Risk of an ‘abrupt stop’ in the housing market, says an economist

New government policies aimed at shifting the balance of the housing market more in favor of first-time home buyers run the risk of bringing it to a “more abrupt stop” than anticipated, says a leading economist.

A series of new measures were announced on Tuesday, including $ 3.8 billion for infrastructure, an extension of the test of the bright line that means that some investors pay taxes on their earnings when they sell properties and the elimination of the interest deduction.

This last point will be important to many investors.

Until now, they have been able to claim the interest cost of a home loan against the rent received for the property, significantly reducing their tax bills. Simply put, if they made $ 20,000 a year renting a property but paid $ 12,000 in home loan interest, only $ 8,000 of rental income would be taxable.

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Under the new rules, the total of $ 20,000 would be.

No deductions will be allowed on properties purchased after March 27 starting October 1. The amount that can be claimed on previously purchased property will be reduced to zero over a four-year period.

ANZ chief economist Sharon Zollner said that was “massive” for the government, because it risked upsetting a large voter base.

The fact that it was retrospective would mean that a large number of people would experience an increase in their tax bills. “That’s brave… that could change the math. It’s quite a significant leveling of the playing field. “

He said it would likely mean more money would go into other investments, which could boost financial markets.

“At the macroeconomic level, it is very difficult to design a soft landing from a vertical takeoff… the risk is that they will cause a more abrupt stop in the housing market than they intended. And the housing market is New Zealand’s economic history right now.

“In my opinion, it is worth sacrificing a bit of economic activity right now to avoid house prices that are doing so much damage to our society, and also to our economy to the extent that a boom-bust cycle is extremely useless and that had seemed more likely every day.

“But the risk is that they overreach and the economy is still quite vulnerable. A New Zealand economy with receding house prices looks and feels quite different. But to be honest, prices have gotten so out of hand with income that declines in house prices have started to seem inevitable. It’s better to fall off a roof than from an airplane. “

Some investors might rush to sell out of fear of a market crash, he said, but others might decide to stay in the market assuming the rule change won’t stick. “Now there are fewer incentives to buy a property.”

Infometrics economist Brad Olsen said the policy announcement was a “good start.” “No announcement that the government could make was going to change the housing market.”

The infrastructure money would be important because it had been a major obstacle for the building to move. “The government has been told there was a problem there and has acted on it.”

He said he would expect to see investors leave the market. The change to the deductibility rules would change the equation for some people. “Some will call their accountant to see what this means.”

NZ Property Investors Federation President Sharon Cullwick said she estimated the deductibility change would mean an additional $ 6,000 a year in taxes for a $ 600,000 homeowner. But as interest rates rose, that amount would increase.

“Every investor who manages their investments like a business will look at their finances,” he said.

Some small-scale investors would decide it’s not worth buying, he said. Cullwick said it likely means fewer commercially available rental properties for middle-income families.