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Interest deductibility centre court, as the back and forth between the Government and Reserve Bank over mortgage lending restrictions plays out in the background

Interest deductibility centre court, as the back and forth between the Government and Reserve Bank over mortgage lending restrictions plays out in the background

By Jenée Tibshraeny

The back and forth between the Government and Reserve Bank (RBNZ) over who should calm the housing market is raging on into its seventh month.

But the relevance of the match has faded since the Government in March resorted to pulling out the big guns by preventing residential property investors from writing off interest as an expense when paying tax.

Both the Government and RBNZ are happy to sit back for the remainder of 2021 to see the extent to which the change, coupled with the reinstatement of loan-to-value ratio (LVR) restrictions and extension of the bright-line test, dampens investor demand.

Indeed, both Treasury and the RBNZ forecast house price growth flatlining.

But if this doesn’t happen, spectators might tune back into the ‘Govt vs RBNZ’ match.

Friction getting the RBNZ to consider house prices

The battle currently under way is over how the RBNZ might limit banks’ mortgage lending by applying debt serviceability restrictions, like debt-to-income (DTI) restrictions.

Robertson wants the RBNZ to take some of the pressure off him by doing more to limit house price growth. But he wants the RBNZ to do it in a way that supports the Government’s goal of cracking down harder on investors to make way for first-home buyers.

The RBNZ has for years wanted debt serviceability tools. But it’s fierce about only imposing such restrictions on its own terms and to meet its financial stability mandate.

However, the RBNZ’s job of maintaining financial stability has become a bit more political since Robertson in February issued a directive requiring it to have regard for the Government’s housing policy.

This Government’s policy is to “support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers”.

Swathes of emails between Treasury, the RBNZ and Robertson’s office, released under the Official Information Act, show the palaver that ensued over how to word this sentence.

The RBNZ wanted the wording to remain as loose as possible to give it leeway to keep doing its own thing. Treasury and Robertson wanted their goals to be more explicit.

A heavily redacted exchange between RBNZ Governor Adrian Orr and Treasury Secretary Caralee McLiesh, with the subject line “Working together”, reveals the tension.

McLiesh, in response to a seemingly critical email from Orr on February 5, said: “I think there are times when we will disagree - not least because of different mandates, functions and perspectives - and not all disagreements reflect a poor process or quality of advice or outcome.

“The housing advice reflects we haven’t agreed on everything, despite a lot of work of the teams to get there, but I do not see that as poor quality advice.”

Differences on DTIs unresolved

It isn’t of course bad or unusual for Treasury and the RBNZ to disagree.

But, it might similarly be a saga for Treasury, the RBNZ and Robertson to decide how to tweak the Memorandum of Understanding between the RBNZ and Finance Minister, so the RBNZ has the option of imposing debt serviceability restrictions on banks' mortgage lending.

Robertson on Wednesday agreed “in-principle” to making a change, provided any restrictions are “designed to avoid impact, as much as possible, to first-home buyers”.

The RBNZ suggested it could do this by setting DTI levels for first-home buyers at such a lenient level, they wouldn’t actually prevent anyone getting a loan.

Nonetheless, this conditionality will again be a spanner in the works for the RBNZ.

Robertson expects to receive advice on the wording of the MoU within the next two months. Once this is sorted, the RBNZ expects it would take at least six months for it to consult with banks before imposing any restrictions. 

Robertson is clearly hesitant. Rather than circulate a properly formatted media release promoting what is by all means a significant, multi-billion dollar "in-principle" decision, his office sent out a statement in a Word document that said Robertson retained the view DTI restrictions should only be applied to investors.

He further downplayed the situation by pointing out the RBNZ has “clearly stated that there is no immediate plan to use DTIs and any decision to do so would only happen after a full public consultation”.

Government out on its own with interest deductibility 

To-ing and fro-ing between the RBNZ, Treasury and Robertson will continue to keep officials busy. 

All this will play out in the background, while the removal of interest deductibility will take centre stage.

It’s clear Robertson thought he wasn’t getting anywhere with the RBNZ, so steamrolled in with his own policy - against the advice of Treasury and the Inland Revenue.

The pressure is now on him and Revenue Minister David Parker to work through countless complexities to clarify the rules by October.

