Definition: "An unintended consequence (or perverse incentive) is a driver that works against the objectives sought from the instrument".
Yesterday the government announced a few changes designed to "tilt the balance to first home buyers".
I have always been quite interested in this dynamic that plays out between "First-Home Buyers" and "Investors".
For years we all had to work hard and save for our first home. It is a part of Kiwi life that seems ingrained in us - "You must own your own home". Some of the most successful people (including property investors) actually rent. A recent podcast I shared on my Toby Pascoe Property instagram account interviewed Elon Musk (worth $250 billion dollars) who discussed selling all his homes because that just took up time in his life and he was happy to rent! Go figure.
What interests me is the abuse that is thrown towards investors, most of which by the way (around 80%) only actually own one extra home to their own, indicating that most are mum and dad investors simply trying to build a retirement pot or get ahead so that they are not one day a strain on the system (government super, public healthcare system etc).
So what happens when one becomes a home owner? Well usually after about two - five years, depending on where your home is in the country, you work out that you have built up a chunk of equity in your home, and you start to think "well what could I do with that?".
You start to google, read, listen or ask Siri "what could I do with my equity". Ding! The lightbulb goes on and the moment comes when one realises they could do one of a few options:
- Build a new dream home using the equity built up in the existing home as a larger deposit.
- Purchase a Bach.
- Borrow more of the value of the home and do home improvements.
- Purchase an investment property using the equity built up as a deposit.
These are all forms of investment. In all of those options you are extending your financial situation (lending more money or using built up equity) to improve your future financial situation or standard of living.
So the dynamic that interests me? When in a given period of time a New Zealander is a first home buyer struggling to find a home, struggling to get lending, all the while being told by the media and then reinforced by the government with yesterdays actions that investors are to blame - only then to find a home, get the lending from the bank, become a home owner and then literally the day of settlement be on the other side of the coin - A HOMEOWNER - and probably start thinking ahead to the day that they can purchase some sort of second property.
Overnight people flip camps. Its an amazing piece of human psychology that up until yesterday had alluded me to how it occurred.
Then yesterday the government reinforced this carefully constructed story by the media and other commentators that investors are the enemy. Our own government went after 130,000 landlords (5% of NZ voters!) and implied "the housing problem is because of investors, developers and second home purchases".
They have put policy out there that poses a real conundrum for investors who own existing built properties, especially with removing the ability to tax deduct interest expenses on the home loan of that property.
The possible un-intended consequences
- Investors sell up and get out of the property they own.
- Investors increase rent at the next rent review to make up for the extra thousands of tax they may need to pay.
- Investors make no change and absorb the tax themselves - but what happens when they go to sell the home?
With all three of these options you have high chances of a good tenant losing their home, higher rents or higher sale prices at the end.
The other policy - an extension of the bright line test (capital gains tax introduced by the National government on non-main homes). An extension from five to ten years on existing built properties purchased after March 27th 2021. New build homes are exempt.
The possible un-intended consequences:
- Investor demands a higher sale price in the end to recoup the tax take.
- Investors don't enter the property market at all, leading to a demand for rental properties = higher rents.
The government & media have created an enemy out of ordinary New Zealander's who provide warm, dry, safe housing to thousands of Kiwi's, a lot of whom are not ready to purchase their own home.
It takes time to save for a first home and yes I agree that the time is getting longer recently, but during that time people need somewhere to live. Rentals provide the answer.
The irony of this whole situation is that the weight of a countries government is behind chastising investors, but millions of Kiwis are actually already investors. If you have a KiwiSaver or Superannuation fund you put money into - you are an investor.
We don't see the government attacking KiwiSaver holders, even though the very equities (shares) we purchase through our KiwiSaver are potentially contributing to the building of a share market bubble and high overvaluation that is more likely to burst over the next few years and cause a whole array of problems.
The 'Shiller P/E Ratio' currently rates the US S&P 500 market in "extreme bubble" territory. The only other times were the Great Depression in 1929, and the Tech Bubble in 2000. Where is the government on this one?
The supply of housing has been an absolute failure in New Zealand. The waiting list for housing has grown fro around 6000 when Labour first took office in November 2017, to over 20,000 in August 2020. Kiwibuild fell over. The rent to buy scheme is slowly sinking.
Under Labour house prices have grown approximately 11.42% per year since November 2017.
Compare this to the nine years under National where the average growth rate was 5.34%.
"Well this is just unprecedented times" you might say.
Under Labour between 1999 and 2008, house prices grew at an average rate of 7.80%.
Remember as well, that as discussed in a previous blog, while wages grew 0.38% more per year under Labour since 1990, the house price to income gap grew 28% quicker than under National.
But I am a firm believer that this is still an issue caused by successive governments. It is an issue of supply and lack of it with both National and Labour passing it onto each other. A recent Stuff article in February quoted Housing Minister Megan Woods - "recent advice puts the gap at around 28,000 to 200,000 homes short".
28,000 to 200,000? Thats only a 614% difference... How much are those advisors paid to come up with that difference - its concerning that the range is so wide.
The government is playing the best game of hide and seek seen in recent years. Hiding from the actual problem - supply, so that the New Zealand public doesn't seek out the thing in the way of the answer to the problem - government.
Government needs to support developers, 'Mum & Dad' investors and home owners, young and old, to grown the housing supply in New Zealand. We are already seeing over the last 12 months a boom in consenting for new build homes. We are doing it! So grow it even more. The funding provided for infrastructure yesterday is a good start, so there was no need make this an "investor problem"
New Zealand should be doing everything it can to create the biggest construction boom we have seen. Construction has an amazing effect on an economy.
There is a theory of money 'velocity' - meaning the effect that one dollar of money pumped into an economy actually has.
There are industries in the economy where if you spend a dollar, that dollar will go from you to the seller of the goods/services and then go no further except into their back pocket.
With construction, the dollar goes to the builder, who then pays their staff, who then go down the street to a cafe at lunch and purchase a coffee and tip the barista, who then gets a taxi or Uber on the way home, who then puts fuel in their car. Perhaps then that dollar stops, but that dollar has gone through so many hands & purchases that it has contributed to accelerating growth in the economy. It was a high velocity dollar, spent initially in a high velocity industry.
Construction seems money to material suppliers, cafes, equipment suppliers, fuel suppliers, transporters, valuers, lawyers, accountants, bankers, property managers, small businesses providing boutique services such as meth testing a rental property and the list goes on from the there.
Where to now for property investors?
Build new! You are doing a good thing for yourself, a tenant, and your country by providing new & up to building & healthy homes code homes.
Purchasing a new build off the plans home can be daunting but there are plenty of places to find support through property investment companies who link purchasers with developers and have systems all the way a long to make it seamless.
Home owners shouldn't panic, the world of property is not ending. Beware of headlines such as "Bank predicts house prices will drop 10% as a result of government crackdown".
Those same banks and news outlets said that 12 months ago during the Covid lockdown. 12 months later the NZ median house price has grown over 20%.
These new policies will have an effect, there will be a slow down in house price growth but that isn't a bad thing. 20% growth is unsustainable, but 3-7% is.
The fundamentals of property still remain - increasing population, scarcity of buildable land, low interest rates, billions in low earning term deposits and it still remains the most effective tangible asset in terms of being able to leverage.
For new builds you still only need a deposit of 20% even for an investment property.
I think it is important to take a step back and turn this into a positive - we have the opportunity as a country to build a whole stock of amazing new homes. If you are a homeowner and can afford a 20% deposit either from cash or from equity built up in your current home, then why not be apart of the team of New Zealander's building homes?
Property is a long term game and time is a healer of all wounds.