The Government announced its new housing package on 23 March.
In doing so, they used some political capital. The following meme is apt:

Any significant change that might impact residential housing prices was going to trigger a fight. The changes announced? Definitely.
Below are some of my comments about the package, not to mention the commentary surrounding it, and how I try to think about big policy changes like this in general.
Go to the primary documents
If you want to have a strong, informed view on something, go to the primary sources.
One of my pet peeves about a lot of reporting on popular news sites is that articles don’t link to primary sources. Often, they don’t even provide any breadcrumbs to find the primary sources. To do so in this case, I had to wade through lots of commentary; some of it in good faith, some less so.
For reference, two of the key primary sources include:
If you haven't read the primary sources, please do this before reading my article, or any other commentary about the change.
Try to put changes into context
When I think about a policy change like this, I try to put it into context. For example, how many landlords are there that will be directly, adversely impacted?
According to this article from Stuff, “The total number of active landlords with bonds lodged, as of February 9, 2021, was 120,330”. (New Zealand’s population is roughly 5.1 million.)
93,076 of these landlords lodged a single bond, indicating they only own one rental property, leaving 27,254 with more than one bond.
Only 7,100 land owners lodged 4 or more bonds. Some of these 7,100 land owners don’t have mortgages and have owned their properties for some time and/or don’t plan on selling their properties, so won't be directly impacted by these changes on a day-to-day basis.
From a population of 5.1 million. We are talking a fraction of a percentage of the Kiwi population.
(I seem to know quite a few of these property investors, but that is probably because of the bubble I live in (as a financial adviser and my own idiosyncratic personal background). If you're a property investor, it’s likely that you know other property investors. Anecdotally, it seems to be common for property investors to have family members and friends who also invest in property. You’re also likely to pay more attention to what is happening in relation to the property market than most other Kiwis. We all live in bubbles.)
Yes, there will be second-order effects that impact other parties. But in the context of these changes, and especially the commentary surrounding them, keep the fact that residential property investors are not as common as you might think, in mind – especially if you yourself are a property investor or work professionally with property investors.
[Note: a thoughtful reader has pushed back on these figures, suggesting that this understates the number of property investors. When I get a chance I'll consider their feedback and update this section.]
If you think this package is 100% good or 100% bad, then that’s a red flag
There’s room for good faith debate about the housing package.


Whatever your thoughts about politicians, they're not like Brennan or Dale from Step Brothers or the crew from The Hangover, with the m.o. of "we're here to f*** s*** up".
With most big regulatory packages that introduce significant changes, most people who engage properly with them will feel ambivalent. They’ll agree with some parts, disagree with some, and be a little uncertain about its potential or likely effects.
If you feel extremely strongly one way or another, then that is probably a red flag that you need some more distance. (And yep, I'm guilty of this. I was inclined to think that pretty much everything that came out of Donald Trump's mouth was better attributed to incompetence, or malice, than trying to improve people's lives in any good faith way. We all need reminders of this, myself included.)
In relation to these changes, there are a lot of people who are very certain about the effect these policies will have.
For example, in an opinion piece in Stuff, Dan Bidois says:
“None of the announced policies will make a difference to the prices fetched at residential auctions. The only clear impact these changes will have is the unintended consequences for renters and first-home buyers.”
When I read confident statements like this, I’m reminded of the saying: “It’s easier to macrobullshit than to microbullshit”.
I also become curious about the author of the article. What's their background? Ahhhhh. A former National MP.
Another article reads that “Government announcement will increase homelessness”. If so, is that an increase of 1 additional household, or 10,000 additional households? The impression from the headline stays the same but the real-world effect is massively different.
One investor says the the package is “awful and stupid”. Is it 100% awful and stupid? Or is there at least 1% that isn’t awful and/or stupid?
(The commentator: someone who will be impacted by the changes to the tune of $50,000 to $60,000 per year in lost tax deductions. Oh, and they also run an agency specialising in investment property.)
Policies like this are likely to have far-reaching effects, including second-, third-, and n-th order effects, many of which can’t be predicted.
There is room for good faith debate about the pros and cons of any given policy. This one included.
