![houses](/sites/default/files/2023-09/houses.jpg)
By Kelvin Davidson*
♦ A shorter Brightline Test may entice investment buyers, but probably also some sellers who would be off the hook for capital gains tax earlier than expected
♦ Softer foreign buyer rules is a lesser known entity given uncertainty around how many would buy in NZ, and the limited stock at the ‘top end’
♦ Reinstatement of 100% interest deductibility would benefit existing investors and maybe boost investor sentiment – but low yields and high mortgage rates would still mean running losses for the ‘average’ investment purchase
♦ There are bigger picture restraints still in play, regardless of election result – such as stretched affordability and ‘higher for longer’ mortgage rates
Many existing and would-be property investors will be keeping a close watch on the polls and whether or not National can form/lead the next government – which we now know would mean a reinstatement of mortgage interest deductibility for all properties, a Brightline Test back at two years (rather than the five or 10 system at present), and a softening of the foreign buyer ban. But what will the overall impact of these changes be? This Pulse takes a look at some of the issues surrounding potential housing/tax policy changes.
1. Brightline
There’s been a lot of focus on the possible buying implications of a shorter Brightline test from July 2024. Some investors would no doubt be tempted to make their first purchase or expand their existing portfolio by the reduced risk of having to pay capital gains tax if they needed to then sell within a short horizon. But what about the selling side? There are likely to be some existing investors struggling a bit with cashflow at present given higher mortgage rates, but who don’t want to sell because a large capital gains tax bill would be even worse. If they suddenly found themselves off the hook for that bill, some extra listings and sales could follow soon after.
2. Foreign buyers
There’s the potential new ability for foreign buyers to purchase NZ properties with a price of $2m or greater, albeit with a 15% tax attached. On one hand, there’s no real way of knowing how many of them might actually target NZ, and for context we estimate that only about 3% of our housing stock has a value of $2m or more. Then again, the shorter Brightline Test would add some appeal, and there may also be greater effects in areas that we already know are popular with foreign buyers, such as Queenstown where about 10% of properties are valued at $2m+.The extra demand could just exacerbate the shortages of stock at ‘affordable’ prices that already exist.
On a side note, National’s estimated annual tax take from foreign buyers is $740m. But that seems pretty ambitious. For example, there have been around 2,600 sales at $2m+ in the past year, and if you assume 5% of those went to foreign buyers at an average price of $3m, the tax would only raise roughly $60m. In some ways, to make National’s figures ‘work’, you have to assume that the large majority of sales above $2m would go to foreign buyers – which seems unlikely.
3. Interest deductibility
There’s the possible reinstatement of full mortgage interest deductibility over a phased period, with 50% this tax year and 2024/25, 75% in 2025/26, and back to 100% in 2026/27. On this particular change, we think the idea that it would open the floodgates for investors to purchase again is probably wide of the mark. To illustrate this, we’ve run some simple investment return numbers in the table below (which assumes either 0% or 100% deductibility).
As you can see, there’s a before-tax cashflow loss each year of around $19,300 in this scenario. Then there’s tax. Given those interest costs aren’t deductible for an existing property in the current system, that actual loss now turns into a taxable profit, which results in an extra bill of around $5,500 (at a 33% tax rate). All told, the required top-up out of other income to keep the property going in this scenario is $477 every week.
At this stage, let’s factor in 100% deductibility again. Holding everything else the same, the weekly top-up drops to $371. Now, that saving is not to be sniffed at, and of course property investors have always tended to be willing to accept cashflow losses in the early stages of their horizon, with the pay-off being rental growth and capital gains later.
It also needs to be acknowledged that these calculations are fairly simple (e.g. excluding depreciation allowances), and in reality some investors might be able to achieve a rental yield higher than 3.5% for example (or get a bargain price, or save on maintenance, etc). Certainly, some investors are still making it work right now, with the CoreLogic Buyer Classification data showing that mortgaged Multiple Property Owners still account for about 21% of purchases.
