Now, ordinarily, I am not in favour of encouraging an increase in the demand side equation of the housing market, but I’ve been pondering what would happen if we introduced mortgage payment deductions for home owners. This is similar, in concept, to what the US offers (and what the UK used to offer – I don’t know NZ’s history in this area). The basic arrangement would be that the interest component of your mortgage would be deductible from income tax (so if you paid $5,000 per annum in interest on your home loan, you’d be able to deduct that as an expense against your income tax liability).
Now, in order for this not to advantage rental property owners, the effect would need to be limited in two specific ways: you’d need to limit the deduction to only a mortgage over your current ‘home’ (the property you maintain your physical presence at) and you’d need to limit it to the loan taken out at the time of purchase (if you allow top up loans to be counted, you may end up partially subsidising consumption, renovations, etc.).
What would be the effect of this be? You’d get a deduction on your income tax (possibly one which could be applied directly through your bank – a reverse of your RWT rate, in effect) and this would reduce the burden of a new mortgage on first time buyers (and going forward). This isn’t a fool-proof plan, but if the state is going to ‘encourage’ home loans, with a specific target of new buyers, wouldn’t it be best to simplify this, not be directly involved (beyond offering the tax credits), and in a way which doesn’t complicate matters?
I am not particularly inclined to increase demand incentives at this point (as I think most of our problems stem from the limitations in the supply side), but I often wonder how much thought actually goes into our tax system (beyond finding ever new and innovative ways to tax us).