Building Today columnist and EasyBuild director Mike Fox says the Government’s introduction of a tax package under the guise of a housing policy will, ironically, make the very people it is meant to assist worse off.
For years we have heard the cries of New Zealand’s housing crisis, and watched as house and land prices skyrocket and rents increase, leaving housing less attainable than ever before, and causing huge numbers of people to experience housing instability and insecurity.
After failed attempts, the Government has decided to have another shot at a silver bullet, quick-fix solution.
Their answer to this unprecedented housing shortage and rising land costs is to introduce a tax package under the guise of a housing policy, essentially implementing a backdoor capital gains tax and punishing residential landlords in the process.
The Government has set residential landlords apart from all other businesses in that they can’t deduct legitimate business interest costs.
This action has been touted as a way to close a mythical tax loophole but, in reality, it was just a politically-expedient smokescreen for the Government to disguise the new tax package.
Pre-Covid-19, the country’s trusty farmers were the whipping boys of the handwringing apologists. But since those same farmers have saved our economy, the vitriol has subdued, and it’s now the so-called rapacious landlord that has become the Government’s favoured punching bag.
The Government chose to ignore the advice of officials and, unbelievably, sought no regulatory impact report. Rather, it opted for its own Putin-style housing policy that will deliver the exact opposite to what is needed.
Landlords that don’t get chased out of the market will have to increase rentals to recover costs and head off threatened rent caps.
The outcome of this tax will be fewer available rentals, higher rents and more vacant houses as home owners seek to avoid the unintended consequences of this ill-thought-out policy.
Meanwhile, the policy itself is likely to have little positive impact. It will simply shift housing investors from competing with first-time buyers for existing properties to competing with them for new properties.
Final policy is yet to be released with the rules about what constitutes a new dwelling, and how long that deductibility will remain in force shrouded in vagaries.
It’s hard to have confidence or trust in the Government with changes likely occurring overnight, so I expect investors to be wary for some time.
It could be argued the “new build” aspect of the housing package gets some incentives right by directing rental housing investment towards increasing the housing stock.
However, add to this the already existing constraints on new house building, such as planning regulations, availability of suitable land, and material and trades shortages, and it’s pretty clear that this policy is unlikely to cause change.
Consider the case of an unsuspecting home owner relocating to, say, Australia to work for just over a year. It wouldn’t be sensible to sell the New Zealand house due to high transaction costs and the risk of slipping off the property ladder when trying to buy back on their return.
Rather, it makes sense to rent in Australia while also renting out their New Zealand home.
However, this would now generate a potentially substantial tax bill on the family home as it gets caught by a sneaky change of use rule.
Indeed, one calculation showed that this plausible scenario could generate a capital gains tax liability of almost a year’s salary — simply if one was to sell and move to a similarly-priced house.
How unfair is that? It will only result in homes either being left vacant or good citizens simply not bothering to return to a tax-punitive New Zealand.
It actually incentivises delaying property sales to avoid the tax even when selling would otherwise be in the taxpayer’s best interest, further keeping a much-needed property unavailable to the wider market.
Furthermore, given the law changes around tenancy terminations, landlords will not take a chance on what might be perceived to be the slightest marginal tenants.
They’ll sadly choose to leave their property vacant until a perceived lower-risk tenant comes along, leaving the state to be the sole provider for housing a section of the community that once would have been acceptable.
Burgeoning queue for social housing
Accordingly, watch the already burgeoning queue for social housing, motels and accommodation assistance balloon out over this coming year.
It is already costing the nation $1m per day for motels, with much worse to come. Perversely, houses that would have been sold off into the general market will now also be retained longer purely to get around the 10-year bright line capital gains tax.
Who can blame home owners, with the tax take at marginal rates of up to 39%? It makes it one of the most punitive capital gains taxes of any western country.
There are few commentators from any quarter who think the Government’s knee jerk tax policy will deliver anything other than more revenue for the Government, and not one more house.
We’ll unfortunately be watching for more policy bounces with the likes of rent caps, as the consequences of policy on the fly hit home.
It’s rumoured that any proposed rent cap will be linked to the house, so even if a tenant moves out, the landlord will be unable to review the rent.
Individuals’ property rights are getting trashed by this Government, and it’s worrying to think what sector of society or business is next in their sights.
