How to manufacture a rental crisis

Dr David Law
Insights Newsletter
26 March, 2021

The government is at it again. They blame everyone but themselves for high and increasing house prices resulting in low housing affordability.

Late last year, the Prime Minister claimed that increasing house prices was due to migration. That was despite the border being closed and net migration having been close to zero for many months. On the other hand, the Resource Management Act and highly restrictive overseas investment rules continue to restrict housing supply and accommodative monetary policy is fuelling demand.

Now the government's wrath is aimed squarely at the evil property ‘speculator’. It seems they will never hit the mark.

For those of you who may be confused, as I was, a speculator in this context is anyone who voluntarily invests their capital to provide rental services to a willing buyer in a mutually beneficial trade. In economics, we would usually refer to such an agent by a less politically loaded term, such as a seller or a firm, hence my confusion.  

Renters are not all victims of exploitative landlords either. They include people who do not wish to own their own home for various reasons or who may have insufficient capital or income of their own to service a mortgage. Renters will, however, become victims of the government's latest package of housing policies as they become caught in the crossfire in the ‘war on property speculation’.

Two components of the new housing package are particularly problematic. The bright-line test has been extended from five to 10 years, contrary to Labour’s pre-election messaging. That means many more landlords will be subject to a capital gains tax than previously, and at a rate amongst the highest in the OECD.

Second, a supposed tax ‘loophole’ for landlords will be closed. They will no longer be able to deduct interest on mortgages from rental revenue for tax purposes. This is the single largest expense for most landlords and is not a loophole. All other businesses in New Zealand are subject to tax based on their net rather than gross revenue and can offset their operating costs for tax purposes.

The consequence of these two changes is that the costs of providing rental accommodation will increase significantly. The outcome is easy to predict. There will be less rental accommodation on offer and higher rents. Renters interested in buying their own home in the future may find it even more challenging to save for a deposit.

How will the government react to the new rental crisis that will ensue? I suspect rent controls may be in our future – a similarly dubious policy that would reduce rental supply and quality even further.

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