For people in New Zealand who have invested in residential property with a mortgage, March 23 delivered something of a shock. Faced with house prices on average soaring a ridiculous 25% since May and by 5.2% in just February, the government has been coming under more and more pressure to do something about the housing situation in New Zealand.
It looks like they may have been hoping that they could encourage the Reserve Bank to take moves to restrain house price rises. But as the Reserve Bank Governor politely pointed out, it is not the job of the Reserve Bank to target a particular pace of house price gain.
Instead the RB aims for inflation near 2%, full employment, the avoidance of instability in the economy, interest rates, and the exchange rate, and financial stability. The financial stability goal mainly involves intense monitoring of banks, setting capital and liquidity levels, and limiting high risk lending through a variety of means.
From around September last year it looks like the banks were actually lobbying the RB behind closed doors to bring back minimum deposit requirements for home loans earlier than their planned date of May 1. Banks were seeing extremely strong growth in credit demand from investors and were starting to reinstate the Loan to Value Ratio rules which the RB stripped away for a year as one of their responses to the Covid-19 shock.
The RB has brought those rules back and investors now require a 40% deposit compared with 30% before the nationwide lockdown from March last year. As it is, with the banks having already brought their own rules back early, it is near impossible to look at the lending data in New Zealand and conclude that banks have been engaging in risky practices.
That situation, plus the fact that the Reserve Bank wants as much stimulus as possible to offset the Covid effects, means the Finance Minister got nowhere in his request for further assistance. So, he initiated his own attempt to restrict credit flows to investors by removing the ability of investors to deduct interest costs when calculating their taxable profit from a residential property investment.
For new purchases the rule applies immediately. For existing landlords it will be brought in over four years. The change will increase property holding costs for an average investor by about $5,000 and this has caused outrage amongst property investors because no other business is denied the ability to deduct a legitimate cost.
There have been thousands of threats to sell property and raise rents aggressively, and while there is a strong spitting of the dummy element in play, there will nonetheless be a reduction in rental property supply and increase in rents. By how much however is anyone’s guess and there is one interesting aspect of the policy change. It does not apply to new builds.
That is, an investor who buys a new property retains deductibility of interest expenses. Plus the brightline test for assessing capital gains tax stays at five years whereas it has been extended to ten years for holders and buyers of existing property.
Already in my three main surveys of mortgage brokers, real estate agents, and Tony’s View readers generally, I can see evidence of investors pulling back from the market. First home buyers have also taken a step back for the moment though to a far lesser degree.
Will the tax changes cause house prices to fall? I have no problem seeing falls for some of the next six or so months given the extreme nature of recent house price rises. But the underlying trend is still likely to remain one of house prices rising long-term, though at a rate eventually averaging closer to 5% or less rather than the average 6.8% per annum gain which has been seen in NZ since 1992.
If you want much more information on the NZ economy and housing market in particular you can sign up for my free Tony’s View weekly at www.tonyalexander.nz
HOW KEA CAN HELP
Join the Kea community, and stay connected to New Zealand, its people and businesses wherever you are in the world.
Post job opportunities and attract internationally experienced Kiwi talent.
Help Kiwi businesses explore their global potential through our worldwide community.