The hot houses hot potato

The Government, not the Reserve Bank, will have to tackle New Zealand's many housing-related issues

26th Nov 20, 10:13am by David Hargreaves

Well, it appears not a moment too soon that the banks have themselves decided to reimpose the limits on high loan to value ratio (LVR) lending, ahead of the official reimposition of said limits by the Reserve Bank in March 2021.

The latest mortgage figures compiled by the RBNZ very much reaffirmed what your eyes could show you. Yep, the market, it's running real hot right now.

At just under $7.8 billion of mortgages advanced in October, this was easily a new record for the banks for a month, beating the previous record ($7.3 billion) made only a month earlier in September.

The real news for me in the latest figures was again how much investors have been flying back into the market.

The banks have been trying to be sensible when it comes to limiting high LVR lending. But where they have had wiggle room is with investors, remembering that for investors the 'high' LVR definition is for loans more than 70% of the value of the property. The 'normal' high LVR definition for owner-occupiers, including first home buyers (FHBs) is loans of more than 80% of the value of the property.

All LVR limits were removed in May. Since then the banks have kept a rein on how much lending of over 80% property value they've done, but they've allowed themselves the luxury of letting their belts out when it comes to investors. So, with investors they have moved the goalposts only a little to say that where before these investors needed 30% deposits, now they would just need 20%.

Lending explosion

And hence the explosion in lending to investors since the market was largely freed of lockdown restraints in June. For the month of June 2020 investors borrowed a little over $200 million on an LVR of above 70%. In October they borrowed $745 million at above 70% LVR. In total, investors borrowed $850 million more in October than they did in June - and over half a billion dollars' worth of this increase was in high LVR lending.

So, the great land grab (for that's what it is all about really) has been on again. I doubt a 30% deposit limit on investors will be enough to really take the steam out of the market (investors were definitely perking up before the LVRs were removed in May anyway). Hopefully the RBNZ will move quite quickly to raise that to at least 40%, which was the level that gave the investors a cold shower when implemented in mid-2016.

That removing the LVRs would unleash the investors (who cares about a pandemic when you can distract yourself by buying another house for your portfolio) should have been foreseeable by our central bank. Pandemic or no, there were always going to be investors who would be relatively unaffected and would see the absence of lending limits as their chance to enlarge their portfolios. It points to an over-reliance by the RBNZ on orthodox economic thinking instead of just stopping sometimes to read human nature. And New Zealand human nature is to buy houses.

Having said all that though, it is worth pausing for a moment and considering what might have happened in New Zealand if all the stimulus from the RBNZ and the Government had NOT been applied.

What might have happened?

And that's the essential problem here. You can't really see what the counterfactual would have been. If we take our minds back to March, it seemed all things were possible - mostly bad. The fact is as we head into December, the economy's as open for business as it can be, the jobless figures are far better than even the most optimistic of optimists might have thought and we are worried about rising house prices - NOT about house prices going through the floor.

What the housing situation again points out is that the Government needs to pull finger and work out some proper long term solutions to housing affordability. For Auckland particularly, people are simply not going to be able to work there if some affordable solutions are not found.

The action by Finance Minister Grant Robertson to write to the RBNZ this week (in very public fashion) and seeking the insertion of the magic words 'house prices' into the remit of the RBNZ's Monetary Policy Committee is window dressing and pretty unfair on a central bank that has been totally focused on keeping this country out of the cactus. In reality, it's the Government that has been slow - as interest.co.nz's Jenée Tibshraeny has been pointing out for months - to get its head around the potential risks of having so much stimulus poured in.

Ignore it

Having had time to think about the Finance Minister's letter to the RBNZ, I'm now hopeful that even if those two little words ('house' and 'prices') are shoe-horned into the MPC's remit, the RBNZ will largely be able to ignore them. And I suspect the RBNZ itself will want to quietly sound that out. The RBNZ in fact will HAVE to ignore those words, largely. Otherwise a lot of things would be mucked up. It wouldn't work. You would have two separate things fighting against each other.

Taken very literally, by putting consideration of house prices into the MPC's remit this suddenly converts house prices from being a 'financial stability' issue into a 'monetary policy' issue. The two hats that the RBNZ wears (I think uncomfortably at times) are financial stability and monetary policy. Things like the LVRs fit into financial stability, while the Official Cash Rate, interest rates, that's monetary policy.

If the RBNZ currently had to set an Official Cash Rate based on what house prices are doing it would be pushing the OCR up - and strongly. But if it were to do that now it would then kill economic activity - given how fragile that situation is at the moment. The dollar would shoot up, exporters would scream, businesses would struggle to cope.

