The Government is reluctant to push down house prices fearing they'll loses the support of those who already own property, according to Bernard Hickey.
The economic and political commentator says the Government should tax capital and wealth and invest significantly in infrastructure in our major cities to combat the housing crisis, he told Breakfast.
“The Government is still very nervous and the reason they’re nervous, and this is the really scary, depressing thing, they don’t want to borrow Government money because if they do that then it might push up interest rates a bit so again, the decision not to build houses is about protecting those who already have houses.”
A report by CoreLogic released yesterday found the average New Zealand property value surged 6.1 per cent in the final three months of last year, with an overall rise of over 11 per cent for the whole of 2020.
Hickey said the economy would survive if there was a significant dip of 30 to 40 per cent in house prices to improve affordability, but it would mean a certain election defeat for Jacinda Ardern and Labour if they oversaw such a drop.
“Some people worry about the banks, cause people might not be able to pay their mortgages if you saw a house price fall, actually the Reserve Bank has done modelling on this, New Zealand’s banks have quite a bit of capital and they could handle a 40 per cent fall in house prices no problem,” Hickey said.
“When I say New Zealanders don’t have a lot of debt, a lot of people go 'what?' Well actually they’re only paying about seven per cent of their disposable income to service that debt because interest rates are so low.”
“If we saw a house price fall of 30 per cent, it’s not going to get me or anyone else elected but it wouldn’t kill the economy, we have to have a debate about what we really want, do we want affordable housing or do we want just a chunk of the population to be really, really rich?"
Hickey said there was no political will to address the housing crisis in a meaningful way while both political parties were competing for median voters in New Zealand.
“We have a massive shortage of houses and a massive demand for houses from lots of people because there is a big increase in our population,” Hickey said.
“Not at the moment, not while both parties are focussed on this middle voter who currently, has just made out like a bandit cause house prices keep rising, in fact, they’ve organised their personal affairs and their small business around that machine of tax from the capital gains that they live in,” Hickey said.
“When you ask both sets of politicians if you want house prices to fall, they climb under a desk and you never see them again. Ultimately that’s the problem, if you want to solve this problem, you have to say to middle New Zealand, the median voter, we think you might have to give up some of those capital gains so that our kids won’t have to wait 50 years for an improvement in affordability.”
The state of the housing market was the result of a perfect storm of increased demand, limited supply, low interest rates and Jacinda Ardern’s guarantee that there would be no capital gains tax “in her political lifetime”.
“A lot of investors have worked out they can make an awful lot of money, tax-free, by buying houses, borrowing more money, buying more houses and that’s the problem the Government are trying to grapple with,” he said.
“At the same time, we’ve just had this big drop in interest rates which means that house prices have jumped 20 per cent and the Reserve Bank forecast this week that in the current two terms of the Labour Government, it expects house prices to rise by 50 per cent and in fact the value of housing to rise by $535 billion on the Prime Minister’s watch.”
“Essentially, it [no Capital Gains Tax] is a Government guarantee, they won’t say it’s a Government guarantee, we asked the Government about this at the end of the last year, what do you want house prices to do?”
“She [Ardern] said she wanted inflation to moderate, well what does that mean? She talked about four per cent on average house price growth, which sounds very moderate, but actually if you want to improve affordability, you want to have prices flat, if not falling.”
“If you do four per cent per year, it barely gets ahead of income growth and you don’t really see an improvement in affordability.”
“If they [Government] were serious, we want house prices to fall 30 to 40 per cent to be back where they were two or three years ago.”
Hickey said there while there were no “silver bullets”, there were three or four measures the Government could use but were “holding back from because frankly they don’t want to push house prices down dramatically, in fact at all”.
“The first thing they could do is tax wealth, tax capital gains in some form, that’s what we’ve had three elections for,” he said.
“We’ve had debates about it, the middle voter who is out there working hard, paying their mortgage says ‘actually I’m a bit nervous about you taking this machine away from me’ because it would change the entire economy and change the outlook for people’s finances.”
There could be a change soon so that “rental property investors can’t claim interest on the mortgage as a taxable expense”, Hickey said.
The Government should also make a significant investment in the tens of billions of dollars in infrastructure, in Aotearoa’s major cities, Hickey said.
“One of the problems is councils are reluctant to help the government build these extra houses because at the moment the council pays for at least half the infrastructure but they don’t get much money back, in fact nothing back from the GST and income tax,” he said.
“We’re in this horrible standoff where the Government won’t pay for this infrastructure, council won’t pay for this infrastructure, investors are jumping in there buying because they can make tax-free capital gains and have been guaranteed that for the rest of Jacinda Ardern’s political lifetime.”
The Government also shouldn’t use repaying debt as an excuse not to spend on infrastructure once the economy recovered from the impact of Covid-19.
“This is the really big third thing, it [Government] says whenever the economy recovers, we want to use the money to repay debt, currently debt is around 35 per cent of GDP, half to a third of what it is around the rest of the world.
“It so good, it’s pleased the bond market so much we actually got a credit rating upgrade last week so there is headroom there for the Government to borrow, to use its balance sheet to solve some of this infrastructure problems.”
“There is a quite doctrinal view that New Zealand must have low debt for a rainy day, well I would say, with the people who are working three jobs, whose kids are getting sick cause the house is mouldy, people are really stressed and they’re paying more than half their income on rent, then you must say this is the rainy day, this is the emergency and it’s now time to use that balance sheet to solve these problems.”