The government released the policy shortly before April Fools’ Day. At the time it seemed funny in a Rob Muldoon so-bad-it’s-good kind of way.
But Ministers have since clarified they are not making this up. The government’s housing affordability strategy really is to raise taxes on landlords.
The main item in the package took away landlords’ right to treat interest as a deductible tax expense. The government says these deductions are a loophole.
It turns out this loophole is a massive problem. For centuries, businesses everywhere have been exploiting this loophole by deducting expenses to avoid paying taxes. Something had to be done, obviously.
And landlords have no right to complain. They can still deduct other costs, like stationery.
But, eventually, some landlords are bound to notice they can no longer afford food. Selfishly, some of them will decide not to be a landlord and leave for more profitable activities, like welfare. Rentals will turn owner-occupied, new investment will disappear. Rents will rise.
Right on cue, yesterday we learned the Housing Minister has asked for advice on “temporary rent controls.”
Rent controls? Strewth.
Roughly no economists think rent control is a good idea. It is famously bad, like stamp duty, tariffs, quotas, or having central banks solve climate change.
In his book Basic Economics, US economist Thomas Sowell looked into rent control and found one or two issues.
Minor things. Like in Melbourne, where rent control stopped apartment construction dead for nine years. Or in New York, where it halved the turnover of apartments. Sowell found rent control led to high vacancy rates in housing shortages; produced slums and black markets; led to a boom in luxury apartments, which raised average rents; some owners abandoned their buildings entirely; and migrants suffered most from the policy.
Apart from this, rent control is great.
Especially when it is “temporary.” Sweden had temporary rent controls. They lasted 30 years, which was long enough for Sweden to work out why it had a severe housing shortage.
Even communists don’t like rent control, it is so awful. In 1989, the foreign minister of Vietnam gave a speech which included this assessment of rent control:
"The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents”.
Rent control is weapons-grade bad policy.
Matt Burgess, a former Economic Advisor to the
Minister of Finance and Chief Executive of iPredict, is a Senior Economist at
The New Zealand Initiative HERE.