Mixed bag of housing incentives no guarantee for success

yearbook 2021 Policy changes tackle housing crisis

$3.8 billion towards new houses, a crack down on investors and more assistance for first home buyers were big items in the Government’s latest housing announcement, but did they get it right?

Policies summary

• $3.8 billion fund to accelerate housing supply in the short to medium term • More accessible First Home Grants and Loans with increased income caps and higher house price caps in targeted areas • Bright-line test doubled to 10 years with an exemption for new builds • Interest deductibility removed for future investors and phased out on existing residential investments • Kāinga Ora to borrow $2 billion extra to scale up at pace land acquisition to boost housing supply

The Government hopes these measures will increase the supply of houses and remove incentives for speculators, aiming to deliver a more sustainable housing market.

“This is a package of both urgent and long-term measures that will increase housing supply, relieve pressure on the market and make it easier for first-home buyers,” says Prime Minister Jacinda Ardern.

“There is no silver bullet, but combined all of these measures will start to make a difference.”

The new housing package includes: • $3.8 billion fund to accelerate housing supply in the short to medium term • More accessible First Home Grants and Loans with increased income caps and higher house price caps in targeted areas • Bright-line test doubled to 10 years with an exemption for new builds • Interest deductibility removed for future investors and phased out on existing residential investments • Kāinga Ora to borrow $2 billion extra to scale up at pace land acquisition to boost housing supply

$3.8 billion housing acceleration fund

The Government estimates the Housing Acceleration Fund will help green light tens of thousands of house builds in the short to medium term.

“Investment in infrastructure has been identified as one of the key actions the Government can take to increase the supply of housing in the short term,” says Housing Minister Megan Woods.

“This fund will jump-start housing developments by funding the necessary services, like roads and pipes to homes, which are currently holding up development.

“The Government will also assist Kāinga Ora to borrow an additional $2 billion that will assist in bringing a range of development forward through strategic land purchases.”

Infrastructure New Zealand says the new $3.8 billion Housing Acceleration Fund will help address short to medium term infrastructure barriers to housing, but only if it is integrated with a visible, committed and sequenced pipeline of projects that encourages industry to invest, scale up and lift construction sector productivity.

“There is a risk that new investment starts competing with existing commitments to the NZ Upgrade programme, shovel ready projects, rising three waters commitments and other critical initiatives,” says Infrastructure New Zealand Policy Director Hamish Glenn.

“To avoid competing for the same fixed pool of labour and other resources, it is extremely important that visibility of the forward work programme is improved.

“Designers, architects, contractors, subbies and the raft of other critical service providers who take each project from idea to reality need to understand what’s coming up not just in the next 6 months, but over 3-5 years and beyond if they are to invest in the systems, skills and capacity to meet a growing workload.

“For this reason, it was also very positive to see that the Government will boost apprenticeships.

“But the sector still needs better clarity of when projects will be brought to market and confidence that timeframes and priorities will be predictable.

“Project sequencing which avoids market participants from competing for the same pool of labour and which encourages companies to invest in training and productivity is critical, as is progress on getting skills which can’t be sourced locally into the country.

“New Zealand’s infrastructure and construction sector can meet the challenge, but can meet it faster and more affordably with a clearer sightline of the programme ahead,” Glenn says.

A helping hand for first home buyers

Property investors currently make up the biggest share of buyers in the market. Finance Minister Grant Robertson says it’s essential the Government takes steps to curb rampant speculation.

“Extending National’s bright-line test and removing interest deduction loopholes for investors will dampen speculative demand and tilt the balance towards first home buyers,” he says.

The bright-line test extension means any capital gains on a residential property that is not a family home will be taxed if the property is sold within 10 years of purchase.

The Government has also made changes to the Home Start subsidy scheme, which enables qualifying first-home buyers under certain income caps to receive a grant to purchase property under set regional price caps.

Income caps to get financial assistance will be lifted from $85,000 to $95,000 for single buyers, and from $130,000 to $150,000 for two or more buyers.

Changes to regional price caps on new build and

Regional Price Cap Changes

Auckland

Location New Build Existing Build

$700,000 +$50,000 $600,000 +$25,000

Queenstown Lakes

Wellington City, Hutt City, Upper Hutt City, Porirua City, Kāpiti Coast District Nelson City, Tasman District, Tauranga City, Western Bay of Plenty District, Hamilton City Christchurch City, Selwyn District, Waimakariri District

$650,000 No change $550,000 +$100,000 $550,000 +$50,000 $550,000 No change Waipā District, Hastings District, Napier City $500,000 +$100,000 $600,000 No change $500,000 +$50,000 $500,000 +$25,000 $500,000 No change $400,000 +$125,000

Waikato District, Dunedin City

Rest of New Zealand $500,000 +$50,000 $500,000 No change $400,000 +$25,000 $400,000 No change

existing properties will also reflect the increased price of housing. (See table opposite)

“This package of measures will help first home buyers into the market and boost activity,” Megan Woods says.

From 1 April, both the income and house price thresholds will be lifted, making more first-home buyers eligible for Home Start.

Century 21, along with REINZ, have long been calling for the Home Start grant to be updated and made fit for purpose.

“As the market rocketed, we saw fewer and fewer properties and first-home buyers qualify, which was killing the Kiwi homeownership dream for many,” says Century 21 New Zealand owner Derryn Mayne.