If the policy doesn't make houses more affordable, Robertson can't be sure the RBNZ will impose DTIs tough enough to supress house price growth, but lax enough to not upset aspiring homeowners.

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40 Comments

What makes Grunty thinks throwing more toys at the market will lower prices. The disconnect between can only be held by a string - popularity politics with a splash of pork barrel.

17
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The government have a majority - they absolutely have the ability to bring house prices down if they want to. Their ammunition is unlimited if they want to use it. They likely don't want a catastrophic fall, so will continue chipping away with actions like these until prices stabilise. There is a real possibility that this will overshoot and lead to a price fall.

The problem is, the longer they let it continue, the bigger the risk of a bubble (if it isn't already), and the bigger the risk of carnage. NZs housing market inflation is about the worst in the world. It was almost a year ago when the PM said that their house price rises can't continue, and they have only gotten worse. Maybe they should instead try and inflate the bubble more, and maybe that will have the opposite effect? Even if prices drop 40% , that will only take prices back to late 2019. But if they let that happen, only people who purchased in the last year will be affected, and only if they are cashing out of the market.

Interest deductibility now added as a new tool to stimulate the housing market when things go bad.

10
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Agree tax change is the best action, so far but the way housing market is moving up, much more is required as LVR to investor is not much of an issue as their existing investment have already gone up by 30% to 50% in just one year, which can be used.

BLT, Is also not much of a detterent as thinking is that one has to pay taxes even in business but atleast in buying / selling house, one does not have to worry about compliance, employees....though tax has to be paid, which otherwise would also be paid if doing other business but no other business can give easy, fast and big money as much as housing. Besides perception is and not out of thin air but based facts that neither government nor RBNZ wants to stop the party.

DTI as a tool is more to control FHB from over leveraging themselves under FOMO. Not able to buy a house is disappointing but buying and than having problem with mortage will be a disaster.

If anyone of them in power were serious would have stopped interest only loan to new purchases as is a tool used which if control will target mostly speculators ( IO Loan is required for emergencies and should only be used if required and not for spevulation). IO loan doubles the purchasing power of speculators in suction room compare to FHB who are on P&I loan.

Mr Orr represent a class where he mostly mingle and they are mostly investors and rich, so he sees things from their perspective alone in the name of economy but people had expectation from Jacinda Arden but forgot that she too now is one of the elite - belongs to multi million dollar club besides belongs to a breed where will do anything to be power - Politicians.

Moral of the story : Both Robertson and Orr lacks intent to control. Of the two more in favour of ponzi is Mr Orr, hence the resistance. Otherwise what is the point of raising issue of DTI, when not plaining to introduced when needed most - is just a distraction used by Robertson and orr.

suction room - brilliant!!
"...IO loan doubles the purchasing power of speculators in suction room..."

This comment should be on the front page of the site as a guest article IMO

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sad that they were given a majority to lead the country and make the tough decisions and they cant stop dithering and dicking around.the property elephant isnt in the room anymore,he has kicked the door down and is running amok.

Another sad reality is that the governments hysterical overreaction to covid indirectly caused the explosion of house prices via an economic shock / monetary policy response. Now they're taxing anything that moves. The more distortions they create the more they mess things up.

fat pat,

"hysterical overreaction to covid". I have seen many asinine remarks here, but this is definitely a contender for top spot.

Wrong. It was hysterical.

But New Zealand governments are by the boomers and for the boomers. So, to be expected.

The housing market is cooked..

'Sustainable House Price Increases' is the government's stated goal.. time for people to move on. It's all just a little boring.. more of the same.

Not sure way people concern themselves with a cooked housing-n-rental market when nothing is going to change - really it's just a bunch of mentally-ill, fixated people laboring under the fantasy they'll own property.

I wonder if there's a disconnect between the Gov't and RB on their definitions of sustainability.

RBNZ " Our working definition of a sustainable house price is the level that the price would be. expected to move towards over several years, given the outlook for fundamental drivers. such as housing supply, population growth, household income growth, and long-term. trends in interest rates."

Nothing about improving affordability there.

blah

Pretty circular to say interest rates feed into the view of what makes sustainable house prices - it's the variable that they fiddle with to distort the market. Effectively they can then justify the market at any price level.

