Pat PilcherWhat are the Government’s latest moves really all about and what does it mean for the housing market? PAT PILCHER makes a close inspection.
Unless you’ve been living under a rock over the last few days, the odds are good that you’ve heard about the housing policy changes announced by the Government. While we’ve written about New Zealand’s problematic property market before, the moves are not all that surprising given how rapidly New Zealand’s property bubble has continued to grow. This has created a significant economic risk for those servicing astronomical mortgages, and most serious of all, a home affordability crisis for those who are not yet on the property ladder.
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In 2019, the average New Zealand house price topped NZ$700,000. Average house prices in Auckland went beyond the million-dollar mark. The property bubble continued to grow, despite warnings from numerous economic think tanks.
In 2017, Demographia rated Auckland’s housing market as being the fourth most unaffordable in the world. Their research found that New Zealand was right up there with Hong Kong, Sydney and Vancouver. This was driven by skyrocketing house prices. Median house prices grew from 6.4 times the median income in 2008 to 10 times in 2017. In 2016 a study found that the average house prices in Auckland were higher than those of Sydney. The IMF also ranked New Zealand as having the most unaffordable homes in the OECD, calling for property speculation taxation.
In short, there are plenty of reasons for the moves by the Government.
Perhaps the most widely discussed aspect of the Government’s actions has been their announcement that they will end interest deductibility against tax for property investors. While the howls of outrage amongst property investment organisations in the media have been predictable, the reality is that it will be some time for the full effects of the new regulations to have an effect. That is providing the regulations are not overturned if there is a change of government at the next election.
So, what exactly did the Government announce? For a start, they have removed the ability of investors to offset their mortgage interest against tax. This move applies to new investors immediately. It is also to be phased in over the next four years for existing landlords. New rental properties are to be exempt from this tax change. The removal of tax incentives is expected to ensure that investors put more equity into properties (which would, in turn, keep their interest costs low). It is also expected to drive the sale of rental properties over time, even if changes to the Brightline Test also need to be considered.
The Brightline Test has been stretched out from 5 to 10 years. It sees property owners paying tax when they buy and sell a residential property within five years of its purchase. If the Inland Revenue department classifies you as buying/selling property to derive income, it will add the income from property trading to your income and tax. Because it considered income, it could affect your tax and other government payments or subsidies. New builds are exempt from the extension. The extension could deter some new investors and see other investors holding on to properties for longer.
The Government has also increased the income and price caps for first home buyer assistance. However, given the stratospheric house prices we are seeing, the paltry amount on offer is unlikely to make a significant difference. That said, the Government has also given extra funding to the social housing agency, Kainga Ora, and additional monies for the development of housing-related infrastructure, which could help speed more new builds and easing housing supply issues. While the additional funding intended for increasing housing supply is seen by most as a good move, the reality is that infrastructure and housing construction takes time to happen, so it is expected that this won’t make much of an immediate difference to the property supply/demand situation.
Some things have not been done. While there were policy ‘sticks’, there are no ‘carrots’ to incentivise investors to put money into other investment areas. A tax break for additional KiwiSaver deposits, for example, may have helped. There was also no mention of any restrictions on interest-only mortgages or lending caps on debt-to-income ratios. That said, insiders say that these could be in the pipeline.
Detractors of the changes to property laws have said that rents will rise as landlords look to cover any extra costs and that some will be forced to sell rental properties. While these assertions might hold true in some instances, it is also worth noting that the devil is in the detail. While some properties will be sold, many will be snapped up by other landlords. Ex-renters could buy them to become homeowners. While some rent increases may happen, it is also worth noting that rents have long been pegged to income levels, even if landlords’ costs have historically risen.
Over the short term, perception and psychology are more likely to have an impact. As speculators realise that the property market is not a sure-fire path to profit, speculation will slow, and increasing supply could draw some heat off the housing market.
