The Government's moves to make rental properties less attractive as an investment, through changes to the tax system, have generated menacing predictions that rents will climb.
It has also drawn fire for flagging the end of interest deductibility — albeit phased in over four years for existing landlords — without the benefit of analysis from officials.
That criticism rather assumes that the Treasury stroking its collective chin, peering at mathematical models and consulting the representatives of vested interests, would have resulted — or will yet — in anything more helpful than: "Well, minister, it will depend ..."
Essentially the same issue arose for the Tax Working Group chaired by Sir Michael Cullen when it was contemplating the capital gains tax it eventually recommended. What would be the impact on house prices and rents of such a change in a supply-constrained housing market?
The current plan is somewhat different. Landlords would face the end of interest deductibility unless and until they sell and are caught by the de facto capital gains tax of the 10-year bright-line test. Not both, but not neither. (At least that's the most likely outcome; consultation awaits.)
The object of the exercise for Cullen and his colleagues was different: how to improve the tax system, rather than the current imperative of laying down road spikes in the path of rapid and accelerating house price inflation.
But the essential similarity with what the Cullen review was considering in 2018 is that the tax regime changes in a way that makes property investment less lucrative.
Officials' advice at the time was that "simple theoretical models" predicted that the change would raise the ratio of rents to rental dwelling prices. Landlords would require a higher rent-to-price ratio to compensate for the additional tax.
That adjustment could come either through the numerator (rising rents) or the denominator (falling prices), or both.
The key factor, officials said, would be how supply-constrained the market is. How responsive is the supply of developable land and new housing to increases in demand?
Then, and still, the answer is not very. In the jargon of economists, the price elasticity of supply is low.
Officials argued that in a supply-constrained market, the main adjustment would be to prices (downwards) rather than rents (upwards).
But several caveats apply.
They acknowledged their analysis ignored the presence of homeowners in the market and the extent to which owner-occupation is substitutable for renting. "This means that even in the short-to-medium run a tax on capital gains could put some upward pressure on rents even if the market is constrained."
In the present situation, shifting the split between renting and owner-occupation towards more of the latter is one the Government's key objectives. Tilting the balance more towards first home buyers where they compete with investors would affect both the supply and the demand for rental properties.
Another objective is to boost the supply of housing through such measures as changes to urban planning regulation, building a lot more state houses, subsidising the training of apprentices and $3.8 billion of grants for infrastructure.
Even the tax measures announced last week aim to incentivise more supply by providing that investors in new builds would still be able to deduct their interest costs and the bright-line test for them would remain at five years.
It all suggests the Government would rather see a situation where the price of rental property is determined more by the cost of constructing new housing than by tenants' ability to pay.
On that important variable, renters' incomes, the Cullen working group in its interim report noted that, while some tenants who receive the Accommodation Supplement would get an increase in their entitlement if rents increase, others — around 23 per cent of them as of 2018 — were already receiving the maximum payment.
It is a reminder that much of the increased tax the Government would get from pushing out the bright-line test and ending interest deductibility is likely to be spun around and paid back to landlords through the Accommodation Supplement.
Renters already get a raw deal, at least when compared to the roughly similar number of owner-occupier households with mortgages.
According to Statistics New Zealand's household economic survey between 2010 and 2020 — essentially the last complete cycle — the average rent nationwide rose from $241 a week to $374, a compound annual increase of 4.5 per cent.
So rents grew faster than consumer prices generally (1.6 per cent a year) and wages (2.8 per cent), though more slowly than house prices, which doubled.
By contrast, for households with home loans, the combined cost of mortgage interest, rates and building-related insurance rose from an average $285 a week in 2010 to $338 10 years later, a compound annual growth rate of just 1.7 per cent.
Statistics NZ said one in every six households spent more than 40 per cent of their total disposable income on housing costs in the year ended June 2020, including more than one in four (26.5 per cent to be precise) of renting households.
Among the lowest fifth of households ranked by income, nearly one in three spend more than 40 per cent of their household income on housing costs, compared with just 3 per cent of the highest income quintile.
This year the Government is spending $3.5b on housing subsidies (Accommodation Supplement and income-related rents). It is forecast to rise to $4.1b by 2025.
"This is all ambulance at the bottom of the cliff stuff," economist Shamubeel Eaqub, co-author of Generation Rent and A Stocktake of New Zealand's Housing told a public meeting in Wellington on Tuesday.
"Rental housing is in crisis," he said.
The Government plans to deliver another 8000 public and transitional dwellings over the next three years.
But there are 22,000 people on the waiting list for public housing now.
"At the moment we have something like 3500 in emergency or transitional housing. On average it costs $90,000 a year to keep a household in emergency housing," said Eaqub. "If we prevented that by spending $50,000 a year we would be better off."
Last week's announcements were centred on first home buyers, but the greatest need is among renters, he said.
"We need to see more rental houses built. And it cannot just be the state building state houses. We also need the community housing sector to build more houses. We can't just have second-hand mouldy old homes coming into the rental housing stock."
There is something like $70b sitting in KiwiSaver accounts. A lot of those savers would like to see some of that money put to work building things that New Zealand needs, like affordable housing and infrastructure, Eaqub said.