Counter-productive

The reality is that considering house prices in the context of setting interest rate levels would be hugely counter-productive - unless we had generalised inflation (which we don't - inflation's on the carpet). Only if general inflation and house prices were moving up together could you put house prices in OCR considerations (which the RBNZ does anyway - as could be seen from its hiking of rates in the mid-2000s).

At the moment, if the RBNZ had to consider galloping house prices it would be setting interest rates at levels that are higher than it believes are necessary to keep stimulating the economy. And the Kiwi dollar would be flying even more than it is (note how much it took off this week when Robertson's letter was released).

So, in other words, the Finance Minister has got himself some favourable headlines for being seen to do something, but in reality he has not come up with anything that is particularly practical or helpful. It just looks a bit like blaming the guy who's been doing all the heavy lifting trying to keep us all out of the poor house.

Remember, Labour was going to be KiwiBuild. It was going to be Capital Gains Tax. Until it wasn't. Yes, Robertson is clearly working on solutions to this whole vexed issue at the moment. He and his colleagues are going to need to come up with some substantive ones pretty soon.

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97 Comments

by b21 | 26th Nov 20, 10:21am 1606339272

It is pretty clear now that dropping the capital gains tax was a huge mistake, we got to a point where housing investment should be banned if we want prices to come back eventually to affordable levels, and even doing so it will take a good while for wages to catch up.

by company of heroes | 26th Nov 20, 10:33am 1606340022

Yeah, agreed. If we've had capital gains tax in place, we probably wouldn't have this issue now. There would be some minor corrections for housing prices, but it would unlike bring huge negative impact on our economy. But now? No one is dare to touch this hot potato, they are all afraid that if they do anything towards it, the house market would crash. But next year, if we had another 20% increase for housing price, Labour and Adrian Orr are done.

by b21 | 26th Nov 20, 10:37am 1606340271

They should and I doubt they would get more support for it than right now since people are really concerned. Kicking the ball will just bring us to a worse place down the track which will probably bring Labour down, when it comes to Orr I am not that sure since the RB is not elected, as long as it works for the major banks he'll stay.

by GV 27 | 26th Nov 20, 10:36am 1606340168

CGT wouldn't have done much - why wouldn't I, as a vendor, just increase prices to recover whatever margin I'd pay in tax? The credit is cheap and the supply for alternatives isn't there? The effects of lock-in were dismissed by the TWG but I don't think they took into account the impact of cheap credit and ongoing supply issues.

I think the missed opportunity was the TWG being so partisan and focused on the CGT instead of other options - land taxes or some other form of holding costs - that could have been exempted for owner-occupiers but multiplied for investors and scaled with the number of properties held. But Labour had three opposition cycles on messaging around the CGT and so that's what the report ended up being hyper-focused on, instead of wholesale tax and capital investment reform.

by b21 | 26th Nov 20, 10:39am 1606340349

As a vendor it is not you who decides the price, even if it would have not done much it would still be the right and fair thing to do.

by GV 27 | 26th Nov 20, 10:41am 1606340506

You're assuming there is equal supply and demand. Were it not for Covid19, we'd still be adding tens of thousands of people a year to Auckland's population faster than we can build houses.

by b21 | 26th Nov 20, 11:10am 1606342235

There are 40K empty houses in Auckland alone, we do not even need to build but change the regulations at a stroke of pen to make those available from investors that do not want to rent.

Edit: change 50K to 40K for accuracy according to comment below

by GV 27 | 26th Nov 20, 10:53am 1606341209

There was 40K empty houses by a very specific definition for the purposes of the census. How this has managed to become 50,000 houses that are totally unoccupied is beyond me. Regardless, you can shake more under-utilised houses onto the market by increasing holding costs - making it more expensive to just have them sitting there idle. A Capital Gains Tax doesn't do that.

by b21 | 26th Nov 20, 11:09am 1606342190

To be completely honest I thought I had read that number somewhere but cannot find the reference to it right now so I might have been mistaken in quoting that. Still 40K empty homes are a massive number and even a small proportion going into the market at once would make a big difference.

by GV 27 | 26th Nov 20, 11:35am 1606343732

But that's the rub - your CGT doesn't do that. It doesn't make it more costly to hold property, it just means you have a bit less fat at the transaction stage - the TWG recognised as much when they said a CGT wouldn't have any real effect in reducing house prices. There's no gun to your head forcing you to sell down property like there when you increase holding costs.

by GV 27 | 26th Nov 20, 11:36am 1606343809

I appreciate we have to do something, but I want to be sure we use the right tool for the job. A CGT makes sense if prices get to a low ebb, but it isn't the silver bullet some people make it out to be when the market is riding high.

by Lanthanide | 26th Nov 20, 1:19pm 1606349965

The CGT that Labour were planning excluded the family home anyway. We now have the bright line test extended to 5 years, which is probably doing the majority of what a CGT would do for investment properties anyway.

by Noncents | 26th Nov 20, 10:55am 1606341351

A lot can be achieved with the stroke of a pen.

