Article: Property Investment

Proportional Representation, Disproportionate Power with Frank NewmanProportional Representation, Disproportionate Power with Frank Newman

So there we have it. MMP at work. A party that receives 7.2% of the vote gets to choose who runs the country. And they choose a party that received 36.9% of the vote, and that party enters into a coalition agreement with another party that received 6.3% of the vote.

In saying why they chose Labour and not National, New Zealand First Leader Winston Peters presented a very gloomy outlook for the economy, and listed a number of indicators that he said supported that view. He added, “Capitalism must regain its human face. That perception has influenced deeply NZ First negotiations.”  The gloomy economic prognosis and the anti-capitalism sentiment is surprising and will not sit well with the business community.

Mr Peters said the choice they faced was for a modified status quo, or for change. He said people wanted change, and that’s what he responded to. I personally am not so sure the majority of people did vote for seismic change. National gained the largest share of the vote and it is likely many of NZ First voters wanted a modified status quo rather than a government involving the Greens.

Although the policy details of the new coalition have yet to be announced at the time of writing, the effect on the foreign exchange market has been immediate. The Kiwi dollar fell one cent against the US dollar on the announcement, and one and a half cents against the Australian dollar. Those movements reflect the greater uncertainty that will undermine business activity, at least until policy issues are clarified.

What we can expect are greater restrictions on foreign ownership of NZ assets and immigration. The “bottom-line” referendum on the Maori seats is not likely to have survived the negotiation talks (assuming it was ever part of the talks), given Labour now “owns” the seven Maori seats and has advocated greater rights for Maori. 

Based on what Labour promised during the election campaign, a number of new policies will directly affect property investors. These include:

·    The bright line test will be extended from two years to five years.

·    Losses from residential property will be ring-fenced.

·    The 42 day notice period for landlords will be increased from 42 days to 90 days.

·    Rent increases will be limited to once per year (the law currently limits it to once
every six months) and require the formula for rental increases to be specified in
the rental agreement.

·    “No-cause” terminations of tenancies will be abolished.

·    Letting fees will be banned.

·    A $2 billion KiwiBuild scheme will be introduced to build 10,000 homes a year.

·    An Affordable Housing Authority will be established to work with the private
sector to cut through red tape.

The big question mark overhanging the three headed coalition is stability. Of the three, NZ First could be the biggest loser. Unlike the Greens, who see Labour as its natural coalition partner, NZ First supporters/voters were not committed one way or another. Many would have voted for NZ First on the expectation that it would side with National and deal with issues like race relations. Those supporters will feel betrayed and cheated and will now become critics rather than supporters.

The new government will have to do well for NZ First to hold is support base and without the luxury of a seat and no obvious sweetheart seat deal in prospect, it may well find itself out of Parliament in three years time - assuming the coalition goes full term.

A further complicating factor is a likely leadership change at NZ First as Mr Peters hands the reigns over to either Ron Mark or Shane Jones. The question is whether NZ First can make the transition without internal division.

Our history of MMP is that coalition arrangements hurt the small parties. There appears to be two aspects to this. The first is they lose credibility by having to sign-off on policies that their voters do not support. The next political poll will show if NZ First has been damaged by choosing Labour.

The second reason minor parties suffer in coalitions is that having to support the unpopular policies of another party, creates tension and internal divisions within a party caucus. This will often result in the caucus fracturing into those who believe politics is about standing up for a principle and those who believe politics is about compromise.

While policy details have yet to be disclosed, the one thing we do know is that significant changes await the property and business sectors. Change creates uncertainty, which in turn causes investors to sit on their hands and do nothing until the mist clears.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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