To say you are sure what will happen? Or to say that it’s terrible in an unmitigated way? I think that reveals more about yourself – and/or your personal incentives – than what the future holds.




(I don't mean to imply anything by sharing these memes. I've just been wanting to include "your argument is invalid" memes on this blog for a long time, and this is the best chance I've had..)
We can hypothesise, and some people will make better predictions (and have better frameworks for making these predictions) than others.
Even if you’re confident a policy might have a certain effect, there’s often a wide range of possibilities about the extent of the effect.
At the end of the day, the effectiveness (or otherwise) of a policy like this is an empirical question, not a theoretical one.
Of course, it’s important for different parties to debate the pros and cons of a policy before it’s implemented. But no one knows ahead of time what will happen. I don’t, and nor do you.
Debate the reality, not the hypotheticals
Quite a bit of commentary isn’t about the actual policies that have been announced. It’s about hypothetical policies that might happen. This can be an effective rhetorical device, similar to whataboutism.
For example, there’s concern that the Government might introduce rent freezes. There’s talk about what types of investments the Government will come for next. None of this is covered by what has been released.
A well-known personal finance podcaster recently linked the changes to Marxism, and asked: “Who are they going to target next?”
It might be worth voicing these things. But these are not part of the package.
Similarly, there is a bit of talk about how the Government should be freeing up land and making it easier to build. For one thing, the package introduces billions of dollars to help make this happen. There may also be policies that do this later on.
Forget these distractions, and let’s concentrate on what has actually been announced.
The “loophole”
I hate the way that the Government uses the term “loophole” when talking about the package.
Most people are reading this as if the Government is referring to a tax loophole, and I agree that property investors historically being able to deduct interest isn’t a tax loophole. It’s normal practice to be able to deduct interest with commercial endeavours.
The documents don’t refer to it as a tax loophole, however. What's being implied is that there’s a loophole that benefits investors over owner-occupiers, in the sense that if an investor buys a property, they are able to deduct interest from their taxable income, whereas actual owner-occupiers cannot deduct this interest from their taxable income. In this sense, property investors get better tax treatment than property owners, and this change creates parity.
There are technicalities on this. In any case, calling this loophole in a colloquial sense is a stretch. If you’re talking about tax, and you use the word “loophole”, people are going to think in terms of tax loopholes.
This detracts from the package, in the same way that references to “rampant speculation” detracts from the package.
However, to me this relates to style rather than substance.
(A side note: I always wondered how it came to be that in the US, some homeowners can deduct interest on their mortgages against their taxable income. I assume this was the reason: to create parity between property owners and property investors. That’s speculation on my part.)
“Affordability”
The elephant in the room with “housing affordability” is that it’s a euphemism for property prices falling.
It’s easy to say that you are for affordability. It’s harder to say that you want property prices to fall.
Even the Government isn’t prepared to say that’s what it wants. It simply wants to “tilt the balance towards first home buyers” and “dampen speculative demand”.
Let’s call a spade a spade: if property prices are to become more affordable, at least in the short-term, that means they need to reduce in price in real terms.
I’m sorry, but it needs to be said.
I’ll add a couple of points:
- If the only property you own is the home you live in, and property prices reduce, then technically that might mean your net worth has fallen. But from a roof-above-your-head perspective, things haven’t changed much. Broadly speaking, you’re likely to buy and sell in the same market, so that if the price of your current home drops, the price of the home you end up buying is likely to cost less as well. The people who are likely to be financially impacted are likely to be property investors – and especially those who own a lot of rental properties.
- Maybe property prices is a red herring, and perhaps the conversation could be whether owning a home needs to be part of the Kiwi dream. There are a lot of places in the world where home ownership is not the norm. Usually, this is linked to significant protections for renters that don’t exist here in New Zealand. I’m ambivalent about this, but want to mention it for completeness.
Significant policy changes have winners and losers
In an ideal world, a policy change would represent a “Pareto improvement”: some people gain, but no one loses.
In the real world, almost every major policy change will have people who gain and people who lose out. Even if we’re a team of 5 million, policy changes will impact us all differently.
