Housing crisis: Fall in prices 'possible' thanks to landlord tax crackdown - ASB

A fall in house prices is "possible" over the next six months thanks to the Government's recent housing announcement, ASB says.

The bank, one of the 'big four' in New Zealand, says it's expecting a drop in demand for houses at the more affordable end, with "first-home buyers... now likely to be the group setting the price at the margin", not investors.

The Government in March said it would phase out the ability for property investors to offset their interest expenses against their rental income when calculating their tax liabilities (something owner-occupiers can't do), unless they were investing in new builds. 

In its latest weekly update, ASB said the added expense would likely drop the price an investor would be willing to pay for a typical property by 30 percent, if they wanted to keep making the same kind of money.

"In reality, rents are likely to bear some of the adjustment and it is also probable that a return to pre-existing cashflows is unlikely," the bank said.

"Nevertheless, the price an investor would now be willing to pay for a property will clearly be less. At the lower end of the market, where investors are most active, first-home buyers are now likely to be the group setting the price at the margin. But they will be doing that in a market that remains undersupplied.

"For that reason, we expect house prices will still get a degree of support: from this month onwards, we expect house prices will be roughly flat through the middle half of 2021."

That would still result in an annual price rise of around 10 percent, well above inflation and wage growth, because prices have spent the first couple of months of the year skyrocketing. 

And despite the changes, ASB expects prices to keep going up - just not as quickly as before, at 3-5 percent a year, still ahead of inflation and wage growth. 

"Essentially, we expect the heat to sharply come out of the housing market over the next six months, rather than the gradual moderation we previously expected. 

"Slight month-on-month price falls may be possible if investor demand changes abruptly over the next couple of months, much as happened last year after the initial lockdown was imposed."

The main problem remains one of supply. The details of the tax crackdown are yet to be finalised, but it's expected they'll exclude new builds. 

"The weak price signal for developers, plus uncertainty over whether/exactly how new builds will be exempt from the loss of interest expense deductibility, will be a drag on construction activity this year," ASB said. 

As for rents, while Finance Minister Grant Robertson says they'll be kept in check by supply and demand pressures, ASB expects them to go up faster than before. 

"Property investors on a 33 percent marginal tax rate will effectively face a 50 percent increase in the debt servicing costs. It is inevitable that some landlords will attempt to pass some of that cost on."

Robertson recently refused to rule out introducing caps on rent hikes, prompting talk rent controls could be on the way. ASB said while this would help people already in rentals that have caps applied, others would face even faster hikes.

"Future would-be renters tend to face shortages of (rent-controlled) properties, as few incumbents want to give up their windfall gain and private landlords shy away from providing rental stock. Properties tend to either be undermaintained (New York's post-war experience) or can be over-renovated in order to boost the rent if such adjustments are permitted (which impacts rental affordability).

"Berlin’s year-old rent controls on pre-2014 dwellings have created a shortage of rent-controlled properties while sharply boosting the rents of exempt new builds, as new renters have little alternative."

ASB even warned gangs could get involved in the housing market if some properties were allowed to be rent-controlled.

"A thriving black market has developed for sub-leases of rent-controlled dwellings, which has attracted criminal gang involvement and even sparked homicides," it said of Sweden.

"In summary, a policy that distributes the benefits irrespective of need, and potentially constricts rental housing supply in the midst of a housing shortage, may not help resolve NZ's problem of an expensive and undersupplied housing stock - for both would-be owners and renters."