‘Obscene’ housing Ponzi driven by banks’ greed

The Government’s new housing policies mark a turning point in New Zealand’s speculation-driven housing markets. All recent homebuyers, investors and owner-occupants alike, and their lenders innately share an underlying hope that the property they just paid too much for will be even more over-valued in the future.

Of these, investors will be the first to regret they gambled on the continuation of the housing Ponzi.

Of the policies announced, stopping investors from claiming mortgage interest costs is the most potent as it will have a profound, near-term impact on their cash flow. While the bright-line extension could very well be undone by a future sympathetic government before it impacts investors, the interest cost policy shift will catch all highly geared investors off guard.

Unsurprisingly, there are renewed threats of skyrocketing rents as landlords seek to pass their higher costs on to tenants. This is unlikely to succeed as rents are largely a function of household income.

Tenants will not deprive themselves and they will not stop saving up to purchase their own home in order to prop up their landlord’s speculative punt.

It is important to note that the vast majority of leveraged rental property purchases in overheated markets like Auckland are loss-making endeavors that can hardly be categorised as a ‘business’. These speculative plays on future capital gains are now merely deeper in the red courtesy of higher tax bills.

Although investor greed seems to be the primary target of the new housing policies, there is an even larger, greedier actor behind the housing Ponzi: banks. Without the eagerness of banks to lend increasing amounts of debt onto the shoulders of owner-occupiers and residential investors, the current obscene prices would not be possible.

Arguably, loosely regulated bank lending is the central reason behind the dislocation between household incomes and house prices in New Zealand and around the world.

It is critically important to appreciate that when banks expand their lending they create new money in the process. Banks are not simply an intermediary between depositors and borrowers. The creation of new money is an immensely profitable enterprise, polar opposite to running a rental property ‘business’.

According to the Deloitte Top 200 Index, ANZ bank generated $1.8 billion in after-tax profit in 2020. With 9,000 employees that is just over $200,000 in annual profit (after operating costs and tax) per head. Much of this profit leaves New Zealand to be paid out in Australian dollars as dividends to bank shareholders. The revenue for ANZ and all other banks is comprised almost entirely of interest charges, the same charges that investors will no longer be able to deduct to lessen their tax bills.

Unfortunately politicians have been too coy to approve the Reserve Bank’s repeated requests for a debt-to-income tool. Such a mechanism can be used to re-establish the link between homeowners’ incomes and house prices.

If debt-to-income restrictions are implemented they should be applied across the board, not just to investors. Sidestepping a debt-to-income limit would amount to a poisoned chalice for first-time buyers as they will surely assume massive mortgages on high loan-to-value-restrictions and will be the first to fall into negative equity when house prices inevitably revert to levels supported by fundamentals.

It’s not possible to say with certainty that we are headed for lower house prices but if the Government doubles down with long overdue debt-to-income limits, recent homebuyers might have reason to be nervous – and prospective, patient first-home buyers can look forward to owning a home without having to sign their life away to their bank.