Do whatever you want to do now this market cannot be tamed, it's too late.
Labor action for curbing this madness is slow & soft rather than fast & hard.

Everyone seems to have the mandate but no one seems to have the guts to do anything. To and fro, all I can say is looks like too many chefs spoiling the soup.

But "many chefs make light work".

Been attending a few auction rooms, for the last one week. From what I observe, all these talk of what restrictions are coming is only spurring more interest in quick buying now itself, driving prices high. 40% over CV for 2/3 bedroom houses in distant suburbs is becoming the norm. The heat is increasing for mid range properties. Which is hitting FHBs more than investors surely.
Top end is a different beast, not affected by these rule changes. It solely thrives on availability of loan approvals for high income earners or rich people (may be from overseas) with loads of cash.
Both Treasury and RBNZ can do zilch to move the market to the direction they want.
They can only screw it up further by their dilly dallying and back and forth with different policy ideas.
Even the cry wolf about inflation and interest rates increase is driving the frenzy to close deals now.
Good luck, FHB.

This is another example of adding inefficient & ineffective complexity to the system.

Using DTI is an example of costly micro-management by this government.

Increasing interest rates is the obvious way to control house prices.

The government’s effort to improve affordability for First Home Buyers has failed & resulted in a crisis for renters and those in emergency accommodation.

Rents will rise faster than they would have if interest deductibility rules had not been introduced forcing more people into costly emergency accommodation.

Supply of lower end rentals will diminish as landlords abandon this type of investment due to the tax changes & risks around getting good tenants. For these people this will be a crisis never seen before in NZ.

If the government had carried out due diligence with a benefit/cost analysis on this it would have never gone down this path. Almost no benefit for First Home buyers & a huge disbenefit for a large number of renters.

The problem is the OCR affects other aspects of the economy too, DTIs would be a tweak specific to the housing sector.

I've long proposed on here the supply of credit is the primary cause. I've not changed my mind and in ten years on here the narrative hasn't changed.

I've largely stopped worrying or discussing it. It should be clear to anyone now this ponzi doesn't get fixed, it gets to run it's course.

Supply is an issue but not the only reason for current ponzi. Even after 10 years supply crisis will remain. Efforts to increase supply is good but in the name of supply ghetto houses are been constructed and ignoring to tackle demand, specially speculative demand is the biggest issue BUT reality is no one actually wants to address the issue neither Jacinda nor Orr.

Curtailing supply of credit is a political decision, which will never be taken here. The only Game in Town, no one wants to disturb or end it.

Yes indeed - DFA did a good post on this sometime ago (last year I think) and the correlation between the availability of credit and house prices is very high.

Pumping demand with immigration criteria akin to the mirror test has not helped ether.

Why hasn't inventory levels increased since these policies were announced..?

For me, one of the main reasons for the big drop in inventory is interest rate levels.. itself
https://www.interest.co.nz/Charts/Real%20estate/Housing%20inventory

With the RBNZ driven financial repression ( ultra low interest rates ) more people are simply hanging on to their homes, rather than selling when they might have.
Deposit rates are so low that most people realize that down sizing and putting surplus money into term deposits is a losers game.
The flip side of that is that the ultra low interest rates resulted in a surge of borrowing ( buying power )...
https://www.interest.co.nz/charts/credit/housing-credit2

These proposed policies only impact the people at the margins... ie. will only exclude some people from the mkt.... who are not already wealthy.

RBNZ erred by dropping interest rates too low in response to covid and now they are/have erred by holding interest rates too low for too long and are trying to micro manage things with LVRS ..DTI...etc..

Adrian Err....

If the government fail to have any basic business understanding then you will probably continue in LaLa land and keep borrowing $770 million dollars every week. Sustainable my arse.

Interest deductibility doesn't target speculators as Grant Robeveryone would have you believe. In fact it harms long term landlords and thus renters. A speculator will buy a property, perhaps tart it up, and flick it on for a profit within a few years. They will be affected by interest deductibility for a those few years, but the main tax for them is being captured by brightline - which they are aware of and are not affected one bit by the brightline extending to 10 years, as they never intended to hold that long.

