Thomas Coughlan: First-home buyers at lowest level since Labour took office after Government tax changes - is this what success looks like?

OPINION

The Government gave itself a great pat on the back for helping first-home buyers onto the property ladder thanks to its 2021 property tax changes.

The changes meant landlords could no longer deduct interest costs from their tax bills - effectively a tax on landlords equating to $1.81 billion in tax over the four years from 2021.

A little over a year after they were rolled out, former prime minister Jacinda Ardern declared partial victory saying she had “lifted the number of first-home buyers in the market now to 24 per cent of the market”.

She wasn’t wrong. The proportion of first-home buyers then, as now, is high. The number is getting a lot of press, partly because it’s the only part of the property market showing any life.

In May, first-home buyers accounted for 15.7 per cent of new mortgages, up from 11.7 per cent in the same month in 2021.

But that number is only a relative one. The goal of the policy was not to increase the share of first-home buyers, it was to get more onto the ladder.

The success of the policy should also be measured in the number of first-home buyers getting on the ladder, not just the share of the market they make up.

By that measure, the policy has been a failure. Measuring the year to May, the period for which we have data, the last two years have seen the lowest number of new first-home buyer mortgages of any year since the Government took office.

Just 9400 mortgages were written to first-home buyers in the year to May, less than two-thirds of the number written in the same period in 2021 which captured the last three months before the new housing policy began to take effect on March 27.

That figure would be a near-record low if not for the fact that in 2022 just 9219 mortgages were written to first-home buyers.

The current numbers are reminiscent of those delivered under the Key-English Government, of which Labour’s pre-ministerial finance spokesman Grant Robertson used to describe the housing market as “completely broken”.

It’s not all bad news. It’s possible that absent the changes, first-home buyers would have found themselves just another casualty of the downturn, rather than the least-worst-off.

But to describe this as a success is to use a Soviet sort of logic. Just because first-home buyers are not losing as much as everyone else in the housing market, it doesn’t mean they’re winning. Making everyone poorer doesn’t make anyone wealthier.

It’s not clear the changes ever yielded much success. Prices continued to rise for nearly the whole year after they were rolled out in March 2021, beginning to fall only in December, after the Reserve Bank began hiking interest rates. The REINZ median house price rose $100,000 between when the first changes took effect, and when prices began to fall.

The reason all this matters is because the policy is on the table this election, with National and Act promising to scrap it, while Labour and the Greens argue it should stay. If the latter win, it’s likely to survive, becoming simply too costly for a future National and Act Government to scrap, if the former win, then it’ll be gone.

This is one of those rare political issues that can be argued convincingly either way.

The argument for returning to the status quo ante and allowing landlords to deduct interest costs is that letting homes out is a business and landlords, like any other business, should be able to deduct costs - including interest costs - from their tax bill.

This is particularly true when regulatory measures like Healthy Homes standards and the Greens’ proposed strengthening of rental regulations propose to subject the property industry to far more stringent, businesslike standards.

Other businesses can borrow money to invest in bringing themselves up to those standards. Landlords cannot.

The problem for the property industry is they’ve taken advantage of a lax regulatory regime for so long, many letting out slum-like accommodation that no one feels particularly sorry for them having to reinvest in bringing their accommodation up to a more appropriate, liveable standard.

The argument for keeping Labour’s changes is they level the playing field when it comes to purchasing a house. Investors can deduct interest costs from their tax bill, while owner-occupiers cannot. At the point of sale, this gives investors a relative advantage over first-home buyers.

The changes were brought in by former prime minister Jacinda Ardern. Photo / Mark Mitchell

This argument is on a slightly weaker footing.

Owner-occupiers already have an advantage over investors in that they are subject to much looser LVR rules, requiring deposits of just 20 per cent, rather than the 35 per cent taken by investors.

Just how this plays out come election time is difficult to foresee.

One of the most surprising pieces of research published by Treasury (coming with the usual caveat that the research represented the views of some Treasury economists, rather than the organisation itself) during the pandemic found that the Covid housing boom actually reduced inequality. New Zealand’s middle class is still relatively propertied (although property ownership is declining) and rising house prices were reducing the wealth gap between these homeowners and the super-wealthy who owned proportionally less of their wealth in property.

Now we are witnessing the opposite effect, where New Zealand’s middle class watches its wealth shrink, while the wealthy once again break away from the pack.

One tax landmine that has not yet exploded this election, but probably will during the campaign, is the issue around trusts.

Comparatively little is known about trusts, with the best data restricted only to those that declare taxable income. The rest (hundreds of thousands) are a bit of a mystery.

The Greens have proposed a 1.5 per cent tax on assets held in trust, mainly so that trusts cannot be used to avoid the wealth tax. The difficulty with this is that we know very little about how many people will be caught up by this tax and how it will affect them.

The elevator pitch for the tax policy is that it leaves 95 per cent of income-tax payers better off - but that figure is only accurate when speaking strictly about income tax.

Houses in Hamilton. First-home buyers’ share of the market in the first three months of this year reached 33 per cent. Photo / Fiona Goodall

If someone is the beneficiary of a trust, they may find their trust landed with an enormous tax bill which would have to be paid by trustees from the trust itself, eroding any benefit from the party’s income tax changes.

IRD, when contacted yesterday, was not able to give a figure for the total number of beneficiaries of trusts. We do know, from Parliamentary written questions that there are 243,315 beneficiaries of trusts that filed returns by May this year, but this figure excludes beneficiaries of non-active trusts that do not have income to declare - people, for example, who place their house into a trust.

There are an estimated 450,000 trusts in New Zealand (the Ministry of Justice reckoned the number sat between 300,000 and 500,000 in 2019). If each has just two beneficiaries, this could mean as many as 900,000 beneficiaries would see themselves hit if the trusts owned assets (minus debt).

The hit could be quite large (although, again, no one knows for sure). For active trusts that filed a return this year, the median net equity in the trust is $370,060 - hitting the trust with a tax bill of $5550 a year.

Split between two beneficiaries (keeping in mind the tax would need to be paid by the trust and trustees, not the beneficiaries) this would mean a hit of $2775 a year to what was held in trust, wiping out any benefit most people would get from the party’s tax cuts (a person earning $75,000 for example, would see their income tax cut by $1352).

The problem for both the Greens (and National and Act) is that the extent of this problem is very difficult to quantify. The best data we have is for trusts that declare income, trusts that do not - perhaps those that hold the family home and nothing else - have very little publicly available data, making it difficult for the Greens to argue that it’s not a problem, and equally difficult for National and Act to argue the problem is widespread.

Not that this is necessarily an issue for National and Act.

An information vacuum is ideal for a scare campaign and some of those numbers look very scary. If there are, say 500,000 trust beneficiaries, that would equate to 12 per cent of all taxpayers - 1 million trustees would equate to a quarter of income taxpayers.

The trust and wealth tax are interesting proposals, whose ideas may come. When announced, they seemed like interesting ideas that might not make it past coalition negotiations. If the Greens aren’t careful, they might not even get that far.

Thomas Coughlan is deputy political editor of the New Zealand Herald, which he joined in 2021. He previously worked for Stuff and Newsroom in their Press Gallery offices in Wellington. He started in the Press Gallery in 2018.