their retirement planning. I have never been a big advocate of rental property, but the part that 'mum and dad' landlords play in housing the 1 in 3 Kiwi households3 who rent is an essential role in our economy.
My worry is that the political environment has caused the Government to take quite drastic action with this change in the tax treatment of interest costs. This could perversely increase rental rates as landlords try to maintain the yield on their property investments with the loss of interest deductibility. Perhaps the Government is hoping that property investment would continue, but would be directed towards new builds where the new rules are less constricting.
It may have only been a few weeks since the announcement, but I have already seen capital that was destined for the property market being directed into alternative areas.
The problem with trying to change perceptions is that our beliefs tend to be anchored in our past. As New Zealanders, we have tended to be transfixed on property and popular culture has reinforced many of those beliefs through TV programmes such as 'The Block NZ'.
The fact that we live in New Zealand means that many of us are already exposed to property by virtue of owning our own home. To me it seems illogical to continue to over-invest (beyond the roof over our head) in any asset class which shows many bubble-like attributes.
There was a time when building a diversified portfolio of assets – which included shares, fixed interest and property – was an involved process. It was the preserve of relatively few New Zealanders. However, this is no longer the case and it is now easy to access the advice necessary to design and build a globally diversified portfolio of investments. Such a portfolio is not only capable of exceeding the returns produced by property alone but also allows access to a predictable income stream which can be either compounded or received as supplementary income.
The issue of housing affordability in New Zealand is not going to be solved overnight. When governments take the kind of interventionist action contained in the latest Housing Policy Statement, it is always the unintended consequences that worry me most.
In investment terms, it introduces risks that are hard to quantify. In such an environment, advice and diversification are critically important.
***
1. 'NZ house prices - how do they compare to the rest of the world?' OneRoof, 24 November 2020.
2. 'House prices could fall 10% following decision to remove interest deductibility for investor properties - Westpac' Newshub, 23 March 2021.
3. 'Renting vs owning in NZ' Stats NZ/Tatauranga Aotearoa, 26 June 2019.
2. 'House prices could fall 10% following decision to remove interest deductibility for investor properties - Westpac' Newshub, 23 March 2021.
3. 'Renting vs owning in NZ' Stats NZ/Tatauranga Aotearoa, 26 June 2019.
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While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and a Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 12 April 2021, as 'Unintended consequences from Government's moves on property.'
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