Housing crisis: Landlord tax changes are 'bad policy' - economist

The Government has stuffed renters to appeal to first-home buyers, a prominent economist has claimed.

Last week tax rules for investors were suddenly changed, meaning the interest they incur on loans could no longer be used to reduce their tax liability. This increased cost won't apply to owner-occupiers or investors contributing to new builds, the aim being to dampen investor demand on existing homes and bring rapidly increasing prices under control. 

"The housing market is the biggest game in town, and has been for about 30 years," economist Cameron Bagrie told The AM Show on Tuesday. 

The value of residential property now adds up to about $1.5 trillion, dwarfing New Zealand's annual GDP of $300 billion.

"The property market it's up there, four to five times the total size of the New Zealand economy. If you look at the market value of the New Zealand stock exchange, it's about 50 percent of GDP."

With all our "eggs in one basket", any changes to the housing market will have a big effect - but the Government made the unusual move of pulling the trigger without waiting for advice from Treasury. 

"What we need is appropriate checks and balances. What that means is we need policy makers to be receiving advice. They do not need to take that advice - that could be what's called a political call," said Bagrie.

"My personal view is that it's bad policy. It's a policy that's going to help out first-home buyers obviously. They're going to skew the battlefield away from the investors towards first-home buyers, but the people that are likely to stuff that are the renters. 

"One of the key economic indicators we're going to be watching over the next six to nine months, it's what happens across the rental market in New Zealand. I suspect they're going to be going up, and that pace of change is going to accelerate." 

Cameron Bagrie on The AM Show.
Cameron Bagrie on The AM Show. Photo credit: The AM Show

The tax changes will be phased in over four years, just like they were in the UK. The effect there was to dramatically slow price inflation. They didn't result in rent hikes - London saw prices go up as usual, while nationwide they've stalled. 

New Zealand's policy goes a bit further though - investors in the UK still have some options for deducting interest costs, while none have been signalled here. 

"What the UK did is equivalent to going halfway to doing what New Zealand did," Westpac chief economist Michael Gordon told Newshub last week

While investor groups have threatened to hike rents, tenants have the option of going to the Tenancy Tribunal, which has the power to reverse hikes if they're deemed above the market rate for the area. And not all landlords will be affected, for example if the property has no mortgage.

Rents have gone up consistently over the past decade, ahead of inflation and wage increases