A lot of good policies provide a net positive to the world, in that the total gain is more than the total loss. However, even when the net gain is significant, a lot of the time the gain tends to be distributed broadly across a broad swathe of people, with the losses distributed more specifically.
In other words, the people who lose tend to have better stories, and are more vocal about the negatives.
There are a lot of people who have a vested interest in the property prices increasing, and sales volumes staying high.
There’s almost no-one who has a vested interest in property prices decreasing in the same way. To the extent that there are people who would benefit from property prices reducing, they’re not the sort of groups that are likely to get together and employ spokespeople and write press releases which will find their way onto journalist’s desks.
What a surprise, then, that most of the coverage has been negative: as I’ve written this article, some of the headlines on Stuff and the NZ Herald online include:
- “Renters will pay the cost of housing package - Collins”,
- “She wants to buy a first home. He has 140 tenants. Neither think the changes will help.”
- “Anger over Government moves against property investors”.
- “‘Chilling effect’: New policies risk impacting on wider economy”,
- “The hidden losers of the Government’s housing market fix”.
- “How the housing package leaves renters and beneficiaries behind”.
- "Property investor braces for extra $45,000 tax bill".
With some exceptions, most reporting has focused on people who see the changes as negative. (It just so happens that most of them are incentivised to push back against the changes).
We need to be careful to remember this sample bias. As with anything, we need to take commentary with a grain of salt.
Residential property is a special asset class and it’s appropriate to regulate it in a unique way
I think the free market is amazing.
However, I also believe that capitalism can’t be untethered from good regulation. We need property rights – which don’t actually exist in a state of nature. We need confidence that commercial promises are met (ie, contracts will be enforced). We need to ensure that people don’t mislead and deceive. And so on.
In some domains, we also need special regulations. One of these domains is residential property. Shelter is a basic need and I want to live in a society where people can be confident they can always have a roof over their head.
(My current stance on universal basic income is that it would fall down because all it would mean is that people would bid up the cost of basic positional goods: namely housing. This has reinforced to me that housing is a special type of asset that requires unique attention.)
This is the context in which I see the removal of interest deductibility.
Again, I HATE the way the Government has referred to this as a “loophole”. But that is style, not substance.
In the words of the “Housing package detail” document:
“Property investment is often heavily funded through large mortgages, with investors allowed to write off interest costs against the income they make from the property. However, people who live in their own home can’t do this.
Closing this loophole will level the playing field for first home buyers.”
Remove the “loophole” language, and the proposal is basically: people borrowing to invest are at an advantage over people who have to borrow the home for their own purposes, since the investors are able to deduct this interest from their taxable income, whereas homeowners cannot. The Government is simply equalising the situation between investors and homeowners in relation to this special asset class.
This has the potential to have a big impact on property prices, and the relative bargaining power of people buying to occupy rather than people buying to invest. However, there are lots of variables at play. For example, political tides could change so it looks like National will win the next election and remove this, in which case it would only be a short-term change and have limited impact on property investors. But time will tell.
(This package clearly illustrates the concept of regulatory risk. It’s something I regularly mention to clients: there is always scope for regulatory changes that can impact you personally, including your investment strategy. I’ve long thought that residential property, as a special asset class, is subject to more regulatory risk than other forms of investments. I believe this will almost always be the case.)
There are two distinct markets – buying property and renting property
A market is driven by supply and demand.
With residential property, there isn’t just one market. There are actually two distinct markets:
- the market for buying and selling property; and
- the market for renting property.
These markets are related, but they are different.
The two markets seem to get conflated all the time. Sometimes I think this conflation is innocent. Just as often, I think it’s done to confuse rather than clarify.
The measures that the Government have announced relate to the market for buying and selling property. Some of these measures relate to increasing supply. However, the main change (IMO) – removing interest-rate deductibility – is likely to reduce demand more than it will reduce supply.
The effect of making interest non-deductible is to make the cost of owning a property for most investors higher. This will reduce yields. Generally speaking, a change that makes an investment less profitable will make that investment less valuable.
If an investment suddenly yielded 1% per year less than it did last week, would you be willing to pay the same amount for that investment? I wouldn’t. If you would – well, I’m not sure what game you’re playing.
