Investor caution likely in housing
House prices could drop as much as 10 per cent or 13 per cent over the next three years, it has been predicted.
As more details are revealed of the coalition agreement between Labour, NZ First and the Greens, commentators are picking over the potential policy impacts on the housing market.
Infometrics chief forecaster Gareth Kiernan was expecting a drop in prices before the new Government was announced.
He said a slowdown in population growth and net migration would be exacerbated by the new Government. Prices could come off by about 10 per cent over the next three years.
Investors had been squeezed by a lack of finance, he said, and that had already slowed the housing market. ‘‘Now we are seeing expectations of future capital gains have disappeared.’’
There was a ‘‘chicken and egg’’ scenario at play where investors saw less benefit in putting money into the housing market and even those who were not constrained by a lack of credit felt less incentive to buy. That then slowed the market further.
Nick Tuffley, chief economist at ASB, said the new Government’s tax policy would be the big issue for investors.
‘‘Essentially what we are going by is if something isn’t specifically mentioned in the coalition agreement, it’s likely Labour’s policy will go ahead.’’
That would mean investors could expect to see the end of their ability to offset rental property losses against other income, and to have the bright-line test extended so that a capital gains tax would be applied to any investment properties sold within five years.
‘‘There’s a degree of uncertainty largely for property investors. They’re facing the potential for tax changes that come through to make property investment less attractive,’’ he said.
‘‘What that suggests is, in the short term at least, property investors will remain cautious.’’
Owner-occupiers might feel less pressure to buy, he said, if house prices were not rising as quickly.
‘‘The risk of prices galloping away on us looks very low in the short term.’’
Buyers would have the opportunity to do their due diligence more thoroughly and drive a harder bargain. But if a significant drop in listings continued, that would give buyers less to choose from and would limit how soft prices would be, Tuffley said.
CoreLogic head of research Nick Goodall agreed there would be a more intense focus on property investment and foreign buyers’ activity in the market, which would curb demand.
Labour and NZ First have agreed to ban foreigners from buying existing homes and to set up a register of foreign-owned land and houses.
Prices would probably stay on hold for the next six or 12 months as investors questioned whether it was worth buying with fewer capital gains on offer, lower rental yields, ring-fencing of losses and tighter rules around owning rental properties.
But he was unconvinced prices would drop substantially. For prices to fall, owners would have to be forced to sell.
There was still a lack of supply in many parts of the country and first-home buyers and movers who had been holding back might take the opportunity to buy.
Owner-occupiers would not sell for lower prices unless there was a substantial economic change that altered their financial circumstances – or much higher interest rates that made it harder to service their loans. OPINION: It was encouraging that the first signals from the new Prime Minister on issues concerning business were designed to reassure.
In a television interview last weekend, Jacinda Ardern addressed a major area of concern for business around Labour’s proposed mandatory fair pay agreements, saying she was ‘‘absolutely ruling out’’ allowing workers to take strike action as part of negotiations.
When asked if she was worried she would get ‘‘some sort of winter of discontent’’ from business to her Government, she replied: ‘‘No. No, no, I’m not. I intend to work in partnership. In fact, I had contact with BusinessNZ over the issue of fair-pay agreements during the campaign, and we’ll continue to engage with them.
‘‘Ours will be a government of partnership. If we want to deliver the gains for New Zealanders that we intend to, we’ll have to deliver them alongside the business community as well.’’
One of my colleagues described those comments as ‘‘comforting’’, and I can’t disagree. It wasn’t a response many expected.
Two days later, we got more detail (if not the fine print) of where the coalition Government wants to take us and how.
There were the policies promised in the campaign: raising the minimum wage; cutting immigration; boosting productivity; targeting training and skills; and reviewing and reforming the Reserve Bank Act.
Business supports some of those, others it can live with, but there are others of concern.
There are obvious challenges, particularly for small businesses, in raising the minimum wage from $16.50 to $20 by 2021.
We all want higher wages for everyone. But how that’s done
We all want higher wages for everyone. But how that's done without putting pressure on jobs, prices, and threatening business viability will be a real test for this Government.
without putting pressure on jobs, prices, and threatening business viability will be a real test for this Government.
The issue is how it’s done, because higher prices will quickly take away any gains. Whatever the Government does, it needs to recognise the cost to business, and there are signs it does.
Business will be watching this closely. If this is a straight wage increase, with no mitigation by way of tax relief, businesses will find it hard to implement – at an extra cost of more than $2.3 billion a year in wages.
Similarly, for immigration. Better targeting is needed, but immigration remains essential for business. Bluntly cutting numbers by 20,000 to 30,000 could do damage.
The Government says it will ensure work visas reflect skills shortages and that’s what’s needed. If business can demonstrate it needs skills that can’t be found in the domestic market, it must have the opportunity to import them without too great an impost.
Labour said it would talk to business and we will hold them to that. A proactive regional approach to need, as happened in Canterbury, may be the best way.
Trade remains a concern, and it’s disappointing that a party that negotiated the China free trade agreement seems so quick to derail by renegotiating the next best thing – the TPP11.
They’ve signalled their intention to resume an FTA with the Russia-Belarus-Kazakhstan Customs Union, and that’s positive, but staying out of TPP11 would be a bit of a tragedy.
As a trading nation we must continue to develop high-quality agreements, and if we let TPP11 unravel then access to 450 million consumers could be lost – and we will be at the back of a long queue vying for access.
In all of this it’s essential the Government does not squander the gains of the past few years – a steady GDP track of between 3 per cent and 3.5 per cent, high employment and labour-force participation, low unemployment (at 4.8 per cent the lowest since the global financial crisis), and the highest export growth since 2014.
Wellington industries, including the key film, ICT, and hospitality sectors, face the same threats as others around the country – increased costs, skills shortages and red tape. A ‘‘partnership’’ with a Government that recognises that, and acts accordingly, will be welcome. ❚ John Milford is the chief executive of the Wellington Chamber of Commerce.