NZ's property pincer movement

Wellington, New Zealand's capital, is a famously compact place. Politicians, bureaucrats and journalists regularly bump into each other walking up The Terrace and back along Lambton Quay on their way to and from The Beehive - the national parliament building - and the main ministries.

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The top floors of the Reserve Bank of New Zealand and Treasury buildings are less than 100 metres away as the crow flies from the 7th and 9th floors of the Beehive where Finance Minister Bill English and Prime Minister John Key pull the financial levers of Government.

" The differing responses over the last month to accelerating house prices on both sides of the Tasman reflect the different sizes of those gaps."

Along with the lack of state governments, an upper house of Parliament and a divided financial architecture, New Zealand can find it easier to do 'joined-up' Government with its Reserve Bank, despite its statutorily independent status as the joint banking regulator and monetary policy operator.

The gap between Governor Graeme Wheeler's office and the Bill English's office is literally as close as a two minute walk. The gap between APRA's George St headquarters, the Reserve Bank of Australia's head office in Martin Place and Treasurer Joe Hockey's Canberra offices – let alone between the lower and upper houses of the Federal Parliament – can seem like a canyon.

The differing responses over the last month to accelerating house prices on both sides of the Tasman reflected the different sizes of those gaps, particularly over the last month as New Zealand's Government and Reserve Bank joined up in a pincer movement to address Auckland's runaway house-price inflation.

They didn't start out in a joined up fashion. Reserve Bank Deputy Governor Grant Spencer called in a speech on April 15 for the Government to do more to help the financial regulator control the risks of an Auckland property market where prices have risen 18.9 per cent over the last year.

He called for more effort from the Government and the Auckland Council to ease planning and infrastructure restrictions on new housing supply and, more importantly, for the Government to reduce the tax incentives for rental property investment.

The debate in Australia is around the practice of negative gearing, whereby losses on leveraged investment properties can be offset for tax purposes against personal income.

That practice was made more difficult in New Zealand after reforms in 2010 to rules around Loss Attributing Qualifying Companies (LAQCs). The reforms made it harder for property investors to shift losses to other family members and to arbitrage the difference between the company tax rate and the top personal tax rate.

In New Zealand, the debate is around the lack of a Capital Gains Tax for property investors. Spencer's call for the Government to revisit this area put extra pressure on the centre-right National Government, which won last year's election by campaigning against a Labour proposal for a Capital Gains Tax on rental property investors and businesses generally.

The pressure on the Government and the Reserve Bank ramped up again in early May when the Auckland Council suspended approvals for new housing developments in 'greenfields' areas because it wanted more central Government funds for roads, water and public transport infrastructure.

The Reserve Bank's own admission that it may have to cut interest rates later this year because inflation is well below its 2 per cent target added to fears that Auckland's property market looked like a 'one way bet', given record high net migration, a shortage of about 25,000 houses in Auckland, no restrictions on non-resident investing and strong employment growth.

The first arm of the 'pincer movement' came from the Reserve Bank on May 13 when it announced rental property investors in Auckland would not be able to borrow more than 70 per cent of the value of a property.

The bank imposed restrictions on all property lending with an LVR above 80 per cent in October 2013, but the targeting of Auckland rental property investors from October 1, 2015 was an escalation of the controls. The bank repeated that it would also increase capital requirements for rental property mortgages.

By mid May English and Wheeler were quietly in discussions about how the Government could work together to slow down Auckland's house price inflation, which English has warned is unsustainable, is increasing the cost to the Government of rent subsidies and is a factor worsening child poverty.

The Government's rapid turn-around crystalised in the announcement just days before the May 21 Budget that it would introduce a so-called 'bright line' test for rental property investors.

This would mean any capital gains on properties sold within two years of purchase would be categorised as trading income and taxed at regular income tax rates. Key presented the change as a toughening up of the existing tax rules for property traders, but he was accused by some of effectively introducing a short-term version of a capital gains tax.

The Government also sharpened the reporting rules for non-resident investors, ensuring they would have to open a bank account here, obtain a New Zealand tax number and report their passport numbers and home country tax details.

It also announced non-residents selling within two years would have to pay the capital gains tax through a withholding tax. This package, which also applies from October 1, effectively became the second arm of the pincer movement.


Opinion is divided on whether the Wellington-driven pincer movement will actually slow down Auckland's property price inflation and the Government itself has made the policy so quickly it hasn't had enough time to model its effects.

The Reserve Bank estimated its targeted LVR restrictions could reduce Auckland's annual house price inflation rate by two to four percentage points.

It also pointed out that rental property investor lending in the now-banned 70 per cent to 80 per cent range made up $NZ16.3 billion or almost 43 per cent of all new lending in the eight months to March, suggesting the impact may be bigger than some think.

It may be more immediate too, given the Reserve Bank has asked banks to comply with the 'spirit' of the law immediately, rather than waiting until the October 1 start date.

The Government said it had not had time to model the effects of its new 'bright line' test on either tax revenues or house prices.

But the underlying drivers for Auckland property prices remain in place, as ANZ's New Zealand CEO David Hisco pointed out this month.

"The only way house price inflation will ease is if there's a dramatic increase in supply or a dramatic decrease in demand," Hisco told the New Zealand Herald early in May, although he warned that rental yields were low.

"Right now, I wouldn't buy unless I had to find a place to live. Net property yields are quite low and there are other reasonable yields around that are more liquid than property if investing is what you want to do."

Also, nothing announced this month changed the outlook for chronic under-building in Auckland and record high net migration in particular.

"It's like adding 100 people a day to the Auckland housing market. That's Monday to Friday 100 new people fronting up and saying 'what's for sale'," Hisco told me earlier this month.

"That's a lot of pressure on the market unless you're building houses at the same rate or something else is changing, so it's hard to see how that will ease," he said of house price pressure.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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