Sharon Zollner
Davidson expects the extension of the bright-line test to 10 years and removing tax deductibility from investors with mortgages will be a “line in the sand” – after they have had time to take full effect.
The greater immediate impact, he says, could come through perception/psychology that the housing market game has changed.
“Once people start to think the market might not be a one-way bet anymore, a slowdown will beckon.”
This had been anticipated by many economists, due to factors such as LVRs and reduced housing affordability among other things. Some are expecting house prices to fall by 10%.
The risk, says ANZ chief economist Sharon Zollner is a correction to the housing market is sharper than anticipated.
“It’s difficult for policy makers to engineer a soft landing.”
The bank is going to review its affordability assessments in the wake of the Government’s new policy banning mortgage interest tax deductibility.
Westpac acting chief economist Michael Gordon goes further. He says as the housing market reorients to the new policies, there could be a sharp fall in house prices. This will weigh on households’ willingness to spend and it will also discourage new home construction.
Zollner says it is hard to know how investors will respond to the new policies.
“The impacts might be quite slow burn, as the lengthy implementation period adds uncertainty around the shelf life of these policy changes, and the tax impact is smaller because mortgage rates are currently so low.”
However, accountants and financial advisers are predicting a sizeable tax take for the government when tax deductibility on mortgages stops in four years. Figures of $600 million plus are being quoted.
Landlords and costs
Zollner says some landlords may be able to recoup the higher costs of running a rental property by lifting rents.
“Some may no longer see housing as a viable or desirable investment and will sell. Others (without debt) will be relatively unaffected.
“In reality there will be a mix of reactions, which make it difficult to gauge the magnitude of the response in aggregate. But the new policy is a negative.”
Davidson is in no doubt the scrapping of tax deductibility will deter some would-be new investors and cause some existing investors to sell.
“It certainly helps to improve financial stability, by ensuring that investors put in more equity in order to keep interest costs low – that may benefit experienced investors at the expense of newer landlords, and could see the ownership of rental properties slowly become more concentrated.”
Stepping back, Zollner says there is a lot on the policy front that’s coming to a head as affordability and credit constraints lift and supply continues to gradually ramp up.
“House price falls are hardly unthinkable from such a stratospheric starting point, but the state of the housing market does have a big impact on the economy.”
Zollner says the counterargument to that is if house prices were allowed to rise unchecked still further. The vulnerability of the economy would worsen, not improve, as the risks of a boom-bust cycle rose.
The big negative is the possible impact on renters – the very people the Government is trying to help into the housing market, she says. But ultimately, rent inflation can’t exceed income growth for long.
Davidson says historically they have been anchored by general income levels, even if landlords’ costs have risen.
“There’ll be speculation rents will rise as a result of some landlords looking to recoup extra costs and/or being forced to sell.
“That can’t be ruled out in some cases, but it’s worth noting that other landlords may buy those properties and also ex-renters could now become homeowners instead.”
More houses needed
The big question says Zollner is what happens if investors stop building houses?
“The Government may need to ramp up its construction plans, but that’s only something that’s achievable if capacity in the industry opens up.”
Given the healthy pipeline and persistent under-supply of housing, the worst case scenario probably isn’t one where residential investment tanks – and the Government lifts its home-building game in response. It’s more likely broader economic confidence takes a hit and underlying momentum runs out of puff before international tourism finds its feet again, she says.
While the bright-line test extension and scrapping of tax deductibility will take some of the wind out of the housing market’s sails, Zollner says the solution to the housing market needs to be considered from two angles. Leaning against the price cycle when it gets out of hand; and addressing the fundamental problem of a lack of supply.
Tax tweaks and macroprudential policies can be effective at addressing the former, but they do nothing towards lifting supply.
She says there’s no quick fix. But the Housing Acceleration Fund of $3.8 billion is at least a step towards rectifying the fact local government is not able nor incentivised to provide the investment that enables large-scale green-fields or densification development quickly.
“As long as the projects are carefully chosen to provide maximum bang for buck, it should make a meaningful difference in pockets over the next few years, and provide a case study for a desperately needed new approach to providing housing infrastructure.
“And unlike home-builders, there is actually some spare capacity in the infrastructure sector, so stuff may actually get done. More houses is the only answer in the end,” Zollner concludes.
