For NZ this is a year that has accelerated straight into the fast lane

Business / opinion

David Hargreaves tries to make sense of a very quick beginning to the year, which means we are unlikely to be able to draw breath until the October election is over. Expect drama

24th Jan 23, 11:05am by David Hargreaves

Source: 123rf.com. Copyright: melpomen

What was it somebody was saying about 2023 getting off to a quick start?

Here we are, the first month of the year not yet done and we are already on our second Prime Minister.

At least this provides some certainty. We now know for sure that the Prime Minister come the end of this year is going to be called Christopher. Well, in so far as we can be certain about anything.

Just about everything else is up for grabs though.

I won't say too much about the change at the top of Labour since plenty has already been said. I would make the observation that in my view the change at the top means Labour's chances of winning the 2023 election have gone from zero to very, very slim. But as Jim Carrey's hapless character said in Dumb and Dumber, "so, you're telling me there's a chance".

To just explain my thinking a little, it seems to me that the most simplistic way to look at what happened is that Jacinda Ardern put up the previously untouchable 'Brand Jacinda' as collateral for the Covid strategy - and as that went awry so the public swallowed up the brand and made it toxic and the election unwinnable for Labour if the status quo was retained.

So, of course the good thing about any change of manager at any business is that the new person in charge gets a free swing in terms of making changes and yes, rolling back previous decisions.

And there's already healthy debate going on about just what Labour's likely to roll back on as the year progresses.

Sharp-eyed interest.co.nz commenters have already honed in on the prospect of the removal of interest payment tax deductibility for property investors. I have to agree.

I said a year ago I thought there was a decent chance even before we got to a Christopher Luxon Government that Labour itself would u-turn on deductibility.

The other thing of course also potentially up for grabs now is the extension – to 10 years – for the so-called bright-line test, the capital gains tax that dare not utter its name.

A U-turn on both of those measures would be a very easy win for the new Chris in town.

And of course it would have twin purposes. On the one hand you cheer the public up with the move. On the other you snooker the Opposition who've made a big election pledge out of getting rid of the things, er, that you are now getting rid of.

The simple fact of the matter is that by rolling back unpopular measures that National has pledged to get rid of, Labour can fairly quickly reveal the paucity of recycled ideas being peddled by National. Tax cuts, tax reversals, thumping gangs, bashing beneficiaries. Rinse, repeat, recycle. The old songs are the best ones.

But to get back to the interest deductibility and the 10-year bright-line test it seems clear to me that Labour may as well U-turn on these because they won't last anyway.

As I've said previously, I actually think removal of deductibility is meritorious - but not the way it was done, as a knee-jerk reaction by a government that was frustrated by its inability to rein in a then (early 2021) rampant housing market.

I've said before that this country needs to, as much as possible, provide a level playing field for the various asset classes so that we don't have the ongoing situation where housing is regarded as the first, second, third, fourth and fifth choice of investment for people. As a nation we are too vested in our housing market. Any change away from that would have to be very careful and gradual. But it should be encouraged.

Anyway, as far as tax measures are concerned, these should be done as part of a considered package. I hated the bright-line test when it was introduced by the then National Government because it was, again, an ad hoc reaction to a then raging house market. Doing something to be seen to be doing something.

And now through the efforts of Labour the bright-line test has become a major part of the housing investment picture. Ditching it and the interest deductibility and starting again (but PLEASE DO start again!) would be sensible. But sense and tax policy in this country have not tended to go arm in arm before and I won't hold my breath now.

The upshot of these latest political developments is that it shines a ray of light on the housing market, I think.

It has been difficult to imagine much happening in the housing market till we get past the election.

Logic to me says that if people have not been forced to put their house on the market then they would have been incline to wait till the election's over - particularly with it being broadly anticipated that a housing-friendly government is about to be elected.

But if Labour itself is now going to start unpicking some of the things that hit the housing market, then the mood might just improve somewhat ahead of the election.

With Chris "bread and butter" Hipkins at the helm of Labour, suddenly the differences between National and Labour have narrowed.

There's much more an idea probably already that there's less 'risk' attached to voting for either of the biggest political parties.

Of course though, the political risk is just one of so many things to consider this year when it comes to the housing market and the economy in general.

If we do soon get over the hump with inflation and people can see an end to rising interest rates, then clearly that will lighten the mood.

And with the borders now open again and with, anecdotally, migrants again coming in reasonable numbers the housing market may well return to something like its old self sooner than is currently estimated. Idea seem far fetched to you?

