Leon Chen
May 30, 2019
In New Zealand, there is a group that is inextricably linked to housing prices: immigrants. New Zealand is an immigrant country, and immigration flows have shown different trends at different times. For example, there were periods of negative net immigration in 1998-2000 and 2011-2012; however, in the last two years, the influx of immigrants has repeatedly broken records.
A few years ago, the Wellington Institute for Economics and Public Policy conducted a study to explore the relationship between immigration and New Zealand house prices. The results showed a fairly high correlation between immigration and house prices. This correlation can even be directly reflected in the numbers: for every 1% increase in the national immigration level, house prices rise by 12.6%, meaning that for every 46,000 net immigrants, house prices will rise by at least 10%.
If immigration is the primary reason for soaring house prices, then the Labour government's policies to cut immigration seem more justifiable. However, the correlation between immigration and house prices does not necessarily imply a causal relationship. New Zealand's net immigration inflows have reached record highs over the past year, while the housing market in Auckland, its largest immigrant city, has experienced sluggish growth, suggesting that the relationship between immigration and house prices may be very complex. However, another set of data offers some insight: when immigrants are divided into overseas-born immigrants and returning New Zealanders, the former shows no statistically significant correlation with house price growth; the latter, on the other hand, exhibits a significant positive correlation: for every 1% increase in returning New Zealanders, a corresponding house price increase of 9.1% can be observed. In other words, returning New Zealanders are the group of immigrants most closely related to house price trends.
The reasons behind this phenomenon are likely varied. For example, returning New Zealanders are often economically independent middle-aged individuals; they have the strongest desire to regain homeownership; they are most likely to find satisfactory full-time employment in New Zealand; and they are most likely to obtain bank loans. Whatever the reason that makes them so closely linked to house prices, it signifies the ineffectiveness of the Labour Party's immigration policies, as these individuals are not within the controllable population of immigration policies. The Labour Party's current immigration cuts focus on tightening student visas for low-value courses and low-skilled work visas. In terms of income alone, these are actually the groups least likely to buy property and least likely to influence local house prices.
The only immigrant group currently potentially affected is existing student or work visa holders. Theoretically, the Labour Party can only reduce demand by stripping these individuals of their home-buying rights, which is also the only way its immigration policies could potentially impact the housing market. However, this would be politically counterproductive, as student or work visa holders are also New Zealand tax residents and are very likely to become permanent residents or citizens in the future; the government has no need to create enemies prematurely.
An even bigger trump card
Banning foreigners from buying existing homes will not decisively change New Zealand's house prices, and the immigrant group most closely linked to house prices is not subject to government policy. Does this mean the new government is helpless in the face of high house prices?
Negative gearing means that when the income a property generates for the owner is less than the sum of mortgage interest and maintenance costs borne by the landlord, the owner can use the book loss to offset the tax payable on other income. Eliminating negative gearing will severely impact owners' cash flow, placing enormous pressure on them to repay their loans. The explicit rule aims to curb investor buying and selling behavior; the Labour Party wants to lock the holding period of all non-owner-occupied investment properties at more than five years. If owners want to sell within five years, they will need to pay a portion of the capital gains tax on the price difference.
Banning foreigners from buying existing homes will only affect potential investment decisions; however, abolishing negative gearing and extending the clear line rule will fundamentally undermine existing investment portfolios and significantly impact investment decisions. The Labour Party's election manifesto states that it will gradually implement these two policies over the next five years, with full effect by 2022.
Therefore, if your purpose in buying a property is for your own residence, please do not hesitate. With interest rates falling and house prices dropping, now may be the best time for you to buy property in New Zealand. Please feel free to contact us if you have any related questions.