On National Radio ‘Morning Report’ 26 January, Nicola was interviewed about what National would do to control inflation. One of the items raised was National’s proposal to restore mortgage interest deductibility for landlords. She said restoring deductibility would remove a cost for landlords as they would be passing this cost onto their tenants. Implying therefore that this policy would reduce inflation and reduce rents making them more affordable. And the interviewer Corin Dann insightfully asked how did she know that the cost savings from deductibility would be; passed onto the tenants. And of course she doesn’t; she evaded answering — as there were many factors involved.
We all know this policy would do nothing for inflation because prices are not set by the costs of the item. Its set by the seller estimating what they can charge for the item. What is the maximum price they can get? A renter in New Zealand has no idea if the landlord has paid off the mortgage on a property so can’t say — but your costs are really low. Costs do not set price. Nicola is either treating us all like a bunch of economic idiots or behaving like one (she isn’t one).
But National Nicola’s policy to allow interest deductibility is actually missing the bigger strategic picture. Her policy will encourage more scarce New Zealand investment capital to be locked into residential property. Helping push property prices higher, making home ownership less affordable, with long term damage to the ability of young people to use a property as collateral to start a business. The New Zealand economy can’t grow through some residents being able to sell a pricey residential property to each other.
New Zealand desperately needs investment in the productive parts of the economy; exports, innovation, productivity improvements. National’s other policies do nothing to address these because their policy on interest deductibility feeds the existing primal distortion to put investment capital into capital assets; i.e., residential rental.
New Zealanders became obsessed with residential property because;
- its something they understand, (e.g. do a house up and then flick it on is quite common)
- it’s largely capital gain free,
- it’s historically the best investment to hold the value of the investment — everything else is more risky,
- it’s one of the best low effort income return investments because rentals are so pricey,
- government rental subsidies are guaranteed income.
These factors have driven the obsession with property. (The Bright line test takes a little gloss off but barely).
The excellent action by Labour to remove interest deductibility from rentals will be taking some of the gloss off residential property investment, and this impact will compound as the policy comes fully into effect. And with the current higher interest rates it will be putting economic pressure on some landlords to sell. And more importantly no deductible interest will encourage new investment elsewhere in the economy. This is desperately needed. However, they have stuffed it up by returning interest deductibility to the ‘build to rent’ rent for life business model. Trapping our young people into rentals. Encouraging every Tom, Dick and Harry landlord to claim they are ‘build to rent’ but not just yet. Groan; the stupidity.
More actions can and need to be taken to address the above positives for property.
National wants to return us to the previous laws of full interest deductibility, that lead people to favour residential property investment, that lead to a lack of investment in the productive economy, and lead to the affordable housing crisis. Nothing is being fixed by Nationals policy, only structural economic problems are being created. Dumb.
And Nationals interest deduction policy by encouraging a return to previous investment patterns will leave the New Zealand economy vulnerable to the economic shocks we have just experienced. Covid destroyed our huge tourism industry for a few years. Many landlords had used residential properties to gain income through the short term rental market on AirBNB, Booking.com , etc. New virus’s will arise and the collapses will happen again. Have National learnt nothing from this experience?
Surely a responsible government would encourage some diversification. But all I heard from Nicola was a return to what went before. Immigration relaxed. No increase to minimum wage but lamenting how inflation was impacting our lowest income people. But no plan to deal with that. It seems like all their policies are wish lists from those people who whisper in their ear about how they used to make a buck this way or that, or could make one. So National just say — ‘yes’; to them all.
National have no effective or credible vision for the New Zealand economy. Have stated no effective ways they will deal with inflation, or the affordable housing crisis. (Private enterprise build to maximise profit not to create affordable housing. The proposed bully building law changes will not deliver affordable housing but maximum return rentals). But though we will all be worse off under National, Labour still have to prove themselves as different. And its not by just saying ‘yes’ in private meetings with business people, after listening to how they used to make a buck with lax immigration or mass tourism.
I don’t think anybody in Parliament has a vision for the economy — unless that vision is everybody cleaning hotels for a living!
The real estate bubble was entirely based on printed money (in this case paper currency, specifically bank reserve certificates, which ended up backing loans for speculation).
But because the N.Z. economy is so weak, most of this activity turned out to be house-flipping. There was nowhere near enough new construction, even though the housing stock is in such a poor state — and the quality of any new construction was below par.
Obviously the first step is to increase the supply of housing: mass development of new housing estates. But this doesn’t fix the main underlying problem.
The economy is trapped in a doom loop of low wages, low value-added production, and low investment.
This only occured because of ‘globalisation’ — the extremism of ‘free trade’, leading to disastrous de-industrialisation. The wealth was sucked out of the country and sent abroad.
You’re correct Kristoff
We’re not going to get out of this hole until someone competent does from real problem analysis. Consider:
Our housing supply is broadly restricted because councils won’t release land for development. Meanwhile our population density is less than a tenth that of the UK.
Our building materials supply shortage is broadly due to dysfunctional, council-imposed materials specifications that artificially create monopolies. Timber and plasterboard are generic materials we should be able to import and export.
We need more high paying jobs, but these are often process industry based and NZ is a place where it can take a decade to push a project through the consent process.
We’re really not helping ourselves with our choices.
Even if ‘land was freed up’, people will still only build expensive luxury housing.
No Millsy
They build expensive houses at the moment because:
The remaining urban plots are oddly shaped and on hillsides, requiring bespoke designs and extensive earthworks.
Land values are so high that it makes no financial sense to build a cheap house on an expensive section.