Well, I think far-fetched is the idea that you can have a pandemic with lockdowns and all sorts of things happening and yet see house prices surge 40% in about an 18 month period!

So, anyway, recent political developments do appear to be good news for the housing market.

But, hey, the year is off to a fast start and it really has only just started. Plenty of road to travel down yet in 2023. Anything can happen and it probably will.

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51 Comments

by Lanthanide | 24th Jan 23, 11:20am 1674512423

I don't think they'll touch the bright line test. As for interest deductibility, rather than 'scrap' the policy as you're suggesting (which is already implemented and affecting landlords this year), I think they'll freeze it at being only 75% deductible, which is the setting right now.

That looks like less of a u-turn and substantially neuters National's attack, while also helping to re-level the housing market away from investors and towards owner occupants.

They should have simply gone with the UK's approach instead which was a phase out of interest deductibility and introduction of a tax credit (and IIRC I said this on interest.co.nz at the time). The 2nd page of this document by Treasury outlines the UK tax-credit approach: https://www.treasury.govt.nz/sites/default/files/2021-04/tax-housing-44…

by General Comment | 24th Jan 23, 11:49am 1674514176

I fully expect interest deductibility to turn into a perpetual bargaining variable whereby political parties try to find the sweet spot that keeps everyone happy, or at least minimally irked. I'd say Labour will settle at 50% or 75% depending on polling, National and ACT at 100%, Greens and TPM at 0%.

by Advisor | 24th Jan 23, 1:00pm 1674518457

Since Bill English's departure from NZ National, the party has stopped pandering to the general business community and has pivoted towards housing speculators and low-value businesses.

John Key was a favourite among NZ businesses of all kinds. The same can't be said about his successors, including Luxon with his vast business experience still featuring at #3 in the 2022 Mood of the Boardroom, behind Green's Shaw and in front of Robertson, despite the latter's numerous failings as finance minister.

by OldSkoolEconomics | 24th Jan 23, 1:40pm 1674520804

That's a great comment. And correct.

I see nothing from National about productivity, export, slashing red tape, export trade deals, attracting businesses to NZ, better education etc. Just how to keep the housing Ponzi alive by making property investment more attractive and knocking ill informed policies from Labour

National and 7-house-Luxon is definitely the Waste-Of-Time-party at the moment.

Preferred outcome

-Chippy (Hipkins) tames the co-governance issues, maybe he has to kill or put 3 waters on hold pending a complete review of its purpose structure and benefits. (kick the can into next year and buy time to negotiate with everyone and put result to the public).

-cancel tvnz merger which isnt a big deal anyway

-Greens and Winston cut a deal with Chippy

- Chippy then states he resolved all the issues, simply posts national as a party of landlords and highlights how many properties they own, the wealth of their donors and so on. Entire middle and lower classes will vote for Chippy.

- As National start to come out with decent economic policies - chippy just copies and executes them

by CrispyKahawai | 24th Jan 23, 11:18am 1674512339

"Ditching it and the interest deductibility and starting again (but PLEASE DO start again!) would be sensible. But sense and tax policy in this country have not tended to go arm in arm before and I won't hold my breath now.

The upshot of these latest political developments is that it shines a ray of light on the housing market, I think."

Why would this be sensible? Why would we want to go back to the prevailing insanity of the housing market? Do you have any ideas on what SHOULD be implemented?

Disappointingly empty piece.

by Lanthanide | 24th Jan 23, 11:20am 1674512457

You'll be happy that my comment has 2 specific suggestions for what they should do, then.

by Rob Reid | 24th Jan 23, 3:27pm 1674527266

A bunch of wealth transfer has already been locked in. Anything a govt can get away with in the electorate now will be fairly minor fiddling. I'm more worried about the ominous balance of payments deficits, not the perpetual game of winners and losers that our central planners play - that horse has bolted, and most people in a hopeless position now will remain so regardless.

by HouseMouse | 24th Jan 23, 4:53pm 1674532392

Just saw this comment, and I agree - see my comment at the bottom.

sorry to say - a poorly thought through article, that doesn’t make much political sense, let alone any other sense.

by IT GUY | 24th Jan 23, 11:23am 1674512636

Luxon is not going to show his hand until the last minute, he can probably get elected as Chris Trotter says by simply "Not being Labour". Chippy must put stakes in the ground, cancel some rubbish and try to deliver something before the election. He has few sitting days left to deliver very much.... Chippy will be reluctant to promise anything which needs actual delivery as they are useless. Perhaps he will simply cancel stuff.....

by paashaas | 24th Jan 23, 2:44pm 1674524697

I reckon he will talk/ hint at cancelling unpopular stuff - without actually doing it .

