Ashley Church: The fuse has been lit on housing bomb

Other than the longawaited news of a ‘travel bubble’ with Australia, few recent government announcements have been anticipated more than the trumpeted release of a suite of measures to address the issues facing the housing market.

Sadly, however, the reality of the announcements falls far short of the hype with one exception – but I’ll come to that later. The announcements comprise a selection of documents all laid out without a hint of irony or humility. This section, which swings between defending the indefensible and taking credit for the achievements of the previous government, paints the construction of 800 Kiwibuild homes as a success despite the fact that the original target was 100,000.

To be fair, not all of the announced initiatives are without merit. The decision to increase income and price caps for those who qualify for the First Home Loan Scheme is a long overdue response to a problem which has been brewing for two or three years, and the investment of

$3.8 billion in a contestable fund to work with councils to develop the infrastructure required for new housing developments is a practical measure that will help to make a real difference. These moves should be applauded.

But such pragmatism is quickly overshadowed by the large dollops of ideology which underwrite the essence of most of the other measures, particularly the decision to increase the bright-line test to 10 years, despite no logical reason for doing so. But the real game changer in this package is the decision to remove interest deductibility on property investment mortgages.

First, let’s understand what this actually means. The ability to treat interest as an expense for tax purposes is an internationally accepted aspect of business tax practice.

If my business generates $100 and my expenses are $75, my ‘profit’ (the amount on which I pay tax) is the difference, $25. The interest paid on an investment mortgage has always been understood to be such an expense, but the effect of this change is that it won’t be in future. The consequences of this are huge and will dramatically increase the tax bill to the average investor.

Inevitably, this measure will lead to a full-blown rental crisis characterised by stagnant (or falling) numbers of rental units, a big spike in the cost of renting, and huge pressure on the Government to build even more state houses to fix this new housing crisis.

And here’s the starkest truth. Neither this measure, nor any of the others in the government’s announcement, will make the slightest bit of difference to house price inflation. Prices will continue to rise and the latest suite of measures will become just another footnote to a long list of failed policies.

It kind of makes you wonder what all the fuss was about.