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Stand Above The Fear And Hysteria

Chartered accountant Matthew Gilligan, who specialises in property, takes aim at years of policy decisions that have targeted landlords.

By: Matthew Gilligan

1 August 2022

It has been disappointing to watch the plethora of contradictory policies coming out of the Ardern Government and the Reserve Bank (RBNZ) over the last five years.

There is zero accountability for the blunders that seem to be arriving thick and fast – just PR spin and denial that anything is wrong. A quick chronology of property investor grievances follows, coupled with advice for landlords and homeowners.

It started in Labour’s first term with the vilification of property investors for house price inflation, and accusations they had caused the wealth gap. We were called tax cheats after a free ride. Stamping it out would be so easy, the government said. They would build 100,000 houses just to start, because it was as simple as saying so in the election lead up.

This anti-landlord narrative was not only offensive; it was incorrect. As the government has discovered, NZ faced conservative zoning rules that prevented densification (everywhere except Auckland), services shortages, and many councils exhibited blatant anti-development behaviour and were/are short-staffed. Every aspect of the house building industry was (and is) severely supply constrained, not to mention significant building supply monopolies pushing up costs.

But none of this featured in the Ardern Government’s narrative. Instead, what we had was “greedy tax-cheating speculators” (property investors) pulling the strings to get high rents and capital growth. It went down a treat at the polls.

It was then a natural extension of Labour’s PR to label property investors unreasonable and overbearing in their relationship with tenants. This justified Associate Minister of Housing Kris Faafoi’s anti-landlord tenancy laws, brought in to remedy a problem that never existed. Now a marginal tenant does not get a look in with private landlords; it’s not worth the risk with no-cause terminations removed. So such tenants rebound into the emergency housing pool, which has exploded in demand under Labour by nearly 20 times.

Broken Promises

The government stated emphatically that there would be no tax changes if re-elected for a second term. Within 100 working days of the 2020 election they broke that promise with the announcement of the astonishing removal of interest deductions on second-hand houses (a back-door capital gains tax). These tax changes caused an exodus from social housing. Investors began to exit second-hand houses in disgust, until the government exempted social housing from the interest non-deduction rules. They had to do it; they were losing houses faster than landlord votes.

And with private landlords accounting for over 80 per cent of rental housing in NZ, the Crown had a big problem on their hands.

After a bull run in the overheated housing market up to 2017, we had the anomaly of petrol being thrown on the housing fire, via cheap and loose credit in 2020 and 2021 under Covid response provisions. Apparently the RBNZ and government could not join the dots between loose credit and cheap interest rates, and massive house price inflation.

There is no doubt the Labour Government and RBNZ caused a second and premature housing boom, only three years after the 2017 peak. There is no doubt that excessive government spending continues to spike inflation (as I write). We shouldn’t be in this position, because rates should not have been dropped so low; LVRs should not have been relaxed as they were.

Now the correct solution is tighter fiscal policy coupled with tighter monetary policy. But Robertson’s only answer is to raise interest rates and punish house owners. And high rates will cause mayhem in the construction sector, not to mention a recession. Waving the flag of inflation and monetary policy, this RBNZ and the government will (in the next 18 months) destroy the lives of many fledgling homeowners as interest rates skyrocket from 2 per cent to the 6 and possibly 7 per cent-plus range.

On top of all of this we have the enduring CCCFA debacle, with banks forced to count savings as expenses to work out borrowers’ budgets at a micro level, etc.

What's Next?

I think high interest rates will cause a recession, with a massive contraction in consumer spending. Inflation will come down rapidly, but I also predict the RBNZ will push the rates too high, for too long. Next we will have a dropping of interest rates to re-stimulate a crashed and recessionary economy. I expect one to two years to get to this point.

‘The Nats will come in, reverse the tax changes, and open immigration doors’

The Nats will come in, reverse the tax changes, and open immigration doors. A flood of migrants will mop up surplus housing that is emerging due to zero migration under Covid and massive building programmes that are ongoing.

Following this (distant) OCR drop to re-stimulate an economy smashed by anti-inflationary monetary policy, house prices will eventually recover, and the long-term cycle will restart house price inflation. How long this takes, no-one knows, especially with the backdrop of global financial uncertainties, war, and offshore inflationary pressures.

Tips For Investors

The market is going down again. Note the use of the word “again” – this is part of a long-term boom-bust cycle. We are in a downturn. What tends to happen in downturns is the media commentators loudly sound the alarm, stating that the property market is going to crash permanently and possibly never recover. This time it’s different they say. And while the facts of the day look different, the pattern repeats. Boom, downturn, bust, recovery, repeat.

Meanwhile, the media rolls sometimes questionable economists, like the one that predicted a housing bust in 2013 and refused to buy a home, saying it was smarter to buy shares and rent. He missed a double boom and, along with anyone taking his advice, got poorer in relative terms. This guy was all over TV in 2013 giving incorrect advice, and he is still there telling us what to do and talking to government. It’s only funny because it’s true!

But because property is cyclical, at some point these doomsayers are eventually right (for a period), the market recedes, then the downturn passes, interest rates settle down, the clouds disappear, and a better market emerges. And on it goes over 10 years. It’s a cycle, although this 2021 boom was a break in pattern with a double boom (thanks to the above-mentioned government and RBNZ mistakes in regard to ill-conceived monetary policy). So following a double boom, I expect a double-sized bust, unfortunately.

While all of this negativity is happening, experienced investors keep level heads and take advantage of the market conditions. They play the long game, not the short game. They stand above the fear and hysteria of the media. I’m buying at present, and getting the best deals I’ve seen in years. And I’m confident the assets I’m picking up will recover in value; it’s just a matter of time.

So for property investors, my advice at present is the following.

  • Choose better leadership in the next election. This country really is going to the dogs (financially) under this well-meaning but incompetent government.
  • Invest counter-cyclically. A downturn is an opportunity over 10 years. The season for buying assets at bargain prices is returning.
  • If you are distressed, take a 10-year view, and don’t panic. What will your property be worth in 10 years? Answer: more than today; inflation will make sure of that. Don’t dump your assets if you can afford to hang on.
  • Get lines of credit in place – now, while you don’t need them. It can be very hard to get credit if you’ve lost your job in a downturn.
  • Think about the recent tax changes and how they will affect your cash flow – don’t ignore this and then get a nasty surprise when your accountant presents you with a tax bill from Labour’s interest non-deduction rules.
  • If you are in trouble with your bank, communicate with your bankers and act early. They tend to shoot the borrowers who don’t respond or don’t react.
  • As always, ask for help from experienced investors and experts if you need it.
  • Check our online GRA workshops at www.gra.co.nz/events/upcoming-events. We stay on top of the market; we are not just tax people.

To investors I say all the best with the coming recession. Get prepared for whatever your household circumstances are. Hopefully, that includes expanding your portfolio. Some of the best deals are done in the down market, so stay alert during what will be a volatile period in NZ housing in the next 24 months.

(Note, this is a cut-down version of my article – you can read the full version at www.gra.co.nz.)

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