The trouble with ideologically-driven, hasty and ill-thought-out policy is the unintended consequences and the constant band aid legislative changes needed to paper over the ever-widening cracks.
One of the peculiar things about politicians is that effects of bad legislation linger with us for far longer than the tenure of the perpetrators who instigated it.
Civic and moral duty
Politicians have a civic and moral duty to do the right thing even when it is against their ideological beliefs.
However, the long-term best outcomes seem to get lost in the clamber to satisfy short-term political itches and the hunger to preserve your political career.
Perhaps it’s because being a politician is so often now seen as a well-paying job rather than a service.
Many of our politicians have never been meaningfully employed elsewhere and, consequently, would be unemployable at any senior level outside of the political arena.
That’s a sad indictment as to the type and quality of our leaders and their lack of commercial acumen. I fear this mess will be with us long after this team of woke politicians has returned to obscurity.
This tax policy has a feel of panic and naivety about it — akin to a group of secondary school pupils asked to come up with an answer to a housing crisis over their lunch break with no real desire to accept any sound advice or opportunity to test outcomes.
In reality, the aforementioned statement is probably not far off the truth in the preparation of what is probably the dumbest policy the Government has dreamed up yet, with the failed Kiwibuild fiasco coming a close second.
The negative consequences of this policy will be far reaching, and the irony of it is that the very people it is meant to assist are going to be worse off. How dumb is that?
Tax and punishment are not the answer, so what is?
Put simply, it’s all about short supply and lack of housing. Create an environment to quickly provide suitable housing stock and the market becomes satisfied, house prices and rents stabilise as home owners finally have choice.
Better than the current obscene scenario where 50-plus people compete for the same rental or home to purchase.
Politicians need to address the root causes of the housing shortage which, in my view, remains tied up in the availability and cost of land for development, zoning restrictions around construction or intensification, and funding problems for infrastructure, particularly bulk infrastructure, which isn’t generally covered by development levies.
While their Urban Development Policy and high level infrastructure mutterings have come onto the radar, things seem to be happening at a glacial pace, and progress needs to be a lot faster.
They’re also now talking about scrapping the RMA, and replacing it with three new laws. But don’t hold your breath — this will be years away and more like rearranging the deck chairs than meaningful change.
None of these issues are new, though what has been lacking is the political will to solve it. One would think the time is right, now more than ever, to solve this.
Without policies that reform construction sector regulations and open up more land for urban housing, there is little prospect of house prices stabilising while current demand-driven trends persist, especially in Auckland and Wellington.
The one centre in New Zealand that has not had rampant house inflation is Canterbury. There is something of a test case and a solution there for the rest of the country if the Government has the fortitude to repeat the emergency powers that were put in place after the Canterbury earthquakes.
Entire suburbs of people were displaced and they needed somewhere to go. The solution was to bypass many of the current regulatory roadblocks and develop sections into the market forthwith.
The result was that suitable land was made available quickly, market demand was satisfied, and rent and property prices stabilised.
Isn’t that what everyone wants? So why not repeat that on a nationwide basis until we can catch up?
And with the added benefit of hindsight, we know the sky didn’t fall in in Canterbury as a result of fast-tracking things.
This is a market supply problem that won’t be fixed by a taxation policy or the stroke of a pen. It needs leadership, fortitude and meaningful change.
One final thought: when does a housing crisis become a housing emergency?
The previous government denied there was a housing crisis, and this now not-so-new government, through its inaction and failed policies, has allowed the crisis to turn into an emergency.
It is with us now, albeit slightly disguised by the media drum around Covid.
I liken it to when Covid first hit, and the World Health Organisation insisted we were only experiencing an epidemic while everyone else knew the horse had already bolted well before, and we were in a worldwide pandemic by the time they threw their hands in the air.
It is now time to stop the handwringing, finger pointing and denial, and treat this issue for the emergency that it is.
We can’t continue to ignore the social, health and well-being of our nation’s future, which hangs on getting this resolved.
Taxes and beating up segments of society that have previously provided rental housing will not produce one more affordable home.
It’s all about supply, supply and more supply.
• This article contains the author’s opinion only, and is not necessarily the opinion of the Registered Master Builders Association, its chief executive or staff.