There has been a fair amount of fallout from the government rushing changes in the tax law through under urgency last night..
There has clearly been a bubble, but this government has not learned from Austrailia or Europe, where capital gains taxes have not changed peoples behaviour in property bubbles. These end when no one can afford the houses, and the prices crash.
While the bright-line test extension might signal a decline in ‘flipping’ houses, it does little to address the cause of the crisis – which is there aren’t enough houses for Kiwis in need,” says Leonie Freeman, Chief Executive at Property Council New Zealand.
“Today, 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 bright-line test will be – a tax on capital gains that will increase costs but do little to provide homes for everyday Kiwis.
The reason one cannot build more houses is the Resource management act, which is expensive -- it will cost us as much to get certified for renovations in casa Kea as it will to get the Architect to draw up the plans -- slow, and the lack of land available to build on. The government knows this, and is talking instead of having three acts. But they have the Greens as coalition partners, so all bets are off as to the effectiveness of these reforms.
The doofus here, of course, is Jacinda Ardern and her best friend Grant Robertson, who decided to remove any tax deductions for mortgage interest on home investiments. This is going to end really badly. It does not affect anyone in my close family... yet. It could affect my kids because they are at the age where they are renting and saving a deposit, and I expect their rents to go up.
The Finance Minister wants the economy to move away from property speculation towards more productivity.
A range of measures has been introduced to put the brakes on runaway house prices and help first home owners get into the market.
Westpac feels it could see house prices fall by 10 percent, and affect the wider economy.
Grant Robertson told Mike Hosking credit rating agencies say the economy has strong underlying fundamentals.
"Investment needs to be more productive and it's time we moved away from housing speculation as an underpinning of economic growth."
Robertson also rejected claims he had lied to voters during last year's election campaign when he said the brightline test would not be extended.
At that time every economist and the Treasury had advised the Government that house prices were going to fall.
But he conceded he was "wrong" to say what he had to Newstalk ZB's Heather du Plessis-Allan in September.
"I've acknowledged that I was too definitive."
House prices had changed "significantly" in the past few months and the Government had to respond, he said.
Robertson said he did not own a rental property.
Hosking said he did and he would be putting the rent up. Robertson said that was his choice and that rental prices were affected by many factors.
Westpac had predicted that the housing changes would affect the wider economy but Robertson said a greater risk was that the housing bubble would burst.
As a wag said yesterday, next time I'm caught lying I will say that I should have been less definitive. This will enter the lexicon real quick.
NZ made Zero Hedge
I've cut the article down a bit, but as expected the Kiwi has gone down basically immediately.
One month after the New Zealand government took the historic step of adding a fresh mandate to its central bank, tasking it with considering the impact its monetary and financial policy decisions have on housing prices, a move to help calm the country’s red-hot property market, overnight New Zealand’s government took another step at popping the local housing bubble by taking aim at property speculators with a suite of new measures to tackle runaway house prices and prevent the formation of a “dangerous” bubble.
As a reminder, back in February, Finance Minister Grant Robertson said the Reserve Bank of New Zealand (RBNZ) must take into account government policy relating to more sustainable house prices.
"Today’s announcement is just the first step as the government considers broader advice about how to cool the housing market,” Robertson said in a statement. "We know the rapid increases we have seen in recent months are not sustainable, which has meant many first-home buyers are struggling to access the market."
However, with home prices refusing to dip and stubbornly sticky at all time highs, rising by a record 21.5% in February...
“The last thing home owners need right now is a dangerous housing bubble, but a number of indicators point towards that risk,” Ardern told a news conference. “Property investors are now the biggest share of buyers, with the highest amount of purchases on record. Last year, 15,000 people bought homes who already owned five or more."
Not to mention the thousands of American billionaires who have decided to make New Zealand their beautiful bug-out location of choice.