He might postpone a few things in the pipeline , but not reverse what has already been passed.

Expect a lot of change of focus / style talk and not much action.

by kiwikidsnz | 24th Jan 23, 3:01pm 1674525676

Luxon just fired a shot across the bow of co governance at Ratana today.

by WestieAJ | 24th Jan 23, 11:36am 1674513414

No. Lets finish putting the Property Ponzi Jack back in its box and seal it shut forever. What about instant tax deduction for capital plant and equipment (not Ford Rangers) but actual machines and technology that make stuff. Companies like Cookie time could buy a new automated production line and make their cookies at scale to satisfy the newly discovered export demand from Costco Japan customers. Without having to find too many more Unicorns (factory staff). Take an instant tax right off instead of depreciating over years.

Instead you would rather they hire 50-100 new migrants and have the landlord class rent them houses at ridiculous cost in relation to their wages (and also a government accommodation supplement to help out) . While the landlord takes a tax deduction on their interest cost and keeps all the capital gains tax free.

by Albert2020 | 24th Jan 23, 11:47am 1674514053

If Hipkins does that he will only further alienate his base and a large chunk of swing voters too. I for one will not vote for Labour and I'm a homeowner. These policies are working, let them play out and then introduce a DTI when house prices reach their trough. Its a lot easier for Hipkins to cast Luxon as the party for the rich and entitled if he leaves these policies intact.

by Advisor | 24th Jan 23, 2:42pm 1674524560

Agreed. The road to prosperity no longer has to be built by hand and we can get machines to do it. Yet successive governments believe the solution to our ageing population (and low productivity) is bringing planeloads of younger people as feedstock for NZ's labour-intensive businesses and landlords.

by Pa1nter | 24th Jan 23, 8:50pm 1674546608

Machines dont exist that do many of our kinetic jobs.

Boston Dynamics has a near humanoid robot, but at the moment it costs about $5 million and the battery lasts about 10 minutes. Lacks fingers but has claws, could maybe replace a warehouse worker or supermarket shelf stacker.

As an added bonus, when such robots last all day and cost a hundred grand, it's unlikely to make most of us wealthier.

by morepork | 24th Jan 23, 11:40am 1674513624

Ditching the bright line test and bringing back interest deductibility would be unpopular with Labour's base. I'm unsure how it goes down with swing voters.

I could maybe see them limiting the level of deductibility to say 50%, which I think is the level in the UK, but it seems unlikely that they'd remove it completely, if nothing else it limits what tax cuts they can offer without taking on more debt.

by bw | 24th Jan 23, 11:43am 1674513832

Either, or any, Chris can do whatever they like. But it will be an Adrian that decides what, or if, any of it will see an effective light of day.

Scrap the Bright Line Test? Go for it! But don't be surprised if Adrian decides that an LVR of 70% is now the norm for any owner-occupier and 50% for The Rest.

Reintroduce Interest Deductibility? Why not! But if a new set of DTI's come in at 4 time household income, be equally unsurprised.

Someone has to make the hard choices in the name of our future, and it obviously won't be the political class (re-read the above to see why) so it's going to be the Technocrats. Over to you, Governor Orr.....

by Von Metternich | 24th Jan 23, 11:50am 1674514203

The housing ponzi must end and the move to change deductibility is wrong.

When the classical economist spoke of the free market, they meant free from parasites, gatekeepers and toll takers. Throughout Smith, Ricardo, Bastiat etc, there is a strong belief that landlords live off fruit they do not gather and work they do not perform.

Productive capitalism should be incentivised, unproductive capitalism should be punished. It should be made less profitable than the risks of productive capital. The parasitic forms of capitalism (usury, landlording, monopolies) almost always generate outsized profits relative to work performed. These should either be owned by the state for common good or incentivised to only make a slightly above riskless profit.

The current big bank usury + landlording is driving our economy into an extremely inefficient, economically uncompetitive neo-feudal hellscape.

by nktokyo | 24th Jan 23, 12:22pm 1674516124

The Kiwi way seems to be angry that their neighbour can accumulate more than them and placidly accept price gouging and/or competition-blocking from major corporations in building, fuel, power, banking, food and insurance sectors.

by J.C. | 24th Jan 23, 2:02pm 1674522124

The current big bank usury + landlording is driving our economy into an extremely inefficient, economically uncompetitive neo-feudal hellscape.

Good conclusion to this post.

by linklater01 | 25th Jan 23, 11:24am 1674599074

Von M,

I wasn't happy with your post on genetics/intelligence, but here I agree wholeheartedly with the thrust of your comments.

