Economic Weekly: Housing policies bring modest forecast tweaks

We have crunched the numbers in the wake of the Government’s recent housing policy announcement.  Perhaps it won’t be too much of a surprise that we have essentially flat-lined our house price outlook for the rest of 2021, made slight trims to our consumer spending and construction forecasts, and nudged up our rent outlook.  Aside from the house price changes, the shifts aren’t dramatic – you can read more on the next page.

Much of NZ’s housing challenges lie with the high cost and sluggish response of NZ’s housing supply.  We simply haven’t been building enough homes to adequately house our population.  Key long-term solutions lie with improving that supply response, particularly successful RMA replacement.  Anything that speeds up the planning/construction phases and provides greater certainty of time and cost to those taking the risk of developing will help.  As we have seen with KiwiBuild, it is not that easy to build homes.  The Government is working hard on policies to permanently improve the supply response, but it will take time for those efforts to impact.

Meanwhile, we run the risk of a housing whack-a-mole game.  To whack the house price ‘mole’ in the interim, the Government has materially increased the cost structure of private-sector landlords – collectively the biggest rental provider – through eliminating the tax deductibility of interest expenses.  As we pointed out in our Note, private-sector investor appetite to hold rental property is likely to fall and rents are at risk of going up – at a time when rental properties are in hot demand and social housing waiting lists are growing.  As yet there is no official advice on the rental market impact of the policy change, though the actual impacts will become clearer with time.

The next housing ‘mole’ that is popping up is rents: the new class of property ‘speculator’ is people musing about rent controls.  Rent controls do give a benefit to the incumbent renters (regardless of their financial circumstances) of properties brought into the rent control web.  But pretty much everyone else bears costs.  Future would-be renters tend to face shortages of (rent-controlled) properties, as few incumbents want to give up their windfall gain and private landlords shy away from providing rental stock.  Properties tend to either be undermaintained (New York’s post-war experience) or can be over-renovated in order to boost the rent if such adjustments are permitted (which impacts rental affordability).  Berlin’s year-old rent controls on pre-2014 dwellings have created a shortage of rent-controlled properties while sharply boosting the rents of exempt new builds, as new renters have little alternative. Stockholm has an average 11-year wait to officially rent a rent-controlled dwelling.  A thriving black market has developed for sub-leases of rent-controlled dwellings, which has attracted criminal gang involvement and even sparked homicides.  In summary, a policy that distributes the benefits irrespective of need, and potentially constricts rental housing supply in the midst of a housing shortage, may not help resolve NZ’s problem of an expensive and undersupplied housing stock – for both would-be owners and renters.

Anyway, that’s enough commentary on NZ’s ongoing obsession.  The rest of the week brings another insight into the durability of dairy prices’ recent jump, and an early read on ANZ’s business confidence survey.  Across the ditch the Reserve Bank of Australia makes its latest policy pronouncement.