“Eligibility in Auckland in particular, became almost impossible.”

In the 12 months to February, Auckland’s median

house price increased by 24.3% to $1,100,000. Yet for first-home buyers in Auckland to qualify for Home Start they needed to buy an existing property for $600,000 or less, or $650,000 for a new build.

Last year REINZ revealed that only 12% of Auckland properties sold were below the Home Start price cap threshold. That number would’ve only reduced since.

“In many ways the market has run away from firsthome buyers. While these adjustments to Home Start won’t be enough for some people, it’s definitely a step in the right direction and will undoubtedly enable more young Kiwis on the property ladder,” says Mayne.

It is worth noting that price caps in Queenstown-Lakes, Waimakariri District, Selwyn District, Christchurch City and ‘the rest of New Zealand’ will all remain unchanged. Currently, only 12% of properties sold in the Queenstown-Lakes District fall below the $650,000 threshold and only 11% fall below the $550,000 threshold in Selwyn District, according to REINZ.

What will change for investors

CoreLogic Senior Research Analyst Kelvin Davidson sees the most significant measure being the removal of interest deductibility.

The new policy stops investors from offsetting mortgage interest against tax. This applies to new investors immediately, and will be phased over the next four years for existing landlords. New-builds will be exempt from this tax change, however.

The Government says this change will “remove the advantage investors have over first home buyers.” Their aim is to reduce investor demand for debt-driven residential property investment over “more fully taxed and more productive investments.”

Davidson says there is no doubt this will deter some would-be new investors and could cause some existing investors to sell.

“It certainly helps to improve financial stability, by ensuring that investors put in more equity in order to keep interest costs low – that may benefit experienced investors at the expense of newer landlords, and could see the ownership of rental properties slowly become more concentrated.”

Despite the crackdown on investors, Davidson says there weren’t any obvious ‘carrots’ for investors to divert money towards other asset classes – e.g. such as tax breaks for extra deposits into KiwiSaver funds.

There was also no mention of any possible restrictions on interest-only lending (and maybe caps on debt to income ratios) for investors, but are in the pipeline from the Reserve Bank in May.

These changes to took REINZ by surprise. Acting Chief Executive Wendy Alexander says this will completely change the financial dynamics of investing in residential property.

“Currently you can use the interest deductions as a legitimate property cost, however, this will no longer be allowed from 1 October this year.

“In our view, people are likely to already be wary about investing in rental property given the changes to the RTA and the prior removal of ring fencing, however, this is likely to exacerbate concerns around investing in rental property and may see investors considering whether they can get better returns elsewhere.

“Many landlords are likely to increase their rent in the

coming years as they look to offset the costs, thereby making rentals even more unaffordable than they are currently and making it even harder for renters to save a deposit for their own property.

“There is also a chance that a handful of unscrupulous landlords might look to even profit from the situation.”

What more could the Government have done?

“Extending the bright-line test will not be a magic bullet in terms of solving New Zealand’s housing affordability issues, nor will it do anything to increase the supply of houses,” says Alexander.

“In actual fact, what it’s likely to lead to is residential property investors holding on to their properties for even longer in order to avoid paying tax, thereby further reducing the total pool of properties available in the market.

“New Zealand has had an issue with a shortage of housing for a number of years now. What we need is to be able to build at scale and speed in an affordable manner, and in locations that are important to Kiwis e.g. close to transport hubs and amenities such as cafes and restaurants.”

Property Council New Zealand Chief Executive Leonie Freeman agrees that supply is the main issue. She says the brightline test extension may signal a decline in ‘flipping’ houses, but it does little to address the cause of the crisis – which is there aren’t enough houses for Kiwis in need.

“The Government has pulled just one lever in the vast dashboard of push buttons they have at their disposal, but they have failed to address the issue of supply.

“Instead, they have fallen back on the previously disbanded idea of a tax on capital gains – which is effectively what the brightline test will be – a tax on capital gains that will increase costs but do little to provide homes for everyday Kiwis.

“While we’re pleased to see moves to incentivise Councils and the Crown to free up more land in the form of a $3.8 billion Housing Acceleration Fund, it remains unclear how and when the Government plans on getting these funds to those who actually build and develop housing,” says Freeman.

The Property Council is calling on government to prioritise other measures to address the housing crisis and clarify their intentions to ensure industry and policy makers are working in concert, including: 1) Urgent Resource Management reform to simplify the planning and consenting system, freeing up land to building houses more efficiently and reducing the costs of housing right across the housing continuum. 2) Considering interim measures to speed up supply, using the fast-tracking legislation more generously or adopting a similar approach to that taken in Christchurch post-quakes. 3) Clarifying whether Build-to-Rent housing will be included in interest deductibility and brightline issues. Build-to-Rent housing will need to play a greater role in the rental solution and cannot afford to be scuttled before it’s truly got off the ground.

“Investing more into speeding up developments is welcome news, but such investment needs to get into the hands of builders and developers sooner rather than later. This, coupled with using the Resource Management fast-tracking legislation and embracing the potential of Build-to-Rent housing would speed up the construction of housing in New Zealand.

“Solving the housing crisis is not a matter of pulling one or two levers and expecting a wave of change. Development and construction take time, the development pipeline can take decades. The only way to guarantee success is if government and industry come together to utilise our collective experience to address each issue in harmony”, says Freeman.