Hamish Rutherford: After months of FOMO, housing measures run the risk of a hard landing


As they released a surprisingly broad package of measures aimed at curbing speculation in the housing market, Jacinda Ardern and Grant Robertson were quick to claim what a surprise the strength in the housing market has been.

It seems a long time ago now, but during the first nationwide lockdown, economists were broadly of the view that a severe economic contraction and the effective end of inward migration would cause New Zealand’s housing market to fall.

Some economists quickly realised that the facts were changing, but as Robertson pointed out, right up to the election Treasury had warned that house prices would fall.

Such warnings have to be taken seriously by any Government, because house prices are as important as an economic indicator as they are a political indicator.

Besides being politically unpopular with homeowners, falling house prices have implications for activity everywhere.

“Private consumption in New Zealand follows house price growth quite closely,” Treasury warned in its pre-election update.

If you believe the value of your home – which for most people is the largest asset they will ever own – is going up, you are more likely to spend. If it is dropping, households are much less likely to go out for dinner, go on holiday or renovate.

Treasury’s belief in early September that house prices were still likely to drop in the following months will go down as a massive mistake.

By early August, the Real Estate Institute of New Zealand had reported that July 2020 represented the strongest month of sales in Auckland in five years, and in the rest of the country in 15 years.

Real Estate agents were reporting a burst of activity and buyers making knockout bids to secure purchases.

There are a number of reasons why house prices have risen so quickly over the past year, but a major driver seems to be the fear of missing out (FOMO) during a period when the Reserve Bank and the Beehive were pumping billions of dollars into the economy in a bid to keep activity strong.

As well as first-time buyers wanting desperately to get onto the property market, wealthy savers saw interest rates fall to zero, meaning money in the bank was effectively falling in value.

That money not only flooded share markets and other asset classes, it kicked into action another generation of property investors seeking a solid place to put their wealth, in an asset class which enjoys considerable tax advantages.

Whether or not Labour believed that house prices were going to fall in September, Treasury’s warning allowed the party to release a tax policy which did nothing to address the problem.

Robertson even explicitly ruled out changes to the bright-line test in an interview, comments which he finally walked back on today.

Whatever the advice was at the time, the Government is now playing catchup as New Zealand’s housing market becomes increasingly unaffordable.

The policy it announced this week runs a strange but significant political and economic risk: it might work better than expected.

The doubling of the bright-line test – the period during which investors are likely to have gains taxed as income – to 10 years would likely have a marginal impact on its own.

The $3.8 billion in funding to make land ready for housing development will take time to lead to more development.

The removal of tax deductibility of interest payments is a significant shift.

While for existing investors it will be phased in over time, it will change the business case for portfolios worth tens of billions of dollars. ANZ said the move was “at the bolder end of spectrum and was not anticipated”.

Combined, the package has economists predicting that the heat could be taken out of the housing market suddenly.

“Today’s announcements indicate significant downside risk for house prices and economic activity more generally,” economists at Westpac said shortly after the package was announced.

The same warning that Treasury made about the risk of falling house prices seven months ago also applies now.

While the risks posed by a fall in house prices might be felt most acutely by those who have recently bought, should it come to pass the changes are likely to be far more widespread.

Whatever house prices were a year ago is now irrelevant; homeowners quickly bank the gains as their own.

Robertson said today that spiralling house prices posed a risk to New Zealand’s economic recovery.

He and Ardern have spoken vaguely of the desire for a “sustained moderation” in house prices. But after such an aggressive increase, achieving a gentle cooling in the housing market is unlikely.

Much of the economic recovery has been driven by strong spending by households feeling confident on the back of rising house prices.

If house prices fall from the current record levels, spending will almost certainly slow, even though many householders will still have more equity in their homes than they had when the lockdown began.

The bigger the frenzy in the housing market has become, the greater the risk that measures to counter it will lead to a hard landing as the market stalls.

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