Housing market still needs brakes applied, rent control could be the way to go

Everything is a bad idea. That’s what we are learning from economists, academics and think tanks in New Zealand, when it comes to controlling demand in our housing market.

Often we don’t give politicians credit for having to decide between “bad” or “badder”.

It’s called being practical and it’s no fun at all in the midst of a global crisis.

The first three housing policy changes have been announced; raising deposit levels, phasing out interest deductibility and a longer capital gains tax window for investors.

Two more tools are on the agenda for consideration:

1. Debt-to-income ratio: controlling the multiple of your salary you can borrow.

2. Rent caps: prescribing a maximum, freezing rents, or setting a maximum percentage increase.

The first three housing policies will have some impact on demand. The beginning of a structural clean up of the landlord market is under way and encouraging less leverage will lead to more price stability for tenants.

While useful, these changes have no speed of response. Shocks like the last 20 per cent increase need to be acted upon as they’re happening.

Changes to First Home Loan price caps

The government has decided to shift the caps on the First Home Loan and Grant scheme, allowing first home buyers to receive the grants for more expensive houses. The income caps have also increased, from $85k to $95k for a single buyer and from $130k to $150k for multiple buyers.

More intervention is needed

There’s an urgent need impose further short-term intervention. Every passing month sees more record prices.

We have a housing supply issue that will take at least five years to show any material signs of reversal and a quantitative easing hangover that could fuel prices for even longer (the increase in the money supply caused by the pandemic).

The time-frame needs to be mirrored by a five-year period of tools that control demand. As we’ve already seen, these tools are going to be unusual and foreign to us, tax changes, lending controls and rental caps are part of the mix.

Isn’t this very Muldoon?

Bear in mind the quantitative easing that saved us in the pandemic is one of the most unusual policy instruments in history. The chairman of the Federal Reserve in the US was once quoted as saying “the problem with QE is that it works in practice, but it doesn’t work in theory”.

QE will now involve running around the economy with a mop for years, cleaning up side-effects and the side-effects of fixing side-effects.

Talk of Muldoonism and tutting over market intervention feels tone-deaf to the enormity of the social and global implications of a world disaster. We cannot regret the easing that took place, given such extraordinary circumstances, but we must respond to rapidly rising house prices and rents with every tool available.

Debt-to-income (DTI) ratios: These are a calculation of how many times you’ve borrowed your annual income. If your household earns $180,000 and your mortgage is $900,000, you’ve borrowed a multiple of five times income. If the Reserve Bank puts a speed limit on this, they might say we can only borrow four times our income.

One of the criticisms is it will squash first-home buyers who tend to have lower incomes that increase over time. It limits their ability to borrow, but like all policies, a social overlay can be added.

First-home buyers and new builds could be exempt from DTIs. Banks are often happy to lend more and judge each borrower’s disposable income, career path and job security. Their in-house models of affordability are far more granular.

DTI multiples have been used in other countries to ensure borrowers are more robust to shocks. Right now in New Zealand we simply need it as a mechanism to slow house prices. It’s a blunt tool, but it stops investors and owner-occupiers from paying too much. Alongside the controls on deposit sizes, the tools complement each other.

To cap or not to cap rents

Rent controls were hotly debated when landlords admitted they’d make tenants suffer the costs of tax changes. Their lending arrangements already factor in the ability to absorb shocks. The vast majority sits on tidy capital gains and years of interest rate reductions. Rent increases are now being driven by the marginal investor and the rest following suit behind the muscle of huge property shortages.

For me, rent controls sit in the same camp as quantitative easing. They don’t work in theory, but in the right situation, they might work in practice. The fact that 95 per cent of economists reject them, gives hope.

On untrodden ground we often fail to incorporate local data, the quirks of Kiwi property behaviour or our unique market structure in economic models.

If rent controls are relatively short term and phased out as overall housing supply increases, it’s a useful alliance. Much of the criticism lies in their longer-term entrenchment.

In April, one New Zealand think tank wrote a long and technically correct argument against rent controls. They concluded the only answer was to increase the supply of housing to provide more competition. It was head-banging stuff – one of those Jesus, Mary, Joseph and the wee donkey moments. And while we wait five years for a meaningful increase in supply to take hold, I’m hoping for their analysis of the do-nothing model.

Weighing up “bad” or “badder” is a tough job.

Janine Starks runs moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.