Last week National and Labour announced ‘build to rent’ companies can claim interest on loans as tax deductible. This gives them a massive financial advantage to outbid a first home buyer or a person wishing to buy a home. For every dollar of interest they will get 28% back (the company tax rate). And they will buy because at some stage they will want to build. But they may hold many in rental till ‘resources’ are available to build.
New Zealanders outbid and outpriced will be trapped in rentals. Owning a house is the main way wealth is passed on (well what isn’t taken by retirement homes). Without equity backing like this, thousands of future small businesses won’t be able to secure loans to get started. Small business are critical to our economy and are major employers. Future generations will be poorer and consequently have less freedom of choice.
‘Build to rent’’ is a very profitable business model that sucks in huge human and material resources to build their projects. Easier for a builder to deal with them than lots of individuals requesting a house built. Build to rent will also become an attractive investment proposition for large investors (e.g. Like Blackrock in the US) who will buy housing companies knowing that middle class people, our children and grandchildren (and those with no chance), won’t be able to afford to buy a house but they can pay high rents – govt accomodation allowances are great as they can pay high.
Once overseas companies start buying these build to rent companies, the profits will be stripped out of the New Zealand economy. With high rents there is less disposable income to stimulate other sectors of the New Zealand economy. This interest deductibility policy is an economic disaster in the making.
But there is a housing crisis! We have to build housing supply!
Yes there is a crisis, and this is where misinformation comes in. Some estimates put housing demand as an extra 65,000 houses nationwide. Another says if an occupancy rate of 2.68 people per household is desired, Auckland alone would need an extra 87,000 houses. These are huge estimates panicking Labour into thinking government simply can’t build this number of house. On these numbers we have to get private enterprise to help.
But the real number that matters first is MSD saying at 30 June 2022, there is 26,664 applicants on the housing register. These are the people that must be placed into affordable housing urgently. This is the number to build, now. That is what government should be contracting to have built right now.
If we rely on profit maximising ‘build to rent’ companies to supply this then that is a lot of accomodation allowance (our tax money) to pay well into the future. And it will take a huge numbers of years to do it. Perhaps we need to raises taxes to pay for it?
But what about all the other houses that need to be built?
New Zealand’s population is appox 5 million with approx 2 million homes. By itself this does not indicate there should be any major housing shortgage. But there clearly is an ‘affordable’ housing crisis.
The problem is; there are too many housing markets in New Zealand and they are all more profitable than building affordable housing. They are:
- Short term rentals (i.e. AirBNB for tourism. Each year almost as many tourists come as NZ has residents)
- Overseas students as a back door to NZ residency (this takes up huge amounts of housing in our university cities).
- Holiday homes, with seasonal tourism (still being built when we have an affordability crisis and people sleeping in cars! A waste of limited building resources).
- Build to rent. (new built rentals are never cheap) They do meet demand but they also take resources away from the ability to build affordable houses. And they are not tied to being affordable as Govt did not set limits on rents. And they crowd out New Zealand purchasers. And they can be used for these other very profitable markets and not the affordable housing market. And they must maximise profit to survive, and these others markets ensure rents will not be set as affordable.
- Rental income for superannuation investors (includes many mums and dads) and lifestylers who don’t want to work too much but live off rents.
- High end builds.
There is simply too much demand on the housing supply for purposes other than the permanent housing of New Zealanders. Holding housing has become a large and very profitable business activitiy.
The stupidity is, this new policy feeds these other highly profitable housing markets. Thus it will make housing affordibility worse, e.g .milllions more students and tourists can arrive – very good business if you can get it – and New Zealand needs this business over every other business??). And at best it will extend the crisis because our scarce buildiing resources are not fully focused on building affordaible housing. Some children are sleeping in cars!
And:
• because interest deductibility means less tax is collected, all taxpayers are subsidising these private businesses.
- we know this interest deductible policy will fail because when interest deductibility was previously available, private enterprise simply did not build enough affordable housing so we got the crisis.
- we know interest deductibility was a key factor in encouraging the housing inflation crisis because it encouraged holding capital assets like housing as tax can be reduced.This new interest deduction policy simply lights the fuse on a new housing inflation bomb, just when we started to see a drop off in house prices. Labour’s previous excellent action of stopping interest deductibility discouraged investors, (look at how the Property Council howled) as investors lose interest more houses would come onto the market so more first home buyers would be able to buy an a house. And this is a relatively short term outcome compared with having to wait the years and years for the market to build the huge numbers of houses needed, with most going to these other markets.
