Hamish Rutherford: How will Grant Robertson convince Kiwi investors not to ‘play the game’ of housing?


Grant Robertson has used his first major speech of 2021 to ramp expectations around the Government’s plans to address soaring house prices, declaring it is time for “bold action”.

Pressure on the Government to address housing affordability has been building for months, as it became clear whatever economists might have predicted in 2020, Covid-19 has driven house prices higher.

Robertson told an event hosted by the BNZ in Wellington

today that less than a year ago, economists were almost “in lockstep”, with forecasts that house prices were likely to fall by 5-10 per cent, due to the enormous uncertainty caused by the global pandemic.

Instead, the measures to counter the pandemic and cushion the economy (slashing interest rates close to zero, closing the borders to international travel and pumping billions of dollars into the economy) caused New Zealand’s largest asset class to shoot higher.

As Robertson indicated, house prices are 17 per cent higher than they were a year ago, according to the REINZ house prices index, with more than half of the increase coming in the final three months of 2020.

Robertson said New Zealanders were seeing family members “crowded out of the opportunity to purchase a home of their own by speculators and investors”.

He indicated the Government would “tilt the balance more towards first-home buyers, while also incentivising more investment in the construction of homes”.

The thrust of

today’s speech was to flag measures to be announced in May’s Budget, which Robertson said would include a strong emphasis on boosting the supply of housing.

But before the end of the month, the Government will announce which measures it will use to address demand: the tools he will use to try to tip the scales away from investors, towards people trying to buy their first home.

Although he acknowledged there was no quick fix, “what we do know is that now is the time for bold action”.

Whether the action Robertson is prepared to take is bold enough to make a difference, especially when it comes to demand, is the question.

Labour has already promised not to introduce a capital gains tax while Jacinda Ardern is Prime Minister.

Although Robertson flatly ruled out an extension to the bright line test when Labour announced its tax policy shortly before the election, it seems increasingly likely that the time period during which investment properties would be subject to the test would be increased from the current five years.

The test, established at two years by National and extended to five years by Labour, sets a line at which investors are assumed to be speculators, and gains are subject to income tax. It seems likely Labour might increase the test another few years.

Other measures are also likely.

Advice has already been given to the Government which could change the tax treatment of interest payments, reducing the deductibility to some investors.

Separately on Tuesday, the Reserve Bank announced an early reintroduction of loan to value ratio restrictions (LVRs) from the start of March (when the Reserve Bank lifted the LVRs at the end of April 2020, it promised to leave them off for 12 months, but is reintroducing them after 10).

Whether that will be enough to put investors off housing, which for decades has been seen as a kind of safe haven asset class which rarely loses value (but often sees healthy gains) remains to be seen.

“There’s an element of, you can only do so much,” BNZ’s head of research Stephen Toplis told the Herald afterwards.

“If you’ve got ultra-low interest rates, and really poor returns on all other asset classes and a history in New Zealand of a very strong housing market, how do you convince people not to play that game.”

Whatever economists were predicting during Covid-19, the prevailing mood now is that house prices will continue to rise.

On Friday, Infometrics predicted that house price inflation would slow as loan to value restrictions were put in place, but only to single-digit rises by the end of this year.

“House prices will continue rising throughout the next 24 months,” Infometrics Chief Forecaster Gareth Kiernan said on Friday.

Successive Governments have talked about the need to boost housing affordability, but none has shown a real demand to do anything which could cause prices to fall. Even now, Labour has used the term “sustained moderation” to sugarcoat the fact that it wants nothing more than for house prices to settle at their current levels.

With interest rates likely to stay low for years to come and house prices expected to continue climbing, telling investors that to avoid being taxed on property they have to own it for a little longer might not provide much of an incentive to invest elsewhere.

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