Will this result in increased rents?
A common argument that’s being made is that property owners will need to increase rents to pass on their increased costs. Apparently, this will hurt renters, and cause lots of additional homelessness.
This seems to forget that market for renting property is its own distinct market. Yes, landlords can increase what they charge their tenants. But they are subject to the same laws of supply and demand in this separate, distinct market with its own supply and demand characteristics.
If landlords can simply put rents up, why haven’t they already done it? If they’re using property managers, why aren’t these property managers already keeping rent prices at market rates?
If property prices become more attractive to first home owners, then maybe this will reduce supply, since there will be less properties available to rent. But the flip side is that these new property owners won’t be looking to rent, so there will be a roughly equivalent reduction in demand. In other words, the effect of changes in supply versus demand in the rental market are likely to net each other off.
The strongest argument I’ve heard about rents legitimately increasing relates to people who own properties with long-term renters who haven’t been raising rents in line with market prices. Where this is the case, there might be some tenants who have to face rent increases – but again, this will be bringing their rents to be closer to current market prices rather than increasing market prices as a whole.
I could be wrong. But to draw the conclusion that an increase in prices for purchasing property will result in a massive increase in rents seems a little… over-confident… to me.
With property investment, what is the tail and what is the dog?
In my view view, property prices are the tail, and rental prices and expenses are the dog.
With most investment classes, the value of an asset is determined by its underlying profitability (or prospects of profitability). Theoretically, the value of a given investment should represent the discounted value of its future cash flows.
In this model, a change in the value of an investment reflects changes in expectations about the underlying profitability, or cash flow prospects, for that investment.
If you own a share in a company, and the value of that share increases, that’s usually because more people want to own the company, or the same people are willing to pay more for a share in that company. There is usually a reason for this increase in demand. This reason is usually because they think the company has better future cash flow prospects than they used to think.
Likewise, if the same company suddenly has worse prospects than before, then the demand for a share in that company tends to reduce, decreasing its price.
Capital gains – in the form of increased prices that people are willing to pay for an interest in the company – are the tail. The dog – or the reason for this capital gain – is the underlying profitability of the investment.
When it comes to property, profitability of the investment comes down to rental income and running expenses.
These policy changes will primarily impact the market for buying and selling property. It will have a smaller effect on the market for renting property.
Yes, the two markets are related. But they are distinct and should be seen that way.
Long-term supply, demand, and equilibrium
Ultimately, the issue with residential property prices is a long-term supply and demand problem. This is both in relation to the market for buying and selling property, and the market for renting property.
Demand primarily comes mainly from factors like population growth – although regulatory factors, such as tax treatment and obligations for people who are renting their property out, which impact profitability for investors, also have an impact. Supply includes factors such as how many new properties are being built.
If we had a glut of properties, then buyers could be more picky, less likely to compete against each other, and more likely to walk away. The current pressure on property prices would fall. It would be the same if there was a bigger rental market.
Until we have more properties – to buy and to rent – a lot of these changes are more temporary in nature.
It’s easy to say that the announced package focuses on short-term measures. But in reality, they go some way to addressing the long-term issue of supply.
A couple of the changes will tilt the balance in favour of investing in new builds rather than existing properties:
- Interest might still be deductible for new builds (to be confirmed).
- Keeping the bright-line test at 5 years for new builds as opposed to 10 years tips the balance in favour of people wanting to create (and extract) value quickly.
The following two commitments below are also pretty significant:
- An additional $3.8 billion to help invest in infrastructure to speed up development.
- Supporting an additional $2 billion of borrowing by Kainga Ora to “increase the pace, scale and mix of housing developments” via “strategic land purchases” is pretty meaningful.
To put the above two commitments in context, for the 2018/19 year, total Government revenue was $119.3 billion. Forgetting about the tax changes, that’s a big package.
It’s also worth noting that this package doesn’t preclude further policy changes by the Government, such as significant changes to the current Resource Management Act which might also impact long-term supply. And who knows what Kainga Ora will do with $2 billion of dry gunpowder.
What’s the probability of increasing supply in the medium- to long-term?