And freeing land will devastate our food security by building on food productive land like Pukekohe. Great plan! Lol
@Andrew:
You’re dead right about the council permit issue. It needs to be drastically simplified somehow.
Perhaps in the short term the government should be trying to entice large foreign developers to build many suburb-sized estates, where all the permits would be quickly rubber-stamped all at once.
You could probably redevelop entire existing suburbs in a similar manner. Use compulsory land acquisition to conduct slum clearance, with the foreign developer building a whole new suburb of high-density rental properties.
Some steps central government could do that would turn this problem around:
> Overrule Council zoning rules to allow Auckland to expand to the west and the north where there is ample land with low agricultural value.
> Require Councils to accept imported building products that meet US, EU & UK codes. This would remove the de facto monopoly enjoyed by local suppliers and force them to meet international standards and prices.
> Allow the major contractors to get blanket ‘type approval’ for their entire design portfolios on a national basis. We do this with cars, so why not houses? This would leave only foundation details to be reviewed by local government, to cover local soil conditions and terrain.
> Earmark a portion of GST revenue for local infrastructure development. This would require oversight to prevent councilors from squandering on pet projects and overseas holidays LOL.
Exempt councils from the “last man standing” laws that leave them (ie you and me) on the hook for someone else’s shoddy or corrupt developments. I hear lots of complaints about councils but they are mostly caused by them trying to cover their arses and protect their ratepayers’ money, which is absolutely the right thing for them to do.
Sorry… but…I don’t think you or Andrew have got a clue about the complexities of house building.
@Kristoff
Why would you need a foreign developer to do this when the government can build suburbs of statehouses itself or finance a local deloper to do it. Why would you send housing ownership wealth offshore?
Well said:
I don’t think anybody in Parliament has a vision for the economy — unless that vision is everybody cleaning hotels for a living!
Let’s bring in more immigrants to pay low wages to, jobs that Kiwis deign to do, fair enough.
I agree.
Seymour would be much better.
Across the board pay freezes then, plus US style healthcare.
For who Frank, his partner? Oh he doesn’t have one! How would he even know how to hold the interests of the country when he’s such an insular and selfish twat.
Nicola is either treating us all like a bunch of economic idiots or behaving like one (she isn’t one).
Not so sure about that – everything I’ve heard from her is just regurgitated waffle and generalized claptrap you can hear in any conservative echo chamber.
Agree with you John, landlords’ property values increased some sold and made millions whilst paying very little taxes on those capital gains. Landlords and those with capital also benefitted from quantitative easing. Rents went up and so the landlords were able to claw back some of those loses. Some NZers were stupid enough to buy very expensive overpriced houses and now they can’t service the mortgage, instead of waiting. There is too much keeping up with the Jones whanau in NZ and some living above ones means. And don’t blame the government if you can’t pay your mortgage when you choose to buy that property.
Quite right. Landlords own their houses so they are the ones who should be meeting the mortgage costs, not the tenants. Landlords should not be passing on mortgage costs as part of the rents.
Agree with you John, landlords’ property values increased some sold and made millions whilst paying very little taxes on those capital gains. Landlords and those with capital also benefitted from quantitative easing. Rents went up and so the landlords were able to claw back some of those loses. Some NZers were stupid enough to buy very expensive overpriced houses and now they can’t service the mortgage, instead of waiting. There is too much keeping up with the Jones whanau in NZ and some living above ones means. And don’t blame the government if you can’t pay your mortgage when you choose to buy that property.
Absolutely covid, only a complete idiot would get a mortgage when prices were over inflated and interest rates were very low. History shows there will always be a correction. National inflated the prices and promoted to the country a “rockstar economy” The gullible were sucked in.
The Opportunities Party seems to have the best policy in this regard. They would disallow investment in rental properties if, in order to make the investment, the landlord had to borrow. In that situation the question of whether or not interest should deductible would not arise.
Nicola Willis is a terrible minister, full stop. She’s Judith Collins 2.0 without the Orivida and dirty politics scandals (so far). She has a set of freshly sharpened knives at the ready, you’ll see soon enough. Vile.
Oh dear Sinic. Nicola Willis is a minister?
Semantics Ian. She’s just vile in any political capacity was the point.
A party completely devoid of any ideas for the problems we face. A bit like the current mob. We’re basically screwed.
Was national who started the increases in rents when they scrapped deductibility of depreciation. Landlords were so used to the big margins they were getting they were always going to pass the costs onto tenants.
The real problem is banks allowing “investors” to use equity to buy houses.
This should never have been allowed when buying a 2nd house.
It wasn’t National that scrapped deductibility, but Labour. It was probably the best move Grant Robertson ever made since it will make investing in rental properties less attractive, and reduce the competition that first home buyers have to face, from would-be landlords, when they try to buy a home for themselves. Also, landlords should not be passing on their mortgage costs, even the interest, to their tenants as part of the rent. – or to the taxpayer. The property that is being rented out belongs to the landlord, not the tenant. However it’s hard to stop them passing these costs on so investors should be prevented from renting out properties if they have to borrow to do so.
Mountbatten, and his castle cronnies,scheeming to take over the Wilson government of the sixties,history,eh!.
Not allowing deductibility of expenses really is a pretty stupid idea. Not only will it lead to duplication of taxation on expense items but could also lead to businesses being taxed on non existent profits; unless of of course they increase prices to ensure that this doesn’t happen, which would lead to inflation.
However, it’s no good preaching to us anyway. If you are really serious about this sort of nonsense you need to take your ideas to the Accountants Society as these are the guys who determine accounting methods. I’m sure they could do with a good laugh.
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