But even with all of that in mind, a $371 top-up every week is still substantial, even with deductibility added back in. The sums get even trickier if the would-be investor is factoring in lower potential capital gains in future than we’ve seen in the past.
Now, let’s be clear that there’ll still be property investors making purchases and getting the sums to work (as they are now) – and that’s necessary, given we’ll always need more rental stock to cater for a growing population. Indeed, rising rents at the moment highlight potential shortages of available stock might already be emerging, and that in turn could help entice some investors back. And even just the ‘mindset effect’ of a change in tax rules could have a similar effect – especially if investors are also concerned that they might not be able to buy at all if/when caps on debt to income ratios for mortgage lending are imposed next year.
However, the key point is that the biggest challenge for making the sums work on purchasing an existing property as an investment at present isn’t the lack of mortgage interest deductibility; it’s actually the large negative gap between rental yields and mortgage rates (and significant top-ups).
As such, although some investors would enjoy a mood/sentiment shift, and may be tempted into a purchase by a National victory, we doubt it’ll be a game-changer.
Of course, the reinstatement of full mortgage interest deductions would certainly be welcomed by existing property investors, given it’s a direct boost to their profits. It’s certainly worth noting that those that have been in the game for a longer period haven’t really been as affected by the phased removal of deductibility anyway, and haven’t been selling to any great degree. But some extra cash would obviously be a solid boost for them anyway.
What it all means
Overall, if National won the election and made these policy changes, the reduced incentives to buy new-builds (although the LVR system would still tend to favour them because of lower deposit requirements) would tend to see demand rise for existing properties relative to new stock – with associated price effects. Indeed, there is some evidence to suggest that a new-build premium has opened up a bit in recent years, which could then go into reverse.
More generally, the combined effect of the changes could result in higher house prices than otherwise would have been the case, but perhaps not to a significant degree in aggregate. After all, affordability is still stretched, rental yields low, and mortgage rates high. Caps on debt to income ratios remain on the cards for 2024 too.
All that said, however, there’s always the risk of adverse consequences, and a stronger price effect couldn’t be totally ruled out, especially if foreign buyers targeted a market such as Queenstown.
*Kelvin Davidson is CoreLogic NZ's Chief Property Economist.
79 Comments
Tax rinse away with a side order of maximum bank profit. Is that what we really want NZ to be when clearly we need every tax dollar generated possible for govt related services that are struggling. It also allows prices to inflate putting further pressure on our educated youth to move to Aussie.
Really highlights why the simplicity and regular nature of a land tax is the way forward.
Yes it is, we know that because National are about to be elected with that mandate.
Those moving across the ditch will benefit from lower cost of living due to coal, so if you're into net zero perhaps have the integrity to stay here.
https://www.afr.com/politics/federal/burke-to-get-extraordinary-powers-…
re ... "we know that because National are about to be elected with that mandate."
Say what? No such mandate exists.
You, yourself, made that abundantly clear earlier today by saying you're only voting for National because you believe it is retribution for Labour's past actions under a previous leader. That means you've given them no such mandate at all.
A protest vote conveys no mandate. Never has. Never will.
by Te Kooti | 6th Sep 23, 9:20am
I'm voting National as a vote against Jacinda. Policy is irrelevant, this is payback for what she did. She may be gone but she's about to get our verdict on her legacy and it's going to be damning. Perhaps no other Kiwi has had do much potential and flushed it away.
Shouldn't the "mandate" be a flow on effect of whatever policy platform was campaigned on? Not the individual intent of the voter provided the party they are voting for as a protest has made clear its intentions.
This is the whole issue with Labour (and what must surely be biting them in the ass like a rabid Rottweiler this election) - they didn't campaign on much last election apart from the "thank us at the polls for saving you from Covid" bit, and then proceeded to drop bombs like 3 Waters that probably would have been far less contentious if they had been channeled clearly prior to the election.
Labour's position being that "we got the votes, so we have the mandate" which is both reasonable and unreasonable depending on how you look at it.
I don't agree with much of National's policy platform, and I'm largely opposed to residential property investment, but it seems fairly clear what we would be getting and so if somebody wants to cast a protest vote - the opposite to a thanks for saving us vote, but the same principle in effect - at least they know where National stands.
TK,stretching it a bit to use the word 'mandate' with regards to proerty rule changes,sure they will be the next government,but for many it is to swallow a rat to oust Labour.
And you stretch it further to try and collate lower cost of living in Oz with burning coal...how about economy of scale with 25 million people...or the fact that they have more minerals etc than you can shake a stick at that are all conveniently located in the middle of no where,where nobody cares how big a hole they dig.
There was a story years ago where they said when prices went down,they just dug double the mount out of the ground.
https://www.theguardian.com/australia-news/2023/aug/30/eastern-australi…
Disagree vman, they have a clear mandate to deliver on their property policy which is one of the major differences to Labour.
Whether you are a lifetime Nat voter or swallowing a rat is irrelevant, you are voting in that policy and they are entitled to deliver it.
As for coal and Australia, they are increasing coal royalties with that money set aside to reduce the cost of living crisis. It is above and beyond any scale benefits they enjoy.
Goes to show how foolish most are when reasoning gets thrown out the window in a crisis. I always advocated to friends and family to vote elsewhere last election due to the risk of having a majority parliament and still Labour delivered naught but long-lasting misery and social division in the name of ‘unity’.
Misery and social division must be living in New Zealands version of the purge. National started all this and labour continued it. Least labour are trying to reduce house prices, with deductibility and DTI not to mention MDRS. Nothings perfect but what is Luxon going to do other then make sure his property portfolio is nice and ready, when he gets offered a chairman's role in a bank. Labour have over seen Nationals mass immigration policies though, creating low social economic hotels in South and West Auckland. Creating more opportunities for homelessness. Both parties are culpable for our crime and poor infrastructure. I work with amazing immigrants, my wife is one. But the mass immigration with quality control dialed down to zero is social devastation.
I like NZ a lot though, beaches are so much better then when I traveled around Europe. Mind you some good ones in Europe as well, but that costs money to get there.
Te Kooti bang on. These people that scream climate change and NZ needs to be net zero also want higher wages and free medical and student loans turn around and shift to Aus for the higher wages soon forgetting that coal and the carbon sector underpins the Aussie economy with only WA and Queensland paying the federal government royalties while the other states are a drain yet pay their nurses doctors teachers etc etc higher incomes which comes from coal royalties. People are such hypocrites
Australia will always be a richer country compared to Aotearoa because of their vast mineral deposits with no limitation of access. We should stop comparing ourselves, its just one moot argument to nowheresville. If peeps want to go there they will. As for brain drain? Who cares. NZ makes all its international money from exporting milk solids. How much brains do you need to milk cows?
Not just tax dollars are required. How about the huge sums that are being given to rich people so that an ordinary Kiwi can buy a house in NZ? For some reason we think this is normal. It's not. It is an example of a total failure of our governments for the last 30 years. They seem only to exist to ensure the rich get richer.
Spare a thought for Jack ... He pays twice as much to rich people than he does in tax ... Is it any wonder NZ has a crumbling infrastructure and deteriorating public services?
by GetFeeling | 19th Aug 23, 1:44pm
Take my friend Jack ... Average Kiwi bloke earning $80,000 per year.
Government takes about $17,320 in income tax each year.
Jack hates paying tax and begrudges paying it.
How dare they take money he has earned!
Still, people tell him he actually gets back most of it in government services.
But Jack has also just taken out a $500,000 mortgage.
In the first year, Jack will pay some $34,839 in interest.
Yes, read that number again. Twice as much as the government takes from him in tax.
He'll never see this money again. Nor receive any physical services.
Some of it goes to people richer than him that have been able to save money and then lend it to banks.
The rest of it goes to very rich people through a convoluted series part-payments with yet more rich people taking a cut.
Does Jack begrudge paying this "Housing Tax" to faceless rich people?