But recent history suggests our pollies wouldn't even know what end of the pen to hold. Let alone actually sign something off and implement it correctly.

by buyandhodl | 26th Nov 20, 12:43pm 1606347806

I've always thought this figure is intentionally misleading. Of course headline figures often are to drive clicks.

Remember that this includes 25,000 properties where the residents were away...

Which leaves ~15,000 properties that are either actually empty or under renovation

by Yvil | 26th Nov 20, 12:55pm 1606348531

Of course the "empty house" claim is rubbish. Imagine you have saved $100k, you get a loan of 400k from the bank, secured against your daily job and you're going to say, "hey I'm going to buy a small unit and leave it empty, I'll have so much fun paying the mortgage, insurance, rates etc and I will love getting no income so I'm going to leave it empty" Total nonsense

by Spectators | 26th Nov 20, 2:17pm 1606353420

Worth it when I sell the house for $750k and don't pay a dime of tax on my $250k profit. All without the hassles that come along w/ having tenants.

by Yvil | 26th Nov 20, 2:33pm 1606354427

Theoretical fluff, you have not bought a house, paid all the expenses for 5 years to avoid the brightline tax and then sold it. I call BS, you're not a doer, you're a Spectator

by Dale Smith | 26th Nov 20, 5:26pm 1606364760

If you buy gold and keep it in bars in a safe and instead of wearing it as jewelry, then that does not make you a spectator but a speculator.

Yes some people in NZ do buy houses and keep them empty, not near as many as some people think, but it's not theory. The Ghost cities in China are real.

by JimboJones | 26th Nov 20, 2:48pm 1606355292

You could just get a property manager and have none of the hassles. I doubt many people would give up probably at least $25k per year of rent for minimum 5 years.

by company of heroes | 26th Nov 20, 11:08am 1606342091

Of course it would work. We often think it wouldn't work because we only focus on housing price. But the key issue that we are trying to tackle here is not about house price. It's about housing affordability and investing in productive industries. Implementing CGT might not directly bring house price down, but it will discourage investors to continue invest into existing housing but encourage them to invest into productive industries. We want a healthy economy, house price can go up as long as it's affordable and not risking our financial stability. Second, price is determined by market. Without investors competing with FHB, vendors shouldn't rise prices that much.

by Jesse1 | 26th Nov 20, 10:37am 1606340248

This is one of the downsides of democracy. The government is too scared to do what they should do for society long term because they are worried about losing votes in the next election. Unfortunately the smug baby boomers are a large voting block that controls them. You know they "worked hard" and all that...

by rastus1 | 26th Nov 20, 11:25am 1606343113

I think you might find there are plenty of us bb's who are quite sick of the property machine. It' just that the noisy ones, particularly those with the power of vested interest groups behind them, keep scarring the politicians aware from acting.

The landslide to Labor govt I'd suggest was largely property concerns related.

by Jesse1 | 26th Nov 20, 11:43am 1606344235

I have no doubt there are some like you, and I don't mean to put all the blame on all BBs, it's a very complicated situation we've all got into, and the media doesn't help at all. It makes me sick watching them getting excited about property increases on seven sharp. No doubt in a few weeks there will be sympathetic stories about the city mission and homelessness at Christmas time, without making any link between the two stories.

by K.W. | 26th Nov 20, 6:27pm 1606368427

How would a capital gains tax stop housing prices from going up. CGT applies to when you sell. Investors are not selling houses, they are buying them. Therefore CGT would have no effect whatsoever, especially since it already is in place on people who are short term house flippers. All a CGT would achieve is to lower the supply of housing as investors buy and hold forever. Forcing people to build new homes, which would increase the price of land, building products, tradespeople, and that would trigger inflation, and mortgage rates would start going up. In addition, as investors move towards calculating their returns based more on yields than on capital gains, rents would start going up as investors start demanding immediate returns rather than delayed ones.
Show me one country in the world where a CGT stopped a housing bubble? Certainly didnt stop the US one, and Sydney/Melbourne house prices are more expensive than Auckland. People who think taxes make things cheaper need a lesson in macroeconomics.

by Averageman | 29th Nov 20, 6:25pm 1606627529

For wages to catchup the price of everything you buy will have to double...everything. This will destroy the retired and elderly living off savings and only serve to bailout the debt speculators.

A reset, or hyperinflation. Pick your option. Neither is without a great degree of pain.

by Squishy | 26th Nov 20, 10:32am 1606339927

The government ran on a platform of not making the substantial reforms that would improve housing affordability. In fact both major political parties did. Most New Zealanders just don't want change, is the government going to risk its majority on its principles? No. They shall assume the prior position of sitting on their hands.

by b21 | 26th Nov 20, 10:34am 1606340067

I strongly disagree since most New Zealanders do understand the issues caused by low quality and hyper-expensive housing and want this to change, the issue is that if both major political parties policies in terms of economy are so similar there is no real option which in democracy is a big concern.

by Squishy | 26th Nov 20, 10:47am 1606340878

I find it difficult to see any evidence most New Zealanders actually do care more about human misery than perpetuating the benefits accruing to those who already own property. Those few political parties that did propose reform didn't even make the numbers to get into parliament.

by b21 | 26th Nov 20, 10:56am 1606341410

I am indeed more optimistic, I just think those that do not care are able to make more noise and resound in the media.

by Fritz | 26th Nov 20, 12:16pm 1606346163

I agree.
If you survey kiwis then many probably would say they care, but I would suggest it's a pretty superficial 'caring'.
I also don't think many understand the pronounced economic costs of a crazy housing market. Perhaps at least partly because they are opportunity costs.

by JimboJones | 26th Nov 20, 12:51pm 1606348296

I get the feeling that some Aucklanders are starting to get it after all these years. The rest of the country are still getting that initial addictive hit but haven't had reality settle in yet. Its a pity the media can make so much money from it and are hence going to promote it.

by karl seastrand | 26th Nov 20, 1:32pm 1606350765

jimboj.. when it comes to property the NZ media (and their motley crew of hired guns) have descended into a world of lascivious pornography which seems to be lapped up by a majority of amoral and addicted Akld homeowners.

by Jesse1 | 26th Nov 20, 11:00am 1606341603

Sure they might want this to change but they still want their own houses to go up in value so they vote accordingly. The main parties do their research and know this too. If you watched the election debates this topic was tip toed around the most as they were scared of losing votes.
National's policies were to reduce the bright line test and reintroduce foreign property buyers because they know what a very large voting block wants.

by redcows1 | 26th Nov 20, 10:40am 1606340422

"Most New Zealanders don't want change." Whats more they refuse to acknowledge why it may be needed.
The blame is easily laid with the two major parties but in reality the current fiasco and the future crash can all be blamed on the voters.
This is what we voted for .

by Independent_Observer | 26th Nov 20, 10:33am 1606340032

Its funny how people are starting to come to realise how broken our financial model is - it isn't fit for purpose and hasn't been this decade but we've managed to hide that fact. And the enlightenment is starting to happen.

Lending rates on residential property shouldn't have anything to do with CPI because its not measured there. Perhaps lending rates on residential property should be set against growth in M3 - i.e. there is another cash rate that limits growth in lending in that sector.

by mikekirk29 | 26th Nov 20, 10:52am 1606341179

Oh ok, so its not RBNZ job to fix what they and banks have largely caused then??
Lots of QE and low rates and no restriction on LVR and high risk lending took off.
That is for government to fix?
There also seems to be a built in assumption that RBNZ rescued the economy whilst USA and EU and UK are up shit creek. Well, I think government keeping community transmission of CV19 had a tiny bit to do with that??

Consensus seems to be that house prices are ballistic , especially in Auckland, for a number of reasons but usual one is inadequate supply. But, supply has to be adequate for demand. And what happened to demand in last 5 months thanks to central bank?? Cuts to rates and LVR un-dammed all flows waiting to get onto housing market ladder (past, "waiters" or pent up demand) + pulled forward potential demand (investors) from future. Hence concertina of demand in a 5 month block when supply could not keep up. And that is all due to government then? Despite CB independence? Mr Orr is a bit full of himself and takes credit where it snot due and offsets blame when it is. He is convinced that NZ was facing a massive deflationary shock. And then it wasn't because fiscal policy and staycation money and CV19 control meant it didn't get hit like everyone thought. Only kindness we should extend to Mr Orr is that everyone thought he was doing right thing at the time and he rightly thought doing sod all was not going to help. As government will not allow Auckland Council to borrow like normal large city councils can plus will not mass build public housing by borrowing to do so, nothing will change.

by JimboJones | 26th Nov 20, 11:59am 1606345143

I actually don't think the government can fix it. There are many reasons for high house prices, but interest rates are by far the biggest.
I guess the government could create a mortgage tax that would largely undo the low RBNZ interest rates. But too many voters would pay the tax and hence vote them out.

by GV 27 | 26th Nov 20, 12:10pm 1606345820

I'm starting to wonder whether the answer is to let owner occupiers 'insure' their current equity through some sort of government backed channel and then go the whole hog on total sweeping tax reform designed to correct prices back to where they should have been all along, along with the other toolbox bits like DTIs.

by JimboJones | 26th Nov 20, 12:46pm 1606347983

The thing is you normally only pay tax on profit. Even a 33% CGT isn't going to have much effect if houses are still more profitable than other investments.
Most people in NZ tend to borrow as much as they can service to buy the best house they can. As interest rates have gone down the amount they can service has gone up and so have house prices. Taxes could help but they would need to be more than just the standard taxes on profit.

by GV 27 | 26th Nov 20, 1:11pm 1606349499

If we were serious about some sort of planned price reset then we'd have to be redefining the Reserve Bank and Government's role in how this all works, so that sugar hits from lower OCRs or higher migration settings are off the table. If higher interest rates means investments in other areas become more attractive to passive investors instead of property (when combined things like DTIs etc) then that might be no bad thing. Provided we have some way of limiting the damage for owner-occupiers in the short term, then we can be clear about who is taking the pain and making sure we never end up in this situation again.

by Independent_Observer | 26th Nov 20, 1:15pm 1606349726

Its going to take a whole new model of economic thought.

by Whatwillhappen | 26th Nov 20, 1:26pm 1606350397

Michael Reddell had some ideas on how to offset some of the damage.,

by BigDaddy | 26th Nov 20, 10:57am 1606341461

You want a Capital Gains Tax?
Really?
Well enjoy the moment. As investors get driven out of the market or back off from the buying, the guaranteed outcome will be higher rents as the rental pool shrinks. We are seeing higher rents now, so just imagine what will happen to rents when there are fewer rentals? Don't tell me that fewer rentals will mean more houses available for FHBs? That's nonsense. House prices are so over cooked already that FHB's can't save the deposits let alone make the mortgage payments, rates, insurance , maintenance etc when owning.

by Independent_Observer | 26th Nov 20, 11:18am 1606342692

This is a false narrative BigD and you know it. If the rental pool shrinks, it will only be because a landlord has sold a house to an owner occupier and that reduces demand for another rental.

by GV 27 | 26th Nov 20, 11:37am 1606343876

That's assuming we're not adding more and more new renters in the form of migration, which we've been doing with reckless abandon for the last couple of decades.

by Independent_Observer | 26th Nov 20, 11:47am 1606344466

I've also come across many (like quite a lot) landlords who don't speak very good English - so clearly weren't born here....

by Whatwillhappen | 26th Nov 20, 12:12pm 1606345936

Fun fact. My analysis of the 2013 census results turned up that there are people born here 50 years ago who still can't speak English. Not many, but some

by Plutocracy | 26th Nov 20, 12:41pm 1606347671

Nice integration, hopefully they at least speak Maori then.

by company of heroes | 26th Nov 20, 1:04pm 1606349048

It will be hard to get more migration when house affordability and inequality are hurting us in different ways.
Apparently New Zealand is not even in the top 10 countries people in the world want to move to.
https://www.dailymail.co.uk/travel/escape/article-8981213/Map-reveals-n…

by Orrsum | 26th Nov 20, 11:56am 1606345012

Gaslighting much?

by JimboJones | 26th Nov 20, 12:01pm 1606345282

So investors will stop buying and start selling, FHBs supposedly can't buy, so what will happen to the market? Remind me what happens to price when supply goes up and demand comes down?

by Chairman Moa | 26th Nov 20, 11:16am 1606342560

If I buy shares and sold them at a higher price, I have to pay a hefty amount of tax on the gain. If I do the same for a investment house, and sold it with some feeble excuses I can walk to the bank with a big wide grin on my face.
Truth is, the loophole around current CGT treatment is so big that one can fit a nice 5br house in it! It's time to follow the Aussie for their treatments on CGT. Yeah yeah.. that old chest nut about vendor increase their prices..

by HeavyG | 26th Nov 20, 11:21am 1606342862

You don't pay tax on capital gains from share sales unless you are a share trader.

You don't pay tax on capital gains from the sale of an investment house unless you're a dealer or sell within the bright line period.

