From October 1, Newly built properties retain tax deductibility for 20 years. Photo / Fiona Goodall
The Government has clarified the new tax rules affecting residential property investors, and they are fairly much in line with what they announced on March 23. New purchases of existing property after March 23 bring zero ability to deduct interest expenses for investors. Those holding property already will lose deductibility over a near four-year period, starting from October 1.
The key piece of information clarifying things is that newly built properties retain tax deductibility for 20 years. This starts from when the Code of Compliance Certificate is issued.
The length of time is probably longer than some were thinking and suggests that many investors will lift their interest in purchasing an investment property because if they sell just after the five-year brightline period ends (it’s 10 years for existing properties now), a new investor purchaser will retain the ability to deduct interest costs.
One thing we can expect is that existing investors will try to load as much of their debt as possible onto their new build purchases and away from existing properties. And we can expect a continuation of a preference by investors for new builds.
The monthly survey of property investors which I run with Crockers Property Management shows that on average over the past four months, 49% of investors planning to make a purchase intend making it a new build. Considering that new builds each year only account for about 2.5% of the housing stock, this is an overwhelming bias towards buying new.
Part of this very high desire to purchase new builds we can put down to the need to meet Healthy Homes standards. But its not going to all be plain sailing for investors in new builds.
Feedback from my various surveys shows that banks are tightening up their new build lending criteria, making applicants (investors and owner occupiers) allow for up to a 20% blowout in costs when calculations are made of debt servicing costs and whether the borrower qualifies for a loan.
Banks are also increasingly watering down the proportion of expected rental income which landlords can count when calculating their ability to service a requested loan. In similar vein, some banks are heavily discounting rental income from flatmates anticipated by owner-occupiers looking to fund a purchase.
Tony Alexander: “We are likely to see more moves by the Reserve Bank to cap risky bank lending.” Photo / Fiona Goodall
In fact, lending criteria overall appear to be tightening bit by bit each month going by the comments mortgage brokers, real estate agents, and property investors submit in my surveys. This is on top of the tightening already initiated by the Reserve Bank for LVR rules – something which will affect first home buyers far more than any other group.
In the very near future we are likely to see more moves by the Reserve Bank to cap risky bank lending and try to prevent average house prices from moving above levels they already have said they consider are not sustainable. Debt to income limits for investors are highly likely. After that we may see some experimentation with maximum debt servicing ratios and minimum interest rates used in debt servicing calculations – again with a focus more on investors than owner-occupiers.
Is growing discussion about tightening rules and tax changes actually having much impact in the housing market? Probably yes, but the effects are being swamped by awareness of how prices soared last time lockdown ended in May last year.
FOMO – fear of missing out – has increased since the lows of April and May following the March 23 changes. In fact FOMO went from 66% of real estate agents seeing it on the part of buyers in late-July to 71% in late-August and now slightly more than that late in September according to early results from my monthly survey of real estate agents with REINZ.
For the rest of this year through summer, New Zealand’s housing markets are likely to continue to power ahead, short of listings, driven by FOMO, with prices rising higher. It may well only be when interest rates are appreciably higher from late-2022 that things really cool down. Before then, we should not be surprised if the Government attempts another tax move to dissuade investors from buying and perhaps encourage some to sell.
– Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz