Today’s housing policy changes announced by the Government were pretty bold, especially the move to stop interest deductibility against tax for investors. Like most things, it may take time for the full effects to be felt, but our sense is that this could be looked back upon as a ‘landmark’ day for NZ’s property market – assuming of course that any change of government at the next election doesn’t see these measures reversed.
This blog provides a summary of the measures and our thoughts, and is supplemented by a special edition podcast which is available here.
What did they do?
- Removed the ability of investors to offset mortgage interest against tax – it applies to new investors immediately, and will be phased over the next four years for existing landlords
- It’s important to note that new-builds will be exempt from this tax change
- Brightline Test extended from five years to 10 years
- New-builds exempted from the extension
- Raise the income and price caps for first home buyer assistance
- Extra funding for Kainga Ora and also for the development of housing-related infrastructure
What didn’t they do?
- There weren’t any obvious ‘carrots’ for investors to divert money towards other asset classes – e.g. such as tax breaks for extra deposits into KiwiSaver funds
- Possible restrictions on interest-only lending (and maybe caps on debt to income ratios) for investors weren’t covered today, but are in the pipeline from the Reserve Bank in May
Some broad thoughts: what does it mean?
- The most significant measure is the removal of interest deductibility – no doubt it will deter some would-be new investors and could cause some existing investors to sell
- It certainly helps to improve financial stability, by ensuring that investors put in more equity in order to keep interest costs low – that may benefit experienced investors at the expense of newer landlords, and could see the ownership of rental properties slowly become more concentrated
- The extra funding for housing supply is welcome, but new infrastructure and construction takes time, so this won’t have much impact immediately
- The Brightline extension could have an impact by deterring some would-be new investors, but we suspect many investors may just be prepared to hold on longer
- There’ll no doubt be speculation that rents will rise as a result of some landlords looking to recoup extra costs and/or being forced to sell
- That can’t be ruled out in some cases
- But it’s worth noting that other landlords may buy those properties
- The ex-renters could now become homeowners instead
- And historically, rents have been anchored by general income levels, even if landlords costs have risen
Overall conclusion: it could be a line in the sand
- We’ve always thought 2021 could be the ‘year of property politics’ and that’s been correct
- Political pressure has meant the Government had to ‘do something’, and today’s measures could be a line in the sand, after they’ve had time to take full effect
- In the near term, the greater impact could come through perception/psychology that the housing market game has changed – once people start to think that the market might not be a one-way bet anymore, a slowdown would certainly beckon (which we had been anticipating anyway, due to factors such as LVRs, reduced housing affordability etc)