Therefore, investment houses are more likely to have capital gains taxed as there is no bright line test for shares.

by HeavyG | 26th Nov 20, 11:16am 1606342618

The next CPI update on 22 January 2021 will determine whether RBNZ is on track. You cannot criticise a worker who is doing their job (well I suppose you can but you look stupid).

by Independent_Observer | 26th Nov 20, 11:20am 1606342839

RBNZ just following their orders eh. Knowing that their job is doing harm, but they still do it anyway. That is usually when you go - morally/ethically can I keep doing this job if I'm causing so much suffering for people? No, I have a moral compass so need to talk to management and change what I'm doing.

by HeavyG | 26th Nov 20, 2:02pm 1606352540

We're a democracy, set up your scrap the RBNZ party and see how many votes that get's you next election.

by Independent_Observer | 26th Nov 20, 11:26am 1606343176

Yes and it then questions the morality of the people voting within the democracy. That requires one to look in the mirror.

by HeavyG | 26th Nov 20, 11:49am 1606344555

No fascism please, people don't like been told they must think the same thoughts as the supreme leader.

by Independent_Observer | 26th Nov 20, 12:04pm 1606345476

Some people think this decade is similar to the 1930's so who knows what might happen. If people who feel oppressed by the current system are given the opportunity to level the playing field and fascism is the answer, human fragility might see them take that path.

by HeavyG | 26th Nov 20, 12:08pm 1606345692

IO the new Hitler.... Good luck with that.

by Independent_Observer | 26th Nov 20, 12:14pm 1606346083

Haha far from it - I'm more pacifist. Just warning you that there are implications to a self interested mind set and that those who feel oppressed can and will go to extreme measures to level the playing field.

I'm reading the book 'Einstein' by Walter Issacson at the moment. Very interesting to see his views of 1920's and 1930's Germany and how economic mismanagement gave rise to Hitler by making enough people resentful of the status quo.

by JasBurnt | 26th Nov 20, 11:27am 1606343234

The term Investor is used instead of speculator. All I can conclude is that the banks very sophisticated machine of selling debt is a beast out of control and the personal debt taken on by average Kiwi is nose bleeding stuff

by Let me be Frank | 26th Nov 20, 11:29am 1606343373

As Orr continues to remind everyone we are a long way from being out of the woods...the wage subsidy has just ended, the mortgage holidays cease in march and the borders are still some way from being opened....default positions take time to build.

by Kate | 26th Nov 20, 12:10pm 1606345809

#rentcontrolnow

The government keeps handing out more and more to subsidise the high costs of accommodation in this country;

baby bonuses; winter energy payments; free sanitary products; more funding for charities distributing free food; increased benefit levels; free doctors visits; accommodation supplements; WFF tax credits and so on and so forth.

When all they need to do is address the rising cost-of-living, starting with regulating maximum weekly rent in the rental market.

by Whatwillhappen | 26th Nov 20, 12:15pm 1606346109

Rent control is a dangerous route to take with many pitfalls. This was done in Asia. To not disincentivise new construction they exempted new builds. The result? Perfectly good existing housing was torn down and replaced with new, uncontrolled rent buildings. IT solved nothing, and probably made things worse.

by Kate | 26th Nov 20, 12:28pm 1606346938

My suggestion is setting a rent maxima based on RV/1000 = weekly rent maxima. Houses with lower RVs would see some rent decreases (and most importantly no massive increases with new purchases as buy-to-let); those with higher RVs would likely be unaffected.

Keen to hear what you think the pitfalls would be.

by refactornz | 26th Nov 20, 12:42pm 1606347746

Incentive to bump up the RV. Exactly what Whatwillhappen wrote above.

by Kate | 26th Nov 20, 12:48pm 1606348126

QV have pretty good rules around RV review requests - e.g., a new roof or a new kitchen doesn't cut the mustard - adding a bedroom does. So, I don't think that valuation service could be corrupted - but yes, perhaps some complementary legislation/regulation needed in that regard as well. Again, quite easy from a regulatory point of view.

by Whatwillhappen | 26th Nov 20, 1:20pm 1606350012

1. landlords would have incentive to charge the maximum allowable rent, regardless of the condition of the house.
2. in areas where the RV is lower than the cost to buy rents could be significantly lower than to cover payments, leading to disincentives to improve the property above a minimum standard.
3. adding another distortion to the market without knowing the cause of the market failure (if there is one) could lead to unintended consequences, like the one above. The general consensus is there is a market failure with house prices caused by a distortion imposed by government. With rents, many point to accommodation supplements and pension increases creating distortions - i.e. increasing the ability to pay increases rent.