Lest we forget, a stronger focus on building the 27,000 affordable homes will help reduce our mental health crisis; our high rates of domestic violence with child impacts; our health crisis e.g. rheumatic fever from poor housing; reduce reduce accomodation allowance payments. All huge savings in social as well as fiscal capital
National and Labour have backed a costly prolonged build build build for any reason model rather than a quicker targeted ‘build affordable’ solution. . Labour needs to show courage and leadership to roll back the interest changes and focus the effort on affordable housing. Punch up, not down.
p.s. One News item on Thursday 19 August had National criticising Labour for more children sleeping in cars. Looks like Labours policy of working alongside National on housing to avoid criticism is not going to work. Labour will be blamed if they do not fix the affordable housing crisis.
What can one say! This Labour (???) government has no social ideology for the benefit of ordinary New Zealanders. They have bought the neo-liberal ideology completely. They (like Treasury) are either economically ignorant or are deliberately screwing us for purely political purposes – as did George Osborne in the UK.
And on National Wilfred, given Stephen says ,
National are just like Labour?
Societies social ills will benefit from a National government how, given where here BECAUSE of them.
Reply to Gus at 2.33pm, ‘Hi Gus, I certainly would not encourage anyone to vote National because there are so many other areas where Labour are fantastic; Three Waters, Nanaia Mahuta on the international stage (future leader?), social policy, Treaty obligations, kindness. Yes they have formed a pact with National and the Greens on housing and they are walking into a firestorm when ugly buildings start going up in Labour voting areas. They don’t seem to see they are being completely set up, or the circumstances are setting them up, for a fall. I can’t vote Green in the local body election. Great young people but no liveability for the city
Thanks for your response.
What is your voting preference for 2023 if you are happy to give us a heads up?
A comprehensive study concluded that an ‘affordable home ‘ in New Zealand, based around the average take home wage, and after deducting all essential expenses, would be around the $295,000 – $300,000 mark……
This is for people who have earned and saved their money in N.Z, not brought money in from overseas and not relied on the bank of Mum & Dad or had the benefit of a big inheritance to fund their way in.
You can see how corrupted the market has become . It’s a disgrace!!
Reply to Grant at 10.57am. ‘Hi Grant, great data, Thank you. I agree, the market is massively out of kilter with affordability. With mortgages so large they are not only a deadweight on the people but the economy as well. I agree, It is a disgrace.
I think some interest should be deductible in respect of new builds on the grounds that building is a productive activity; however, I don’t think deductibility should extend beyond the completion of the build. One option would be for the landlord to take out a mortgage on completion to pay off any outstanding debt relating to the project, and then the interest on that mortgage might be treated as non deductible.
An alternative would be to make all interest incurred in respect of property, whether residential or commercial, non deductible. However, the resulting inflation from such a move might make that option untenable for the time being.
The Overton window has shifted a long way to the right – the idea that governments can get involved directly in delivering outcomes is long gone. The private sector must always be given first consideration and the opporutinuity to make or increase private profit is the key motivator behind nearly every single economic policy decision.
If you look at the UK as an example – most of their utilities and much of their public health system is operated and owned by private firms that extract billions in dividend payments and deliver horrific outcomes to the population at large. This could be over crowded and poor quality health care to raw sewarage being dumped into the rivers and oceans. These are very profitiable ways to run public services.
The reason no government will move away from this approach in NZ is largely due to the trade deals we have which explicitly prohibited government engagement in the economy where it might impact the profits of existing market player.
More corporate welfare! Back to 1984 for Labour!
Meanwhile that plumber and teacher who used to save for retirement with a rental, will fly to OZ instead to work and save enough.
Taxes will NOT be spent on health care and making NZ better, but on more subsidises for accomodation for corporates as they lobby to get more and more poor and dysfunctional into NZ to live in their rentals.
I do not agree that churches should be taxed on their profits because essentially they are not for profit. It is called surplus revenue. It is often allocated towards establishing new ministries within a church such as budget advice, planned Parenthood courses, housing for the elderly, practical skills courses, restocking the food bank, church equipment, outings for the youth, etc. This surplus revenue dried up under Covid so taxing churches now would be a death blow to many of the smaller ones and unnecessary as it has worked so well for so long in serving communities throughout the country.
Comments are closed.