No. Jack just accepts it as the price to pay that ensures that over time his 'asset' will appreciate in value.
But does it? Once all the costs are taken into account, and including the slice rich people take, and adjusted for real inflation and property cycles - it is questionable.
But what is unquestionable is that the rich have found a way to tax the majority of us way more than our governments do and provide nothing in return except for the 'privilege' of paying them more and more as they lend more and more to inflate house prices.
Any government would do well if they build social housing and rented them out at low rates.this could be funded by small sale tax say 0.5% on all house sale also tax land bankers. Investors would be losing money if they buy average home in Auckland to rent 1 million in falling house market when could be making 60k with a bank term deposit. Any government should stop speculators as this is causing huge social problems when most of the population who do not own a property have very little chance to buy.
The current idea of reducing the amount of interest a property investor can claim as expenses is working fine. The most responsive part of the property market is CBD apartments and they have dropped in price like a stone. The rest of the market is following. And the higher interest rates are then the more tax the govt collects. With interest rates and inflation closely related it means NZ govt stamps harder on property prices just when it is most needed.
I'm guessing when ACT/Nats get into power they will delay any removal of this policy. This tax year it is 50% of all investor interest and it comes just as most fixed mortgages are refixed. It is making quite a difference to my modest property investment and it will be a kick in the teeth for less defensive property investors. [Disclosure - I'll be hit quite hard but on the other hand I have several working adult children who may have a chance of buying their first property].
Looking at the current situation from the perspective of a new investor really isn't valid.
The vast majority of residential investors have been in the 'game' for many, many years.
Thus, whatever might be relevant now, will not be relevant to the bulk of them.
The bulk will be sitting on substantial tax free capital gains and will have smaller mortgages. For these "investors" having to pay more tax on their already hansom yields is what will be irksome. I.e. they don't want their incomes taxed. The National Party is - once again - ensuring the already wealthy benefit the most.
So let's get real.
National Party policies are about enriching existing investors much more than about any potential new investors.
You gonna vote for the party the wants public services to be race based?
https://www.rnz.co.nz/news/political/492341/opposition-parties-accused-…
Screw that. Join the 45% of Kiwi's that are voting for a minor party that wants to actually change things.
Easy to throw the race card out there,ACT wan't to discriminate in other ways as told to Jack Tame on Q&A last week...that episode was worth a watch,Labour,Nats & ACT all had a candidate grilled by Jack,he was equally hard on all of them,was refreshing to hear someone ask tough questions for a change rather than a newstalk ZB bias.
excerpt;
He also thinks Pharmac needs to evolve alongside the evolution of medical technology.“A lot of the treatments and the innovations being brought forward can actually deliver economic benefits because you’re treating people who can work longer or go back to work when that wasn’t possible.”“It would be good to be able to take a more holistic approach to what these treatments are bringing.”When asked if that meant more economically productive people should be prioritised for treatment, Stephenson said: “Not necessarily, but when you’re looking at the value of these treatments, that should be taken into consideration.”“If your treatment can return someone to work faster, how does that benefit the whole of society? And then those bodies that are making those value judgements can decide whether that should be put into the equation.”Take out,if you are unemployed or retiredyou won't be getting any expensive treatment.
Please don't. (And I say that as a life long Labour voter.) Their abdication of any responsibility for the growing inequity in our society is outrageous.
I will be voting for the Greens.
Instead of a Labour / Greens government I'm hoping for a Greens / Labour government with the Greens in both the Finance & Revenue seats.
Our tax system MUST be reformed. We owe it to Jack and Jack's kids.
Run the numbers again assuming it's used as a BNB instead of rental, and with interest rates easing off a bit, then you get a different picture.
Gross yield: 5%
Interest rate: 5.5%
Income: $39500
Interest: $28242
Other costs: $11000
Total costs: $39242
Now with full interest deductibility it turns a small profit.
Sure, most investments aren't suitable for Airbnb but if 5-10% of them are then that will put a floor on prices in suitable areas.