by Kate | 26th Nov 20, 1:55pm 1606352140

1. As long as the formula is right (i.e., gets the job done) at the lower quartile of housing/accommodation, what happens elsewhere in the market will be dictated by what people are prepared to pay. The controls would be targeted to take the stress off the increasing qualification/need for government/social housing and halting the need for increases to accommodation supplements. As rent yields at that lower quartile reduce, FHBs will likely have less competition from investors.
2. Meeting the Healthy Homes minimum standard is adequate - as it is a good standard. Improvement above that minimum isn't the State's (i.e., a regulatory) concern.
3. I think the cause of the market failure is known - that being the rapidly inflating price of residential property (and subsequently rents). Agreed that rent prices based on ability-to-pay is distorted by the accommodation supplement (and that's why rent controls are needed), but pension increases are tagged to CPI and we haven't got a rampant inflation issue in that regard at present. Asset inflation is the current problem.

But really, it's the government via TSY that need to look at this in an open and transparent manner, such that everyone can consider the evidence in full.

by Whatwillhappen | 26th Nov 20, 3:10pm 1606356601

1. Exactly. The devil is in the detail. The devil could be avoided by not putting in rent controls
2. Recent ruling on these standards are a power socket in the living area is sufficient to providing a heat source. Great!
3. The rapidly inflating price of residential property isn't causing the market failure - it's the symptom/effect of the market failure.

Agree Treasury needs to look at this. Pity Grant didn't ask them 3 years ago (he probably did and the answers were politically unpalatable - this week has just been an exercise in distraction).

by Kate | 26th Nov 20, 3:20pm 1606357215

2. That ruling doesn't relate to the HH Standard - it's a pre-standard adoption ruling.

Once the standard comes into effect landlords must provide adequate fixed heating in the living room, plus provide ventilation, draught-stopping and moisture prevention.

https://www.stuff.co.nz/life-style/homed/renting/300150557/healthy-home…

by rastus1 | 26th Nov 20, 2:41pm 1606354911

I don't think making rules or regs solves it. These require 'policing'. The environment needs altering so the market in effect does the policing.

by Kate | 26th Nov 20, 3:27pm 1606357655

Regards policing, I agree, the regulation needs to be simple - such that any prospective tenant can look up publicly available information and check that the rent maxima has not be exceeded.

Yes, good regulation does exactly that - change the environment around incentives.

by K.W. | 26th Nov 20, 6:34pm 1606368843

People would move their properties to the short term rental pool. Or you would not even bother with long term renting - you would seek the fastest bang for your buck, which would be flipping. Why wait 5 years to realise a capital gain, when you can buy a run down rental, do it up, and sell it to a FHB in a few months. If the tax is the same, why would I bother renting it out? I could buy and sell 4 houses a year, 20 in 5 years. I think I'd make a lot more money than just buying one and waiting for the price to go up over 5 years, and then still paying the same amount of tax.

by Kate | 26th Nov 20, 7:11pm 1606371067

Have you not seen the massive decrease in weekly rent in the Qtown region? That's the effect of the COVID disruption to the short-term rental market.

No problem with people working to renovate a property (as the work attracts appropriate taxation - just as income tax does). The problem is the these properties being purchased by buy-to-let aspirants and the resulting over-market prices paid resulting in ridiculously high weekly rental prices in attempt by new owners to make the investment profitable.

Here's an example - market rent estimate ($410-$560 per week);
https://homes.co.nz/address/lower-hutt/stokes-valley/99-thomas-street/X…

Property investor paid too much a couple of months ago - so wants (needs?) $670 per week to make it profitable;
https://www.trademe.co.nz/a/property/residential/rent/wellington/lower-…

by paashaas | 26th Nov 20, 1:08pm 1606349319

so basically ANY benefit is simply a form of "subsidizing costs of accommodation in this country".
Scrap them all I say - Kate says so.

by Kate | 26th Nov 20, 2:02pm 1606352526

Absolutely, aside from base benefits, which ought to be set at a level that provides for a dignified living standard.

But, before determining what a dignified living standard is, the cost-of-accommodation at the lower quartile of household income first needs to fit within generally accepted economic metrics (i.e., no more than 40% of income being spent on accommodation; and ideally 25-30% depending on the number of dependents).

Once you get that right the universal 'tack on' supplements are no longer needed.

by JimboJones | 26th Nov 20, 2:56pm 1606355788

The best way to lower rent is to lower house prices. (Of course you could argue the best way to lower house prices is to lower rent...)

by Kate | 26th Nov 20, 3:28pm 1606357711

The latter is my argument.

by Dave Moderato | 26th Nov 20, 12:13pm 1606346039

What if I told you all a CGT on housing would further increase house prices and hike rents?

