Has the recent housing reform made any difference?
The Treasury has released the latest Budget Economic and Fiscal Update 2021 (BEFU 2021) report, revealing the impacts of the recent housing tax changes on its forecasts of house prices, economic growth, interest rates, and tax revenue.
The Treasury indicated that the extension of the bright-line test from five to 10 years for property acquired after the application date had little impact on its forecasts. However, it expects the removal of interest deductibility to have a material impact on house prices.
“Without this tax change, we would have forecast an increase in house prices of 34% over the forecast period. Due to the removal of deductibility, we revised our forecast to around 14%, a downgrade of around 16%,” said Minister of Finance Hon Grant Robertson.
The Treasury also expects more moderate house price inflation to cause more moderate household consumption and residential investment, slowing economic recovery.
“In turn, this will make it more difficult for the RBNZ to meet its inflation and employment targets, necessitating lower interest rates for a longer period. And low-interest rates will ameliorate the downward impact on house prices. The end result was that the tax changes to interest deductibility decreased the BEFU 2021 forecasts for both houses prices and 90-day rates,” the report said.
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The Treasury forecasts the demand for investment properties among highly-leveraged property investors will plummet, resulting in price moderation that would most likely attract additional demand from owner-occupiers and unleveraged investors unaffected by the tax change.
“Our assessment is that house prices around 16% below the counterfactual will equilibrate the market, but this is highly uncertain,” said deputy secretary and chief economic adviser Dominick Stephens.
Speaking of owner-occupiers, the Treasury predicts some increase in demand from this group of buyers – increasing the rate of homeownership.
“However, we expect the bigger impact will be a lift in demand from unleveraged (or low leverage) property investors. The side-effects of this include a reduction in both bank deposits and bank loans and a reduction in domestic funds available to other forms of investment, such as equities,” Stephens said.
The Treasury also suggested that the exemption for new build would likely cause changes in market composition, with leveraged investors moving into the market for new builds and displacing owner-occupiers and cash investors in the existing housing market. In addition, the tax on landlords could result in higher rents.
The report clarified that it is not yet possible to calculate an estimate of the fiscal impact as the policy details relating to interest deductibility are yet to be finalised.
“Instead, we will include a specific fiscal risk (SFR) in the 2021 BEFU document. The SFR will indicate the uncertainty around estimating the fiscal impact at this point in time,” Stephens said.
“While an estimate of the fiscal impact has not been undertaken for fiscal forecasts, analysis of tax outturns from 2018/19 can be used to indicate the order of magnitude expected from this tax change.
“We include a preliminary figure that is subject to high uncertainty and would be likely to differ materially from an official costing. It is expected that there will be more certainty around the design of the policy ahead of the 2021 Half Year Economic and Fiscal Update and that the fiscal impacts will be included at that point.”