They promised no tax changes, and then made them, claiming that they were not tax changes but they had "found a loophole in the system ". Technically maybe not unlawful, but they broke a promise. (This is in relation to the debate on removal of Interest deductibility and the proposed reinstatement).
You should probably add: restricting new affordable housing developments
https://i.stuff.co.nz/business/300964613/developer-licking-wounds-after…
John Gillon is aligned with Shore Action a National Party proxy in Auckland Local elections.
Probably more symptomatic of the fact that National is no longer the "party of business", but just a bunch of property speculators who appear happy to govern instead for the benefit of their own multi-million dollar conflicts of interest. At the sacrifice of the economy.
Maybe it's because they are all have BAs and or have worked as policy wonks / lobbyists. No real world experience.
** I don't actually believe having a BA or a being a policy wonks makes you a worse politician, just throwing out the same nonsense people spout about Labour
Not all of them are BA's. Nicola Willis has a journalism degree, a qualification which matches her portfolio as spokesperson for finance. Maybe if you want someone to "spin" the numbers.
I throw out that nonsense about National and I actually voted for them once (never Labour).
Business is just too hard. You have to employ people, pay taxes, carry inventory/materials, marketing, deal with shrinkage from those dreg shoplifters, all that not so fun stuff.
What other industry can lock someone into a contract for 2/3rds of one person's wages for 12 months, while not putting a single cent of your own money into the pot, while simultaneously claiming all the tax benefits that go into real business? If you need more income, just raise your prices. Real business will have to reduce their bottom line to compensate, if not the taxpayer will just subsidize.
Not only that, but the path to profitability can be long. If you're expecting to earn hundreds of thousands, or million of dollars a year in income, there's usually a long time between inception, investment, and return. Even more so if R&D is part of your model.
Usually also, it's not something you can necessarily apply a standard formula to. You need people who can see what most can't, and most of those sorts of people often have bad ideas, than good ones.
Don’t forget you are a business when it comes to claiming tax deductions and running all your household expenses though, but just a “hardworking mum and dad investor” when there’s any discussion of business rates or taking out a business loan rather than residential mortgage.
best of both worlds
In my opinion, reversing the Brightline back to 2 years will result in a haemorrhage of ex-rentals hitting the market. The reason why? Its in that cashflow table. Those numbers are for an INTEREST ONLY mortgage. I'd be interested to see the same calculation using a standard P&I mortgage to really see how much it is costing investors to keep an investment property at the moment.
Increased listings will result in reduced prices. Especially of those recent new builds where investors must be really struggling to achieve a decent rental yield, and there is very little opportunity for capital growth or value adding over the medium term. If there is one bad tenant in the complex, their properties are actually more likely to depreciate in value instead. They will be very very lucky if they can get out even, let alone without suffering significant losses (see below).
Currently the value of the tax deduction benefit is built into the price of the new property (and paid by both investors and owner occupiers) which is why there is a premium on new builds compared to builds a few year older that dont qualify for interest deductibility. Reinstating deductibility will eliminate this premium overnight by equalising the market. Prices of new builds will be forced to drop. Developers will have to sell their yachts. Investors will be free to buy older properties that do not cost as much, and rent them at lower rents compared to new builds. This will be a relief to low income tenants who are currently struggling to find affordable properties, as almost everything on the market at the moment is a new build townhouse.
Builders who are currently building 6 x 75 sqm dogboxes can turn their talents to building some amazing $2M homes to sell. Lets swap modern ghettos for great architecture.
As a voter, I have 3 options:
- Vote for a party that I want to win
- Vote for a party that I don’t want to win
- Don’t vote at all
Statistically speaking, all 3 options have (effectively) zero effect on the election outcome…
Guess I’ll save time and not bother reading the policies ;)
Totally agree. The concept of referred decision-making by politicians is completely unnecessary in today’s world. We have the technology to allow everyone (who cares) to vote specifically on the policies that affect them.
It seems so archaic to vote for a party who then make decisions on your behalf for the next 3years… Although I’m sure it suits them well.
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