At the end of the day, ask. Who would be paying for this additional expense? The same folk who do now.

by valueformoney | 26th Nov 20, 12:19pm 1606346378

scrap interet deductablilty on residential zoned land.

by Yvil | 26th Nov 20, 12:41pm 1606347714

The solution is simple, government should build the 100'000 affordable homes they promised and that got them elected in the first place. Now just do it

by stuart786786 | 26th Nov 20, 1:23pm 1606350204

Government affordable housing is just to give roof on your head and not home to live.

Check Kiwi build and in approx 10mt to 12mt (it seems) have lounge, dinning and kitchen. In lounge one family can sit comfortably but if have another family will struggle.

Jacinda Arden and Labour's DEFINATION OF AFFORDABLE HOUSING : Pigeon hole.

Next they will build on 35sqmt sqmt section - 4 level which will go by name of town house. On ground level will have kitchen and dinning, first floor, lounge and toilet, second floor bedroom and toilet and next bedroom on 3rd floor and will proudly showcase - what great are they doing.

by Hans Brink | 26th Nov 20, 6:09pm 1606367391

That's right Yvil it is simple supply and demand. Maybe some sort of tax incentive to build rental property might help.

by Orrsum | 26th Nov 20, 12:52pm 1606348327

NZ is sick
https://www.nzherald.co.nz/nz/wellington-flat-labelled-an-800-dungeon/M…

by stuart786786 | 26th Nov 20, 1:15pm 1606349710

If Jacinda Arden and Mr Robertson has no solution (as they do not want to act or stop the ponzi) WHY DID THEY WENT ASKING FOR VOTES.

Real Shame.

by Dave Moderato | 26th Nov 20, 1:26pm 1606350360

Don't you worry. PM will play, "Look over there! It's a climate emergency!" card. And all will be well for the masses.

by JimboJones | 26th Nov 20, 2:52pm 1606355528

And also refuse any new climate taxes while she is PM?
Actually if she happened to go on say maternity leave, could Grant push through a CGT as acting PM?

by Fritz | 26th Nov 20, 1:34pm 1606350874

Despite their rhetoric, those two are very conservative individuals.
There won't be any change, just more talk and 'concern'.

by Dave Moderato | 26th Nov 20, 3:28pm 1606357701

In a way I hope you are correct in that assessment.

by kiwikeith | 26th Nov 20, 2:03pm 1606352611

" If the RBNZ currently had to set an Official Cash Rate based on what house prices are doing it would be pushing the OCR up - and strongly. But if it were to do that now it would then kill economic activity"

I doubt it. If the OCR was raised to 2% I doubt if the effect on the economy would even be noticed. Are there many business owners out there who are going to close up shop or not start a business due to that sort of rate rise?

by refactornz | 26th Nov 20, 2:17pm 1606353469

Exports would be hurt by 1 NZD : 0.90 USD and 1 NZD : 1.20 AUD

by rastus1 | 26th Nov 20, 2:55pm 1606355708

Imports would be cheaper (oil, plant, all that stuff we need to turn into exports). Or does that not matter?

by kiwi_overseas | 26th Nov 20, 5:08pm 1606363698

It's not rocket science to fix - but political willingness is far far harder.
We have had appalling strategic failure after failure by government after government to address the issues.
Real (LAND) house prices have been rising since 70s/80s.
1) A population strategy based on maximising total welfare (wellbeing) per capita, not gdp growth. As soon as covid19 is over we risk reigniting the migration tidalwave.
2) Massive government fiscal stimulus to build state housing for the bottom of the market where there is no developer profit
3) RMA fixed/replaced. National standards for all effects (based on social costs benefit) & no zoning & density limitations otherwise - we dont need city plans stacked as high as the sky tower full of rules that planners dont bear the consequences of.
4) A land tax. Its not houses going up in price, but land. It wont be in Jacindas time (she does have the fortitude to show real leadership), but it needs to happen soon after.

by Pusheen | 27th Nov 20, 12:48am 1606391310

Speculative & full of jealousy - we surely don't want any type of control/nanny state issue here. Leave it as it is, roaming free. The more number that we can increase to the housing value is the better for economy. We defeat covid, with the most strongest economic resilient with govt+rbnz assistance which exceed expectation, we need OCR to be negative soon not up please. This good upward momentum should be maintain, Steadfast Kiwis!

by Averageman | 29th Nov 20, 6:28pm 1606627711

No nanny state...its the Lab party.