I spent my working life in the UK financial market and dealt with both CGT and IT.. Nobody liked them, but most accepted them as part of a tax system that taxed both income and capital. Of course, any system leaves loopholes and that incentives the use of tax avoidance structures but these can gradually be knocked over by the courts.

by chebbo | 24th Jan 23, 11:54am 1674514478

Flip-flopping on either the bright line test and/or interest deductability will make Labour look extremely weak.

Besides, if removal of those things are key issues for you as a voter, who are you going to vote for - the "transformational" party who can't seem to make up their mind, or the party who has been clear about their position all along?

by interesting1234 | 24th Jan 23, 2:09pm 1674522589

This is the core issue for the upcoming election between the haves and the have-not's. What will be the decider of the result, and the true revealer of public sentiment is whether people put aside their own vested interests in the housing ponzi or whether they cast their vote for the party with the best outcome for the majority of kiwis over the long term. Many lifelong labour voters are thinking, assessing and admitting they will not vote for them this election on results/lack thereof already displayed and anecdotally this appears to be becoming a more prominently held view. I'm banking on having one of the best turnouts in a long time for those in their 20-40's who have been priced out of being able to afford a house, perhaps this will have a more significant influence on the results...but then again the force to be reckoned with is of course the baby boomers with multiple properties and have a high propensity to vote

by nktokyo | 24th Jan 23, 2:13pm 1674522817

If you're in your 20's-40's and have been priced out of being able to afford a house then why on God's good earth would anyone vote for Labour, who have just presided over the biggest price gain in history for property owners. They couldn't have moved home ownership further out of reach for people if they had fired it from a cannon.

by Beanie | 24th Jan 23, 3:02pm 1674525763

To be fair, Labour did make changes to reduce the growth in house prices. National wouldn't have, and in fact criticized them all.

It was the price momentum, surging immigration, then especially the RBNZ dropping its pants on the OCR during the pandemic that sent them to the moon. I think National would have had them orbiting Mars.

by KH | 24th Jan 23, 3:41pm 1674528086

Interest on rental properties should not be tax deductible. Deductability was a major driver of the house price fiasco, leading to New Zealand greatest social disaster.

by nktokyo | 24th Jan 23, 5:29pm 1674534595

Also on supermarkets. Why should those millionaires get any tax relief.

by Zachary Smith | 24th Jan 23, 11:56am 1674514605

Bring back interest payment tax deductibility and Labour have my vote.

by Jesse1 | 24th Jan 23, 1:32pm 1674520375

Bring back interest payment tax deductibility and Labour lose my vote.

by linklater01 | 25th Jan 23, 11:26am 1674599176

Jesse 1,

All that proves is that you are selfish and care little for the wider good.

by nktokyo | 24th Jan 23, 12:17pm 1674515879

I disagree and predict the PM come October will be called Nicola

by Advisor | 24th Jan 23, 2:29pm 1674523781

Don't know if we've had a PM entering Parliament on a list in NZ, except perhaps Bill English himself deciding to step down from his electorate in the 2014 election to list-only. Nicola's loss to Robbo widened from 25-pp in 2017 to 40-pp in 2020.

by nktokyo | 24th Jan 23, 3:01pm 1674525718

She lives in Wellington so that doesn't really matter.

by Small Kev | 24th Jan 23, 12:58pm 1674518322

Game changer if labour does U-turn on policies mentioned. A very interesting year ahead indeed.

by tis i | 24th Jan 23, 1:39pm 1674520749

Said it before and I’ll say it again. If landlord’s get interest deductibility then I want it too.

by nktokyo | 24th Jan 23, 1:52pm 1674521558

LL's pay tax on rents and if they discount for family that is also taxed. Are you offering to pay tax on the implied benefit/equivalent (saving) on rent to offset the deductibility?

by tis i | 24th Jan 23, 2:27pm 1674523626

Then I’ll need to be able to claim for all the other expenses as well.

by nktokyo | 24th Jan 23, 3:01pm 1674525675

Go for it. As market rents go up and your mortgage goes down, your tax payment will increase each year.

by tis i | 24th Jan 23, 3:30pm 1674527451

You make it sound like landlording is nothing but a loss making venture. Makes me wonder why anyone would bother.

