- New Zealand has announced plans to axe its version of negative gearing policy for all existing dwellings over the next four years.
- The measure is one of several announced by Jacinda Ardern’s government after house prices rose around 20% last year.
- The New Zealand government will also spend billions on speeding up new housing developments and provide more assistance to first homebuyers.
- Visit Business Insider Australia’s homepage for more stories.
New Zealand is leading developed economies right now in actively trying to stop runaway property prices.
In its latest bid to tackle plummeting housing affordability, Jacinda Ardern’s government will over the next four years axe the country’s version of negative gearing, whereby property investors could claim a tax deduction on mortgage interest against their rental income.
While less comprehensive than Australia’s own controversial policy, which enables investors to claim back all property expenses against their entire taxable income, the closure of this “interest deductibility loophole” is the latest indication of just how seriously New Zealand is taking its affordability crisis.
The median house price soared 19% last year, rising as much as 25% in Auckland, a city ranked as one of the least affordable in the world.
“The need for further action is clear,” Ardern told media on Tuesday. “The last thing our economy needs right now is a dangerous housing bubble but a number of indicators point towards that risk.”
How things change in the space of 12 months. When faced with a rapidly-spreading pandemic and the prospect of recession at the beginning of 2020, the country removed a number of lending restrictions in a bid to preemptively put a floor under the market.
As New Zealand sidestepped the worst of the crisis however, handing out public money and slashing interest rates alongside the rest of the world, investors piled into property. The proof, as they say, is now in the asking prices of homes right around the country, with some small towns reporting price rises of up to 40%.
‘There is no silver bullet’ for house prices
Negative gearing is just one of the fronts on which the Ardern government is fighting a red hot property market.
On Tuesday, Ardern announced an entire suite of changes including a $3.5 billion ‘Housing Acceleration’ fund to ramp up housing supply. The government claims it will help open up the construction of “tens of thousands of homes” in the medium term by speeding up the building of essential infrastructure to new developments.
Owner-occupiers meanwhile will be given a hand up as the government relaxes its first homebuyer grant scheme, opening it up to higher income applicants and raising caps on house prices.
“The housing crisis is a problem decades in the making that will take time to turn around, but these measures will make a difference,” Ardern said. “There is no silver bullet, but combined all of these measures will start to make a difference.”
Just last month, the Reserve Bank of New Zealand (RBNZ) introduced a range of new lending constraints, including demanding a minimum 40% deposit from property investors from May.
New Zealand is leading the world on property intervention
With a median house price in Auckland now above $NZ1.1 million ($1 million), and over $NZ665,000 nationally, the government is under pressure to cool things down.
Considering median wages there remain well below Australia’s, the country is now facing the worst affordability crisis in the region, save for perhaps Hong Kong.
However, despite the market now flashing red, New Zealand’s market reflects a similar challenge facing policymakers everywhere. The threat of a global recession has slashed interest rates to historic lows, flooding already expensive property markets with a river of cheap money.
With the recovery still potentially years in the making, and with small central banks outgunned by the likes of the US Federal Reserve, the likes of the RBA and RBNZ are stuck maintaining easy monetary policy settings for years.
“That cheap money is what is setting us up for a credit bubble, globally,” Louis Christopher, founder of property research house SQM Research, told Business Insider Australia.
“The concern is those risks will only increase as the year continues because I don’t think any first world country right now, besides New Zealand, is really putting the brakes on the housing market.”
New Zealand in that sense is leading the charge on the few fronts left to curtail rising prices, clamping down on lending, ramping up construction, and throwing first homebuyers a bone.
The level of heat in the market has demanded such intervention, with other developed economies looking on with curiosity. Australia looks unlikely to tinker with negative gearing. after Labor went to — and subsequently lost — the 2019 federal election with the proposal to axe it. However the country could tackle lending instead. Markets from Sweden to Singapore after all have pursued borrowing restrictions.
In Australia, a similar conversation is beginning to take place, as a growing number of households borrow amounts more than six times their income. Such trends coupled with forecasts of 20% price growth over the next two years have helped fuel speculation that an intervention is potentially coming later this year.
While Australia has looked reluctant to intervene in the property market so far, there’s a potential lesson playing out right now in New Zealand.
The longer you wait, the harder you will have to pull the handbrake.