In a lot of ways, increases in property prices are predicated on demand running ahead of supply. However, even if this is the case in the short- to medium-term, it’s possible that this balance will change over the medium- to long-term.
Is this likely to be the case? I don’t know. As with other areas in life, I don’t have a crystal ball, and I don’t think I have a good, non-biased framework for making a good prediction like this. It’s one of the reasons I don’t personally invest in property.
This relates to all investments, property or not. If you’re making long-term investment decisions, make sure you are basing them not just on short-term market dynamics but a strong, informed view on medium- to long-term market dynamics.
If there is a supply issue, and there’s money to be made by increasing supply, then eventually that will happen, even if it doesn’t happen immediately. The good thing about capitalism is that $20 notes don’t stay on the sidewalk for long.
Show me the incentives and I’ll show you the outcomes
The older I get, the more interesting tax and Government policy becomes to me. It can seem so abstract, but in many ways it’s a subtle form of changing the behaviour of individuals, households, and organisations.
If you change the incentives (the carrots) – or the outcomes (sticks) – in almost any environment, you change behaviour.
Whatever people say about changes of this nature, I believe they will change behaviour. The questions are: How much it will change behaviour? And what will the second, third, and n-th order effects be?
I don’t have a crystal ball
What will happen as a result of these changes? Might these changes change before they’re fully implemented? Might they be a blip on the landscape and be reversed sooner than later? Will additional changes come into effect that reinforce this package? Your bets are as good as mine.
Some of my own predictions, if the change to remove tax deductibility of interest endures:
- price increases will slow (probability median property prices are 10% higher than now by the end of 2021: 10%);
- perhaps even making them static for a period of time (which is similar to reducing in value in real/inflation-adjusted terms) (for example: median property prices the same in five years as they are now: 20% likelihood); and
- perhaps even reducing property prices to some extent, at least in the short-term (median property prices down by the end of 2021 compared to when I publish this article: 50%; down between now and the end of 2022: 35%).
- Rental prices won’t substantially increase, because the supply-demand dynamics in the rental market are fundamentally different to the supply-demand dynamics in the market to buy and sell (even if they are related) (probability that median rental rates are 10% or higher than they are now by the end of 2021: 20%).
As you can see, I don’t have a high level of confidence in what will happen.
What do you think of the changes?
When I look at policies like this, I do my very best to put personal biases and self-interest to the side and focus on the common good, and my personal view of what type of world I want to live in.
In the spirit of being fully candid, though this lens:
- The significant amount of funding (billions) to help invest in infrastructure, speed up development, and increase the pace, scale, and mix of housing developments will help increase supply over the medium- to long-term. That's a good thing.
- I am ambivalent about increasing the bright-line period to 10 years. I think it might have the opposite effect on supply, by discouraging some people to put their properties on the market even if they otherwise would have (ie, this might reduce supply). Although I think providing an incentive for investing in new builds (by having a shorter bright-line period) is a good one – creating an incentive for ambitious people and organisations to increase supply.
- I personally like the idea of interest not being tax deductible. It creates parity between people buying to occupy versus people buying to rent. (The "loophole" that has historically favoured property investors in the past, if you will.
) Yes, this means investing in residential property is treated differently to other types of business ventures. But in my view, residential property is a special asset class, and some regulations are inevitable and I think this is likely to result in outcomes more in line with the type of society I want to live in (with more owner-occupiers and less tenants. Which isn’t to say I want all people to own the property they live in. I just think housing affordability – and the ability for more Kiwis to be able to make this choice – is important.)
I’ll reiterate that there is room for good faith debate and we can legitimately have different views. You’re welcome to share your thoughts by emailing me. I am especially interested if there’s anything factual I’m missing, and if there are any specific arguments that you disagree with. Unfortunately I’m flat out at the moment so I might not have much opportunity for a back and forth, but I may incorporate any strong arguments/corrections into this article.
NB. Have you read the primary sources yet??? Plus, a reminder to take my comments with a grain of salt.
NB. Thanks for reading. In the meantime, have you read through the primary sources (Official release and “Housing package detail” 3 page document)?
And as with any commentary, take my views with a grain of salt and focus on your own thoughts after reading the primacy sources!