Broken promises and bromide

24/03/2021

Yesterday’s announcement on housing was mere tinkering.

It broke the promise of Grant Robertson that there would be no changes to the bright line test and Jacinda Ardern’s promise there would be no capital gains tax while she was leader.

What makes it worse is that the broken promises will do nothing to solve the housing crisis. It could well decrease the supply of rental accommodation and will lead to increased rents.

That pressure on rents will be compounded by the decision to single property owners out by ending their ability to claim the cost of interest against their income for tax purposes.

This is not as the government asserts, and some in the media parrot, closing a loophole, it’s a change to tax law that has until now applied to every business.

Higher costs for landlords will inevitably be passed on to their tenants.

Increasing income caps and house prices for First Home Grants is a token gesture when house prices are so high and if it does anything it will add fuel to the fire. Anything which makes it easier for people to buy a house without increasing the supply will push up prices.

At first glance the infrastructure accelerator looks good, but will it be effective?

. . .However, Kiwibank chief economist Jarrod Kerr said the policy changes simply “tinkered at the edges”, and were not enough to address the systemic supply issues that have caused New Zealand’s house prices to soar beyond the reach of many.

“It was pretty disappointing to be honest. Some of the ideas are good, but the size is pathetic. It’s a drop in the bucket and it’s a leaky bucket at that.”

Kerr said the tool with the most potential was the $3.8b infrastructure accelerator, which is intended to help local councils create the necessary services infrastructure – plumbing, roads, power – to unlock remote land for property development.

“I think the idea is great; we need to get funding into councils to sort out woeful infrastructure and get it to areas that need to be developed. But the fact that it only got $3.8b means that it’s going to be ineffective – $3.8billion spread across all our councils is a rounding error.” . . 

The whole package is underwhelming, it’s just broken promises and bromide that ignore the root cause of the crisis – a lack of supply and the foundation for that is an unwillingness to cut the red tape that holds back development.

 


Interest rates can be too low

04/03/2020

The commentariat is predicting another drop in the official cash rate to counter the economic slow-down in the wake of COVID-19, but Kiwibank’s chief economist Jarrod Kerr has a better idea:

“What we need right now is targeted fiscal policy rather than monetary policy and I’d say if we’re sitting here and the Reserve Bank is forced to cut 50 basis points, that’s because the government hasn’t done enough on the fiscal side,” he told Morning Report.

Interest rates are already at historically low levels. A further drop is unlikely to stimulate business spending but it could add fuel to housing inflation which is not what we need.

Low interest rates bring other downsides.

Reports on changes to interest rates are usually written from the point of borrowers for whom lower is better and higher is worse.

For lenders the reverse is true.

If inflation is low too, the real value of their capital will be maintained but interest rates can be too low for savers, especially if they are depending on the return from their investment for all or most of their income.

Low interest rates can also be a disincentive for business succession.

A business broker told me that several potential clients looked at what they were getting form their business, worked out what they could sell them for and the return they’d get if they invested that in interest-bearing accounts, and decided the income gap would be too big for them to sell.

Low interest returns are already hurting savers and would-be retirees, another drop in rates will compound that and do little if anything to stimulate the economy.

The government must look in its fiscal toolbox rather than leaving it to the Reserve Bank and monetary policy.


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