As Bloomberg notes, New Zealand’s success in battling Covid-19 has seen its economy recover sooner than many others, putting it at the forefront of a global property boom as ultra-loose monetary policies encourage investment in higher-yielding assets. House prices surged 21.5% in the year through February and investors accounted for more than 40% of purchases that month, a record high.
So to dissuade speculation, the government will enforce the extraordinary step phasing out the ability of investors to claim mortgage interest as a tax-deductible expense, and will extend of the period in which profits on the sale of investment property are taxed to 10 years from five.
According to Westpac Banking Corp, the changes “will significantly reduce the financial incentives to invest in housing” and have “a chilling effect on investor demand. Today’s announcements indicate significant downside risk for house prices and economic activity more generally."
The package is the latest salvo in Ardern’s assault on the booming property market, which is undermining her efforts to reduce inequality. Prices are soaring at double-digit rates around the country, taking the national median to NZ$780,000 ($556,000). In Auckland, the median price has reached NZ$1.1 million, making it the fourth least affordable city in the world, according to Demographia.
After tasking the central bank to pay more attention to the property market as noted above, NZ finmin Grant Robertson said today that New Zealand’s housing market has become the least affordable in the OECD and it was “essential the government takes steps to curb rampant speculation."
Robertson said extending to 10 years the so-called “bright-line” test - effectively a capital gains tax on investment property sales - and removing interest deductibility for investors “will dampen speculative demand and tilt the balance towards first home buyers." While the new bright-line test will apply to properties bought from March 27, the time horizon for new builds will remain at five years to encourage supply.
Ardern disagreed and said that “the housing crisis is a problem decades in the making that will take time to turn around, but these measures will make a difference", adding that while “there is no silver bullet, but combined all of these measures will start to make a difference.” Only they won't, and instead the latest government intervention will only makes things worse as it will remove the impetuse from the RBNZ to tighten conditions earlier.
Speaking of which, the New Zealand dollar plunged by almost 2%, dropping to 70.20 US cents, down from 71.70 cents beforehand. Swap rates and bond yields also declined as traders speculated the central bank will be able to keep interest rates at a record low for longer thanks to the government's own efforts to rein in home prices.
“The announcements made today relating to housing investors were bolder than most expected and will be more hard hitting because they basically take effect straight away,” said David Croy, an interest-rate strategist at Australia & New Zealand Banking Group in Wellington. If that cools the housing market, it will give the RBNZ more breathing space, and delay rate hikes.
And since the level of overall liquidity is all that matters, it means that New Zealand's "dangerous" housing bubble is about to get even more dangerous.
I would make some Venezuela jokes but they are suddenly not funny.
Westpac, which predicted a 10% decrease in housing prices yesterday, today is hit with a Reserve Bank NZ notice saying that its governance needs external review. They could be gone. Of note, Westpac is the NZ government's banker.
In a statement to the NZX shortly before closing today, Westpac said it's been "actively considering the businesses we operate in".
Employing 4500 workers in New Zealand, the business is the nation's third-largest bank.
"Westpac is also assessing the appropriate structure for its New Zealand business and whether a demerger would be in the best interests of shareholders," it says.
"Westpac is in the very early stage of this assessment and no decisions have been made."
The bank has been involved in New Zealand for around 160 years, it says.
Earlier today, the Reserve Bank of New Zealand (RBNZ) ordered two reviews of Westpac New Zealand after finding it breached liquidity requirements between 2012 and 2020.
"Westpac NZ needs to take a close look at its risk governance practices," Reserve Bank deputy governor Geoff Bascand says.
"We have experienced ongoing compliance issues with Westpac NZ over recent years, most recently involving material failures to report liquidity correctly."
The decisions around a sale would "consider the impact" of the announced reviews, Westpac says.
"However, given the changing capital requirements in New Zealand and the RBNZ requirement to structurally separate Westpac’s NZ business operations from its operations in Australia, it is now appropriate to assess the best structure for these businesses going forward. Westpac will provide further updates as required."
My question is, if they see a housing crash, if they are getting out while their mortgage portfolio has value. We have seen this before.