As an alternative can I suggest that, if interest is a business expense, landlords pay business interest rates? That might level the playing field. Which is all I’m really interested in.

by refactornz | 24th Jan 23, 4:43pm 1674531810

There's really no such thing as "business interest rates". Interest rates set by banks are based on their assessment of risk of the underlying security.

by nktokyo | 24th Jan 23, 6:26pm 1674537979

It's profitable when you do it right. Buy something bad, improve it, rent it at a profit, pay tax on profit. As debt goes down, profit goes up, pay more tax. With deductibility removed, you probably will pay tax on a loss.

In your scenario, work out what your implied rent savings is and pay tax on that. It winds up as a bad deal as your debt reduces (actually it starts to look like TOP policy), but you can't deduct your costs without paying tax on the income.

by Murray Falconer | 24th Jan 23, 11:15pm 1674555303

One incorrect assumption you make is all landlords declare rental income to be taxed - they don't. BTW, TOP policy has simplified to a land value tax (used to reduce PAYE - so not an increase in overall tax take), this will capture landlords that don't declare rental income so will level the playing field amongst existing landlords.

by huttman | 24th Jan 23, 2:15pm 1674522931

One thing worth to mention, technically the interests are still deductible, one cannot deduct in annual tax reports, but can still be deductible if house get sold within 10 years where one needs to calculate the capital gain on the property.

but yeah, I think the interests deductbility issue should've never happened, it doesn't make sense, and can only makes it more expensive for both landlord and tenants.

by kiwikidsnz | 24th Jan 23, 3:03pm 1674525809

Labours Hipkins already talking about increasing taxes, never a mention of reducing costs.

"Brand Jacinda":

353,904 people of working age on a benefit

This is 22% higher than in Dec 2017

Those on a benefit for more than 12 months up 26% to 257,865

Maori on welfare up 26%

Pacific Peoples on welfare up 35%

Numbers on job seeker who are work ready up 51%!

Numbers on job seeker for more than 12 months up 49%

Maori on job seeker up 41%

Pacific Peoples on job seeker up 67%

by Advisor | 24th Jan 23, 3:45pm 1674528350

Hipkins also spoke about raising wages in NZ through government "levers". No point for predicting what those levers are. Jacinda pushed up NZ's minimum wage by just shy of 35% in only 5 annual increases.

I don't know how the majority of small businesses with their huge overheads and high labour dependency could ever shell out higher wages in such a high inflation environment. The big corporates with disproportionate pricing power in telecom, groceries, energy, etc. can simply pass these increases in entirety to their customers, while small businesses choose between shutting shop and cutting margins.

by HouseMouse | 24th Jan 23, 4:50pm 1674532222

I totally disagree that Labour will get rid of interest deductibility and the 10 year bright line test. How would that help them politically? Most of the people who support those things are Nats or Act supporters.

There’s lot of disillusioned centre-left people like me for whom the best way to attract us back, potentially, to Labour is not at all including doing those two things. Rather, it is putting forward a tax package that lifts the 30 cents in the dollar income tax threshold much higher than it is presently, and having the first 10-15k of income tax free.

by kiwikidsnz | 24th Jan 23, 5:17pm 1674533834

Half of NZ households already pay no net income tax after credits.

The people who will probably benefit most from a tax free threshold are those on NZ super.

by HouseMouse | 24th Jan 23, 7:13pm 1674540780

single people and young couples in their 20s and 30s (pre-kids, or no intention to have kids) on low to middle incomes could benefit significantly. And that would help them invest or potentially save for a house deposit.

by IT GUY | 24th Jan 23, 8:15pm 1674544524

real hard to cut tax for these people......

by Rob Reid | 24th Jan 23, 7:52pm 1674543123

Assuming Labour reads the mood correctly I agree they would not cave on bright line and interest deductibility.

An election in Oct means we've had more inflation outstripping wage growth, unemployment has had a chance to get going, and more mortgagors are feeling the pinch with rollovers exposing them to rate rises. So where does Labour spray election year bribes? Where does Nact promise to?

1) Somebody is bound to hang their hat on borrowing for infrastructure projects to suck up spare construction industry workers.

2) Will anybody promise to take from savers and tax payers and reward those who've taken the risk to borrow on property with enough of a bailout for them to limp on?

I think 1 and 2 are more likely bribes than tax cuts because they will be loud screamy issues, but I guess we could get all 3. Afterall, it's somebody else's money.

by Averageman | 26th Jan 23, 1:12pm 1674691926

Interest deduction on existing house should be phased out. Maintain it on new builds/stock to promote tax rinser's to produce more stock. Having it apply to existing homes simply drives the productive part of the economy to distort second had prices (higher) as a means of mass tax avoidance as we have seen in the last twenty years. With an increasing older retired population we need the productive part to remain productive from a tax perspective.

Do the math.