News & Research

We finally have a new Government!

20 October 2017

After extended discussions, we finally have a Government! Overall, it feels like a result for change, which signals an intensified focus on the housing market.

I think there’s no doubt that Labour have more policies aimed at addressing demand for housing - either directly or indirectly. Today, I analyse into a few leading issues in context of our new Government:

The Healthy Homes Bill

This Bill has captured my attention, largely because our previous Government has actually already passed it through the majority of phases required on its journey towards becoming an official law. The Healthy Homes Guarantee Bill (no.2), proposed by Labour’s Andrew Little, seeks to amend the Residential Tenancies Act 1986 (the Act) to ensure that every rental home in New Zealand meets minimum standards of heating and insulation.

Interestingly, both the National and Act parties have previously opposed the Bill. It’s support came from Labour, Greens, The Maori Party, United Future and NZ First -  so it’s actually surprising that the Bill has got this far already (it’s passed two readings, albeit only marginally). Now that Labour and NZ First (with support from the Greens) form our Government, it’s very likely to pass through to legislation.

So then, when is the Bill likely to come into effect and what does it mean for property investors?

The next stage is for Parliament to debate the Bill clause by clause (and amend if required), but this stage may not take place for a few weeks and could last a few days. Following this, there will be a third and final reading (which could be as soon as mid-November, or early December) where it will either be passed by the house or not. If passed, it will go through a few additional formalities before becoming law.

The Bill’s current drafting sets out that once the Act is passed, it will come into force twelve months later. From then, the Ministry of Building, Innovation and Employment (MBIE) have six months to set and publish the minimum standards of heating and insulation. Finally, once that is done any landlords issuing new tenancy agreements must comply with the new standards*, while all other landlords (with prior tenancy agreements) have five years to comply.

So, ultimately we’re set to see the cost to landlords increase in the next 18-24 months. What impact will that have on demand for property investments?

I think it’s worth asking whether it’s likely that the costs will be passed onto tenants and I don’t believe they will. Previous increases in the cost to landlords haven’t necessarily been passed on. This makes sense because rents are more closely linked to income than they are with rental costs. Landlords will have to shoulder the cost, so when some take that into account, their numbers may not stack up for particular investment properties.

We could therefore see a reduction in demand from potential property investors. Are we likely to see a ‘fire sale’ of rental properties, due to the cost increasing for those existing properties? I doubt it. They have five years to comply with the new standards, so there should be no rush of investors selling out of the market, but I’m sure plenty will be considering their options.

Foreign property buyers + migration: 

As details of coalition discussions (and compromises made) are released over the coming weeks, there are a few issues to keep a close eye on. My pick of those are whether the new Government will restrict foreign buyers purchasing property in New Zealand.

This is quite likely given it aligns with both Labour and NZ First proposed policies. The key question will be what (and how) they do anything, especially given there’s currently no register or measure of foreign purchases.

It’s also likely there will be adjustments to our migration policies – tightening up at the lower skilled end of visas. However, it’s important to remember that a large contributor to current high net migration figures are Kiwis not leaving and Kiwis moving home - we can’t change that with migration policies.  Plus, it’s unlikely we’re going to dramatically drop from 70,000 net flow within a few months - so pressure from strong population growth will remain for the time being.

Capital Gains Tax: 

Perhaps one of the big talking points in the lead up to the Election (almost a month ago now!) was the potential introduction of a comprehensive Capital Gains Tax (or equivalent). While it’s essentially been ruled out for this term, there is a chance we see an extension of the Brightline test. This currently ensures any speculators selling within 2 years have to pay tax on their profit and has had little impact on the market so it’s unclear what any extension would do. Regardless, an extension to 5 years is something I’d expect to happen.

Negative gearing + tenant’s rights: 

Finally, once again focusing on property investors: it’s also likely we’ll see the removal of the ability to ‘negatively gear’ investment properties and see amendments to improve tenants’ rights, both in terms of limiting rent increases and increasing the notice period for eviction. Both of these changes will make property investment slightly less attractive than before, creating a further dampener on demand.

So: where does that leave us?

When you stack all that together, it does tell a pretty grim story for property investors in particular over the coming years.  Ultimately though, we Kiwis love property investment. Upcoming changes may cause some to doubt its profitability but many of the positives will remain - not least the attractiveness of bricks and mortar investment and low interest rates to borrow against. Adding to this, we’re also currently undersupplied, and under resourced in the construction industry (especially in Auckland) and despite ambitious building targets, there’s still a big gap to fill before things improve.

As I’ve said before, intriguing times…

*Full standards:

  • heating
  • insulation
  • indoor temperatures
  • ventilation
  • drought stopping; and
  • drainage

MBIE will also set out certain conditions under which a property may not be required to meet those standards.

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