New Zealand’s housing reforms lead the way on tackling affordability and speculation
- The Ardern government has exceeded its peers by not shying away from policies that address the underlying causes of excessive price appreciation
- Countries that have resorted to scapegoating foreign investors or been reluctant to antagonise wealthy homeowners should learn from the Kiwi example
There are housing bubbles all over the place. The most epic one by far is in New Zealand. Even before the Covid-19 pandemic erupted, house prices were outpacing those in other advanced economies, notably Australia and Canada, two of the world’s hottest property markets.
Just like other countries suffering from unsustainable housing booms, successive governments pledged to make homes more affordable but achieved little. For a while, it appeared Prime Minister Jacinda Ardern’s Labour-led government, which came to power in 2017 promising to fix the housing crisis, would go the way of its predecessors.
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The combination of the sheer scale of the imbalances in the market, the intensity of the public outcry at spiralling prices, and political agreement that urgent and effective action is required, has proved a potent catalyst for reform.
Shamubeel Eaqub, an economist at Sense Partners in Wellington, said the fact New Zealand had “decades of experience screwing things up” in the housing sector made the current reform agenda all the more impressive.
First, the government has empowered the central bank to make house price stability a top priority. While its decision last February to amend the Reserve Bank of New Zealand’s mandate to take home values into account when setting policy stole the headlines, the consequential measures have been on the macroprudential and tax fronts.
Furthermore, policymakers have tilted the playing field away from investors – the main driver of new lending, particularly high LTV mortgages – in the past two years. Instead, they have tilted it towards first-time buyers despite strong opposition from investors’ associations.
Last year, the government stripped investors of their right to claim mortgage interest as a tax-deductible expense. It also extended the period in which profits on the sale of an investment property are taxed to 10 years from five.
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The move is part of a wider effort to ramp up supply to help improve affordability. Restrictive zoning laws, a cumbersome residential development consent process and capacity constraints in the construction sector have contributed to a shortage of housing.
Last October, the government and the opposition National Party announced they had teamed up to pass legislation on overhauling planning laws by allowing the development of medium-density housing in all major cities. The IMF noted that the reforms marked “a major departure” from previous schemes focused on low-density housing.
Yet, given the longevity of the boom, it is doubtful whether the slowdown even qualifies as a correction. The real question is whether the recent reforms can improve affordability and reverse the sharp decline in home ownership. “If ever there was a chance to turn things around, this is it,” said Kelvin Davidson, chief economist at CoreLogic in Wellington.
New Zealand has already made headway by correctly identifying and tackling the underlying causes of the housing sector’s woes. Other countries that have resorted to scapegoating foreign investors, or have been reluctant to antagonise wealthier homeowners, would do well to take a page out of the Kiwi book.
Nicholas Spiro is a partner at Lauressa Advisory