Conversely long term investors/landlords providing rental accommodation will be affected by interest deductibility costs for 10, 20 or 30 years (until the mortgage on the property is paid off). For the bulk of those years a significant additional cost will be borne by the landlord, and by simple economics you know that over time as the deductibility effect takes hold, those costs will flow onto renters, who ulitimately will be the ones who suffer most.

Top notch policy!

That the costs will flow onto renters is speculation on your part, if the govt doesn't prop up landlords with increased Accommodation supplements then those renters will not be able to pay. All it would take is the govt doing 2 things now to kill the slumlords golden goose
1) State house building, continuation and ramp up of build numbers
2) quietly going out and buying stock for KO as infestors bail out. So long as they don't overpay.

Another great article. Maybe rising interest rates globally will actually resolve this before the seemingly endless consultation process ends. You wonder why the RBNZ, if they wanted these tools for so long why they hadn't already done the required consulting.

The Govt and RBNZ have no mandate to tell people what they and cant borrow. They are infirnging upon our most basic human rights.

So indebting yourself till you choke is a basic human right ? Silly me, I thought shelter was.

Have you seen some of the insane questions asked on various social media sites from "investors". It is unbelievable the lengths some are prepared to go to to form a brontosaurus sized debt noose. Some people need to be saved from their own inane behaviour.

The actions of the Labour Government is clearly to reduce the number or private rentals. If you reducing the 600,000 private rentals you will make people homeless. Sure they might double the number of social houses but that will not even make a ripple on the market. Where may I ask is the moral mandate to make people homeless. How will making people homeless help someone buy a home for themselves. The collateral damage is worse than any possible benefits of giving some lucky rich kids a home of their own.

Mass immigration has been making kiwis homeless for many years now without any moral mandate.

Both Labour and National have blood on their hands.

Labour actually promised to reduce immigration levels when they first came to power but fail to deliver their promises. THe current housing market crisis is a consequence of an open border immigration policy by both labour and national over the last 20 years.

Watch them play catch up post covid and the brain drain begins.

You do realise those rentals dont disappear as they leave the hands of private landlords.....

People are homeless as a result of governments continued lack of action to control a runaway market, not as a result of market regulation.

Better late than never but adding DTIs would have an immediate effect on who gets a mortgage and for how much, which will in turn eventually increase affordability. The problem with your theory is thinking everyone renting does so because the want, that's not the case. Many would buy their own home if they would be able to do so, and increasing affordability means less rentals would be required. Of course some might lose in the process (landlords and banks), but they have been on the winning side for quite some time, so shouldn't feel too sorry about them.

All these things help, but at the end of the day there is only one way to achieve price stability. That will only be achieved between the tensions of supply and demand of an unfettered total free and competitive market. At the moment it is any thing but. Just about every market lever is tweaked in favor of demand.
1 Force councils to release and develop land withing a very short period of time, otherwise take that function away from them
2 Land bankers should be given a short period of time to develop and sell their land before they are forced to pay the full rates that the council would receive from that area of residential dwellings. Either that or the land is designated and developed as natural reserves. This being able to be reversed at the councils whim.
3 Let house construction tenders to large overseas and very efficient house builders. Government build then the cash recycled through sales to FHB preferentially, rent to own, and latterly to anyone.
4 engage the Australian Commerce Commission to go through our building material supply industry like a dose of salts, reccomending law changes that will force free competition. Our CC is useless and should be made to sit on the sidelines, watch, and learn how to do this stuff.
5 Rewrite the building code so that it is not a non tariff barrier and suitable overseas standards are accepted
ETC
etc
the list goes on a long way
The important thing is do get of their backsides and do something significant instead of fluffing around and just tinkering.
If they do not, I predict that we are going to loose 100's of thousands of young Kiwis, who as things stand will never have a chance of buying their own home and have no hope remaining in NZ.

Agree with all except review of building supply industry. Two things (1) majority of build cost is land cost and labour… supplies aren’t the big kicker to reduce total build cost (2) NZ is small market vs other nations. Relatively low population density. Serving this market is costly. Competition is way to ensure ‘market’ pricing but the points above are not enticing for many to enter the market