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Image via Getty

Peter Williams: The government’s wonky ideological housing plan

Peter Williams 24/03/2021

OPINION: What do you think about all of the government’s announcements, not to mention broken promises and wonky ideological thinking that came out yesterday? Will they make any difference to house prices? Will they put you off becoming a property investor? 

Because it’s early in the day, I’ll give them - the government, a bit of credit. The $3.8 billion allocated for new pipes and roads and wiring and lights which will open up more subdivisions is a good idea. But can we trust them to actually spend the money and do the work? Therein lies the issue. 

These guys have always been very good at announcing stuff, but never actually following through. Just how are those “shovel ready projects” actually going anyway? The idea of training up more apprentices and training more people to build houses is a good idea too, except that it takes three years to become a qualified builder and even longer to be able to run your own project, so the fruits of that are still a long time away. 

Frankly, if I’d been the government and had $4 billion to spend on infrastructure, I would have gone for the jugular and just went and bought some land, changed the consenting processes to speed up the building and got on with it. Not just the infrastructure, but the actual houses as well. 

I know it’s the best part of 85 years ago now since it started, but the first Labour government’s much-lauded state housing programme was just that - a housing programme whereby the government built real houses. Would that have not been the better thing to do, ramping up the speed of statehouse building and offering incentivised schemes like rent-to-buy? 

But the fundamental issue remains - the lack of land to build houses on, and the time and costs it takes to get consent. There were absolutely no moves made to increase the amount of land available to build houses in Auckland, despite the Labour Party saying 4 years ago they would extend the Auckland Urban boundary. Oh well, another broken promise.

Then there is the matter of the broken promise on the bright-line test. Oh well, I guess we didn’t expect anything different. This had been well signalled and was easily predicted because it’s some low hanging fruit. Will it actually make much difference to seller behaviour? 

I have my doubts, if you are a property investor and you sell a house for say $100,000 more than you paid for it less than 10 years later, you’ll still have an annual return of six per cent on your money, which is more than what you’ll get in the bank. And as well you’ll have collected the rent along the way. So it’ll still be one of the best investments going around because until we build more houses, there will be a shortage of houses for people to live in. And if there is a shortage of houses, in other words, more people and households wanting a place to live in than there are places available, then the demand for them will remain high. Pretty simple really. 

As for Grant Robertson breaking his promise about not increasing the period of time for this bright-line test, have you ever heard so much pathetic spin from a government minister before? He now claims that last year before the election when he specifically promised, under repeated questioning that he would not increase the number of years for the bright-line test, that he was just too definitive in his statements. 

Isn’t that outrageous? It’s a broken promise, Grant. How can we trust politicians when you go ahead and make brazen changes to things you have said during an election campaign? The answer is that we cannot trust politicians much anyway, but this broken promise and the ridiculous justification for it certainly takes the cake. But Robertson knows he’s done this early in the election cycle, and come 30 months from now when we all have another vote, most people will have forgotten about it.

And then this other nonsense, removing interest on investment property borrowing as a tax deduction is just pure ideological socialist nonsense. It probably hasn’t occurred to most inside the Labour Party that owning an investment property is actually a small business. It provides a service because it offers people the opportunity to live somewhere. It’s obviously a service which is in demand. That service comes at a risk and a cost to the provider. Yes, the provider of the service will possibly make a profit from it, but then that is the idea of business is it not, to make a profit? 

So when any business adds up the income and the expenses at the end of a financial year, they only pay tax on the surplus. The expenses, the costs of providing a service, are listed and the more expenses you pay, the less your profit is and the less tax you pay. I mean, is that not basic accounting? It’s a concept that exists in business across the globe. 

And frankly, when a business is expanding, growing, especially in its early days, it’s using borrowed money upon which interest is paid and that interest is a genuine business expense. It is not a “loophole” as the Prime Minister disgracefully suggested yesterday. Even more disgracefully journalists, who obviously have no clue about investing and business, parroted the Prime Minister’s expression. It is yet another example of unquestioning journalism that we have become so used to. This is not a loophole. 

What other business has its interest expenses denied tax-deductibility? Absolutely none. If you want to borrow a hundred thousand dollars to invest in any other kind of business, you’ll pay interest on that, probably $5000 a year, and when that hundred thousand dollar loan helps you make a $50,000 profit you’ll be able to expense that $5000 of interest and only pay tax on $45,000. 

Now, tell me what is so different between a business making goods or providing a service, and a business providing accommodation in a time of a housing shortage? Don’t tell me, housing investment is not a productive economic activity? What could be a more important part of a productive economy than providing people with places to live? 

The writing off of interest as a tax deduction is just an absolute disgrace. It’s by far the worst part of those measures announced yesterday, and as I see it the only losers are going to be those who will be paying rent. 

If landlords, running their small business, cannot make genuine expense deductions on their operations and still need a worthwhile return on their investment, there’s only one way to do that and that’s to increase the revenue, the income - and that means putting up the rents. 

And if you think people won’t pay the increased rent, then think again. We all know of stories whereby up to 50 people or families or groups of flatmates, sometimes more, are applying for a rental property because there are just not enough of them. I think that the removing of interest as a tax deduction is an idea so bad it defies belief. It is not a loophole. It never has been a loophole. It is woolly left-wing thinking of the worst possible kind.

If this government wanted to make houses more available and more accessible to first home buyers, as they say these moves will do, then one very straightforward move would help - remove the loan to value ratio, the amount of money required for a deposit, and make a home loan entirely dependent on the borrower's ability to repay. 

So if you’re a young educated professional aged say 25 and you’re making $70,000 a year - and that’s not uncommon, you’ll be taking home about 55,000 or around a thousand a week. Now if you find a house for say $700,000 and you don’t have a deposit, but you’re assessed by the bank as having good prospects and a steady job why shouldn’t they lend you the whole 700,000. The interest on that at 3 per cent is just over $400 a week, you pay off a bit of principal each week and your outgoing might be $450 a week. That’s $450 better spent on owning a house than on renting. Yet at the moment, for you to buy a $700,000 house you have to save 140,000 for a 20 per cent deposit. That’s stupid. 

In days gone by, your ability to repay the loan, or to meet your commitments, was the most important criteria in whether you had a mortgage. The LVRs have stopped so many potential first home buyers dead in their tracks. Socking the landlords with no interest deductibility or extending the bright-line test I reckon is just tinkering around the edges. And don’t call housing a non-productive investment. 

It’s the basis of production in any economy, is it not?

Are landlords and investors the real problem here? Or can it all be sheeted back to a simple concept - we just have not built enough houses for a long time, and it will take some time to fix that?