Warning! Economists say widespread property speculation will seriously harm economic development! A new round of housing market intervention is set to begin this week!

Finance Minister Grant Robertson also urged New Zealanders to spread their investment eggs across several baskets, rather than focusing solely on the current housing market. Prime Minister Jacinda Ardern likewise said the Government must take a range of measures to ensure and encourage people to find alternative investments in the productive, or real, economy.
Reserve Bank: we encourage people to go out and “spend our money”, but that does not mean only buying houses
 
Reserve Bank of New Zealand Governor Adrian Orr also spoke out over the weekend, warning property investors. He acknowledged that the Reserve Bank had cut interest rates to encourage people to “go out and spend our money”, but said: “We didn't say you could only go out and buy houses.”
 
Discussing the longstanding issues underlying the housing crisis, Orr said people needed to find “alternative places to invest. There are all sorts of places to invest, but New Zealanders continue to buy houses…”
 
Orr stressed that serious thought and real change were needed. Leverage, taxation and supply-side factors were the drivers. He also referred to using “incentives” on TVNZ's Q + A programme. From the finance minister and prime minister to the Reserve Bank governor, these comments all reveal the Government's and central bank's determination to regulate the housing market this year.

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LVR reintroduced: has the housing market really cooled?

LVR restrictions were reintroduced on 1 March, requiring investors to provide a 30% deposit. From 1 May, the deposit requirement for investment properties will rise to 40%.
In an article published in late February, Westpac chief economist Dominick Stephens said house prices would “continue to boom”, forecasting a 17% increase in 2021. In its February Monetary Policy Statement, the Reserve Bank forecast further house price increases, but “expected” prices to begin “falling” in the year 2021, from June.
Data from Interest.co.nz shows that Auckland residential auction activity has gradually weakened since the start of March, after peaking at the end of February. Residential auction numbers so far are below those in the final week of February, while auction volumes since the start of March are only slightly higher than in the same period last year.

Industry insiders say the tighter LVR lending restrictions for investors taking effect on 1 May will influence the housing market.
 
In fact, data supplied by Interest.co.nz shows that New Zealand home sales volumes are slowly declining. The series of government measures introduced this year also suggests investors have begun taking a cautious approach to the housing market. Banks: higher interest rates offer savers more investment choices
On 1 March this month, ASB made the year's first move to raise interest rates, announcing increases across all deposit terms and lifting its five-year deposit rate to 1.75%. ASB said the increases were intended to give savers more competitive investment options.
 
We had previously predicted that ASB's latest increases would be linked to the Government's encouragement of investment in other areas. An ASB representative had said they wanted investors to allocate their portfolios sensibly, rather than focusing solely on the housing market in front of them.

So which areas will this week's policies address? Let's look at what economists have to say. Although the finance minister has not specified which areas this week's policies will cover, media and economists have already predicted that the measures will target taxation.

 Policies to encourage investment 

1. Reduce KiwiSaver tax payments
   
   We understand that, in its final report to the coalition Government in the year 2019, in February, the Tax Working Group recommended cutting the two lowest prescribed investor rates (PIRs) for KiwiSaver funds by 5 basis points each, to 5.5% and 12.5%, from 10.5% and 17.5%. It also recommended keeping the highest PIR at 28%.
   It is estimated that implementing this policy would increase low-income earners' income by US$630,000,000 over five years.

2.     Raise bank deposit interest rates

Looking at current term deposit rates across the major commercial banks, most are at much the same level, apart from ASB's five-year rate, which has risen to 1.75%. ASB's increase this month could prompt other commercial banks to follow suit. With ASB having fired the opening shot in this year's interest rate battle, increases in term deposit rates across the major banks seem inevitable. They are also one way commercial banks are competing for market share. Whether the major banks follow ASB this week will become clear in the days ahead.
 

3. Reduce tax on capital income Andrew Coleman, a former University of Otago lecturer and current economist at the Reserve Bank of New Zealand (RBNZ), said he had long advocated taxing income from capital, namely dividends and interest, less than income from labour. His proposals include introducing a more comprehensive capital gains tax and lowering PIRs to encourage investment outside housing. Capital gains tax remains contentious, and the likelihood of the Government introducing it in the short term appears very small. Labour also promised during the election not to introduce new taxes during its term. However, a reduction in capital income tax to stimulate investment in other areas could be announced this week.  Policies to curb the housing market:
 
1. Extend the bright-line period

Economists propose extending the bright-line test period further to dampen investors' current enthusiasm for the property market.

The bright-line policy refers to legislation formally passed and implemented on 28 March 2018, extending the test period from two years to five years. This means investment properties resold within five years of purchase attract 33% capital gains tax.

Bright-line test rules for residential property:

(1) If you bought residential property between 1 October 2015 and 28 March 2018 and sell it within 2 years;

(2) Or if you bought it on or after 29 March 2018 and sell it within 5 years, you must pay income tax on the profit. As Labour promised during the election not to introduce new tax policies during its term, an extension of the bright-line period could feature in this year's housing market measures.
 
2. Restrict bank lending

Economists have also recommended that the Reserve Bank of New Zealand restrict property investors' use of interest-only mortgages to buy homes. An interest-only mortgage is a home loan on which the borrower pays only interest without repaying the principal. This arrangement has long been regarded as an excellent investment tool in New Zealand's property market.

The Reserve Bank of New Zealand recently said it welcomed the finance minister's request for more information on debt-to-income ratios and interest-only mortgages, and would respond in due course. This suggests the Reserve Bank could adjust its policy on interest-only mortgages this year.

 3. Reintroduce DTI
Economists and members of the public alike have long called for debt-to-income (DTI) lending restrictions to be introduced as a housing market measure. These would link borrowing amounts to income: the more you earn, the more you can borrow. Industry analysts say only the introduction of DTI restrictions can truly cool the housing market. This is also a tool the Reserve Bank of New Zealand has long wanted to use. Yet discussion of introducing DTI restrictions in New Zealand has produced much talk and little action. Will the policy actually be introduced and implemented this week? In this writer's view, if DTI restrictions are currently the most effective way to regulate the housing market, their introduction this week is highly likely.

New Zealand's GDP falls sharply: housing market intervention is now imperative

The latest figures released by Stats NZ last week show a sharp downturn in New Zealand's economy in the final quarter of 2020. GDP fell 2.9% overall over the past year, the largest annual decline on record.

With the housing market continuing to boom, economists warn that, over time, it will constrain New Zealand's economic development. The Government has now recognised that widespread property speculation will inevitably bring serious economic consequences. A new round of housing market intervention is set to begin this week.