Budget 2021: Hamish Rutherford - Treasury sees housing market going from raging bull to Goldilocks zone

Treasury's house price pick aims a raging bull at a very small target. Photo / 123RF

OPINION:

For months, Jacinda Ardern has been warning there was no silver bullet for housing, and that the Government did not want house prices to fall.

Treasury's Budget appears to assume there is a silver bullet, which can stop a raging bull market in its tracks, only for it to casually wander off into a kind of Goldilocks zone. Much cooler than now, but not too cool.

The latest Treasury forecasts assume that after rising 17.3 per cent in 2020, house prices will rise by only 0.9 per cent in 2021 and 2-2.5 per cent over the next three years.

"This is a very sharp adjustment in house prices but a very necessary one," Finance Minister Grant Robertson said.

It is a bold call from an agency which does not have a great track record on predicting house prices. Just before the election, Treasury forecast house prices would drop slightly before returning to a gradual increase.

Given how much of the Government's focus is on housing it is possible to believe it can stop prices from surging as they are now. But to cause such an abrupt slowdown in prices without sending them lower is a very precise target for such a massive asset class.

So far the Government has announced an extension to the bright-line test to 10 years, announced it will remove the ability for investors to deduct interest costs from tax, and poured billions into a range of initiatives it says will increase supply.

Treasury appears sold on the policy, even if it had doubts before.

"The removal of interest deductibility on existing residential properties is expected to have the largest impact on the housing market and wider economy by significantly reducing house price growth over the forecast period," Treasury says of a policy which the Government is yet to develop policy on, let alone introduce legislation on (and one that it recommended against).

"The extension of the bright-line test is likely to have a relatively smaller impact," Treasury says.

A few months ago, Treasury could not say whether extending the bright-line test to a decade was any better than a five-year test.

Finance Minister Grant Robertson during his Budget 2021 lockup presentation at Parliament. Photo / Mark Mitchell

So far, signs are mixed about whether the changes the Government has announced will stem the increase or send prices into a fall.

Despite claims investors are nervous, recent data has suggested prices so far are continuing to increase, meaning Treasury's forecast of a 17 per cent rise is likely to be conservative.

Stephen Toplis, head of research at BNZ, said it was not really a surprise that Treasury believed house prices would stop increasing.

"The Government has staked a lot of its credibility on getting the housing market under control. For Treasury to forecast anything other than zero or close to it would basically be saying they don't believe the Government can do it."

Toplis said it was possible to argue the current housing shortage and policy response would not be enough to slow the market "but if that's the way it looks, they'll just come up with something else" with both the Beehive and the Reserve Bank likely to take steps to generate a sharp drop in house price increases.

The question was not whether house price inflation dropped to zero, but when and also whether policy makers could then do so without sending prices falling.

"It's going to be a very difficult market to fine tune."