Economic policy decisions ripple into the economy like waves in an otherwise still lake: even, concentric and constant - as long as nothing stands in their way.

But place obstacles in their path and they change and morph around them. This creates, varied, inconsistent and often unintended consequences.

Unfortunately, the lake that is housing in New Zealand is far from still. It is populated by a variety of obstacles such the planning legislation (the Resource Management Act), a logistically and labour constrained building industry, a near monopoly of material suppliers, a shortage of developable land, high land cost, high build cost, risk averse banks and a relatively low wage economy.

Since the start of its second term in 2020, the current Labor government has sought to implement facets of its monetary policy to influence house price inflation – something that has been a problem (or at least a perceived problem) in NZ particularly in the post-Covid era.

The frequently stated aim has been to help ‘first time buyers’ into the market.

Labour’s first attempt to achieve this was to exclude foreign buyers from the market. This was a belated attempt to have the tail wag the dog, given that: a) there was no accurate measure of how many foreign buyers there were in the market and b) on any reasonable approximation, it wasn’t a big number and had no real influence on the market.

Consequently, this had little effect.

The second attempt was arguably more fiscal than monetary in that it sought to ‘take the heat out of the market’ by saturating it with stock. The government proudly proclaimed it would build 100,000 houses over ten years via the state housing arm, Kainga Ora, (KO) or Housing New Zealand as it was then known.

To say this was optimistic is an understatement. Between 2017 and 2021, KO built an average of 1,144 houses per year. How they expected to create a 774 percent increase in an already constrained market was borderline incredulous. There was clearly no one in cabinet with even a rudimentary understanding of the impossibility of that task. The fact that it wasn’t questioned and became a publicly stated policy objective – much to the delight of the opposition – speaks volumes about the current government’s intellectual capacity. They’d have been better off asking the resident cat!

Lamentably, as it came to pass, the new housing minister was forced to withdraw the commitment and forbade anyone within government from speaking about anything that remotely resembled a number count. This was much like Harry and his friends who dare not speak of ‘he who must not be named’.

Having failed to correct the market (this last 12 months, they’re just above break even, having built around 700 and taken 500 units out of the market) Labour found themselves faced with high rates of housing inflation. Now, to have record low interest rates was a measure designed to stimulate the economy post Covid, and it can hardly have been a surprise that a whole new tranche of buyers emerged, consequent of that almost free money. But surprise it apparently was. The resulting increase in house value, put NZ average homes amongst the most expensive in the world.

After epic failure number 2, Labour then sought another target – landlords.

Yes, let’s penalise those people who actually made up for the drastic shortcomings in state housing supply that were a consequence of the government’s own failed policies.

Yes, let’s penalise them: those who provide around about 33 percent of all housing stock and without whom every hotel, motel, penthouse, hen house and stockyard would be full of social housing tenants.

The government, again, presumably idly chatting around the same table in cabinet that saw that whizzer of an idea to go build 10,000 units a year produced, thought, let’s deny the landlords the right to claim interest on their debt as an expense in their accounts. The idea was that this will disincentivise those investors to enter and/or stay in the market and will leave more stock available for that holy grail of purchasers, the first-time buyers.

“So, we make it illegal for them to claim interest as an expense?”


“What like, Telecom, does?”

“Yes, I know they do it.”

“And Spark?”

“Yes, they do it too!”

“And all the take-aways and restaurants and shops and nail bars.”

“Yes, they’re all at it.”

“But they do that all over the world, it‘s standard accounting practice isn’t it?”

“No, no, no, not for your property landlords, it isn’t.  For them it’s a tax loophole.”

“Is it?”


And forthwith, it was thus so.

Grant Robertson (the chancellor and deputy leader of the Labour party) stood up on his podium and declared that interest deductibility on debt as an expense would be phased out for those people who owned residential property.

This did not apply to commercial property – it wasn’t a tax loophole for commercial property landlords. It was only to apply on residential investment properties.

As well, the policy would not apply to new properties. Instead, it would only apply to existing policies. Cos new ones, were,…well they’re like new aren’t they?

Taking some crude averages:

  • The average house price in NZ is $840,000
  • Assuming a debt of say 65 percent of that ($546,000) the cost per calendar month on a 5.5 percent, 25-year mortgage is $3,353, of which $2,500 is interest.
  • So annually, the landlord could offset against his tax bill, as an expense, $30,000 which at 27 percent tax is a sum of $8,100.

Now let’s just go back to the cabinet discussion that must have taken place in some form to pre-empt this. Did no one stop to think that taking an average of $8K out of the landlords’ pockets at a stroke for no better reason than it was a viable alternative to doing nothing would have some sort of impact. . .   perhaps disrupt the ripples on the lake?

Clearly not. But lo and behold, look at what happened.

The main impact was one of affordability. Average rents increased over the next 12 months by 11 percent.

That had further secondary impacts.

In its scramble to provide opportunities for first time buyers, they made the rental sector more expensive. Oh, just a thought, where do people who don’t own a home live whilst they’re saving for the humungous deposit needed to buy one? Well, a lot of them live in rental accommodation. And if by chance that accommodation becomes more expensive because their landlord is seeking to recover some of the $8k that has to all intents and purposes been legally stolen from them (oxymoron I know) then they save less and spend longer in their rental. All the while, as house prices generally increase faster than wages, they find that their ability to purchase is  eroded.

The other unintended consequence of this is that it stimulates inflation.

For the first time buyer, the market has gone from interest rate of sub 2 percent to rates that are now above 5 percent;  from an environment where ownership was cheaper than renting to one where the opposite is now true. The Reserve Bank’s governor, Adrian Orr, said publicly, ‘told you so’. So he who creates the rain, criticises those who buy umbrellas. Well, frankly, advice like that, they can do without.

Perhaps they all went to the same school?

This doesn’t require an economics degree. Anyone with any experience of property and development could have foreseen the consequence of what is both penal and misguided and frankly a downright lie. Claiming interest as an expense in accounts is not a ‘tax loophole’.

As for the consequences, well, being able to say ‘told you so’ is of little comfort even though they were told by many educated voices. By real estate institutes, by developers, by investment advisors…it is in fact hard to find anyone outside of the chancellor himself who has actually publicly supported that measure.

For me, it’s a first. I have not yet in my career to date, seen anyone both dig their grave and then bury themselves!

There is general election next year and I suspect Labour will be as clueless in opposition as they have been in power.