Investor ban would cool our boiling-over housing market
Should we put a temporary ban on investors in residential property to cool the housing market? There’s a strong case for it.
New Zealand’s out-of-control prices are attracting worldwide headlines as inequality widens.
Go hard and fast
Our solutions for the housing market all have time lags. Even the requirement for investors to have higher deposits (30 per cent in March and rising to 40 per cent in May) is akin to holding back the tide with a bit of number 8 wire.
The demand surge continues with Kiwis returning from overseas and retirees seeking rental yields due to bank accounts generating near zero.
Middle-aged couples with a mortgage-free home can easily use this to meet the deposit requirements for a rental. Investors sitting on a rising tide of capital gains during 2020 can afford to re-enter the market using the free equity they’ve gained.
Higher deposit levels (loan to value ratios) help control demand in many normal situations, but we’ve just gone through some of the most extraordinary market conditions in history.
Governments worldwide flooded the financial markets with cash (buying back bonds, known as QE or Quantitative Easing) and decreasing interest rates. QE has been described as crack cocaine for asset prices and that’s why share prices and property are high as a kite.
Extreme forms of intervention
For economists and bankers, the mere thought of artificial intervention in the free market appears to go against the beliefs of a liberal democracy. But there are times when extraordinary measures are needed to protect us from external and internal shocks to the economy.
Our borders closed and we banned tourists. We’ve had massive wage subsidies and flooded the financial markets with cash. Our export markets have undergone major structural change.
Bearing this in mind, our views on radical intervention are now vastly different. Applying a hard brake to investors in residential property would feel no more surprising than these other actions.
Allowing the demand from owner-occupiers to take priority until other supply-based measures are phased in seems far less extreme than sitting by like lame ducks and letting the forecast of Westpac’s economists (17 per cent rise for 2021) wash over us.
Quick action
Right now the government can’t afford to delay. We’ve backed them into a corner on capitals gains tax and it’s firmly off the agenda. Other tools are needed to force the foot off the accelerator.
A temporary emergency measure to cut all lending on investment properties to zero would give policymakers and owner-occupiers a chance to breathe and phase in a new suite of measures.
If investors have the full value of a property value in cash, they should still be able to buy. This helps retirees looking for yield. But let's not keep fuelling the market with investors leveraging up their capital gains over and over.
Solutions
A short round-up of the most widely talked about solutions are:
The government paying for infrastructure in new subdivisions to lower land prices, and offsetting it against the GST earned on the new property.
Altering the Resource Management Act, which is already under way.
Increasing the size of deposits required by investors (LVRs). This is occurring over the next three months but seems unlikely to control demand.
Implementing a debt to income ratio (DTI) with standard rules so borrowers are restricted to a multiple of their income as a mortgage.
Implementing stamp duty when an investment property is purchased to give owner-occupiers a pricing advantage.
Increasing the bright-line test to 10 years so only long-term landlords get free capital gains.
An annual land tax for property investors.
Charging council rates on land rather than capital values to penalise land banking.
A ghost housing tax on empty property.
Controlling the gear stick
Property has become highly politicised in New Zealand. Our government urgently needs to hand over a set of policy levers to the Reserve Bank and set up a price stability committee. With tools such as LVRs and DTI settings at their disposal, much of the heat can be transferred to an independent body.
Importantly though, the government must also make a decision on some form of taxation that isn’t a full-blown capital gains regime. Extension of the bright-line test and investor-based stamp duty would go a long way as softer substitutes.
Banks are already indicating fear to shareholders
In a strange turn of events, who would have thought we’d see banks regulating themselves before the government had a chance? Some are already demanding 40 per cent deposits on investment properties and one bank has stopped lending to investors building new houses.
It seems counterintuitive when new housing supply is crucial, but for those who struggle with sign language, it’s an indication of panic and a nod to shareholders that they don’t want more exposure to the New Zealand housing market at this price level. They see risk on the upside for interest rates as a flicker of inflation appears.
Banks only do these things when they have fears for their future profits – not because they are kind, moral types that want our kids to be able to afford houses. It’s simple shareholder protection.
A stable market rather than one fuelled by the crack cocaine of liquidity from a global pandemic is far preferable to any banker.
Janine Starks is the author of www.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.