Some of the coalition Government’s property tax policy changes could have marginally negative impacts on financial stability, the Reserve Bank says.
The central bank highlighted three tax adjustments, which could have an impact on property prices, in its Financial Stability Report published on Wednesday morning.
First, it said restoring interest deductibility for investors in residential property would boost their valuation of existing homes and boost their debt servicing capacity.
This would increase demand for existing properties and presumably push up prices.
Secondly, reducing the brightline period to two years would increase the after-tax profits earned by investors selling properties within the period.
“This could increase speculative housing activity at the margin,” the Reserve Bank said.
It could also prompt investors struggling with debt-servicing costs to sell their properties now, instead of waiting out the 10 year taxable period.
While house prices were within the sustainable range, increased investor activity from these tax policy changes posed a risk that prices could rise above sustainable levels.
Chlöe Swarbrick, co-leader of the Green Party, said the report made it clear the Government’s tax decisions were increasing house prices and “lining the pockets of speculators”.
Strong population growth and potentially lower mortgage rates were also cited as potential drivers of higher house prices, with fewer new homes likely to be built going forward.
The Reserve Bank said the supply of new housing would slow once developers completed their existing projects, despite growing demand for rental properties.
Amid economic uncertainty and reduced borrowing capacity, buyers were preferring to purchase existing properties rather than buy new builds off the plans.
“As a result, many developers are finding it difficult to achieve the levels of pre-sales required by banks to finance new projects,” the central bank said.
Watching commercial property
The Reserve Bank singled out the commercial property sector as being particularly troubled in the high interest rate economy.
While this sector is a key source of risk overseas, it only makes up about 8% of bank lending in New Zealand. The vast majority of lending is related to residential housing.
That said, commercial property has been struggling with weaker demand for office and retail space after the pandemic and now because of the broader economic slowdown.
Rising unemployment and soft consumer spending means businesses are less likely to need additional office space or want to open a new retail store.
The RBNZ said the economic slowdown was the key risk to the sector, but the Coalition’s plan to remove the depreciation tax reduction could add to existing cash flow pressures.
Finance Minister Nicola Willis said removing the “one-off changes” made to depreciation during the pandemic was a key part of the tax package.
“That provides us a significant source of funding for personal income tax reduction, that’s the policy we campaigned on and reflects our priority of giving working people a better deal”.
Both National and Labour campaigned on removing the depreciation tax benefit from commercial property owners as a way to raise about $525 million a year in revenue.
There has been a long-running debate about whether commercial property depreciates in the same way as other physical assets do. While buildings depreciate, land values often increase.
Depreciation claims were removed by National in 2010 but were brought back by Labour in 2020 as a form of fiscal support for commercial property owners during the pandemic.
It was originally intended to be a permanent measure but it was picked up by politicians as an easy source of revenue to fund more popular policies — such as tax cuts.
Helen Johnson, a legal partner at PWC, said getting rid of depreciation contradicted the recommendations of the 2018 Tax Working group and created uncertainty for investors.
“Many decisions made since 2020 to strengthen, upgrade, develop or acquire commercial property, will have factored in depreciation deductions and, should the changes be made, marginal investments may now be at risk,” she wrote late last year.
72 Comments
Back of a fag packet:
(reportedly) 7 rental properties @ $924,734 = 6,473,138
Gear them at say 70% = 4,531,197
Interest @ say 7% = 88,811
Deduction benefit @ say 28% = 24,867.
If I were him I wouldn't even claim it. The noise wouldn't be worth it.
But it will have bought some votes, especially in Epsom...
Once upon a time a family of 4 with 1 adult working could survive. Are you suggesting that people are far too frivolous these days that they cannot make 2 wages work without subsidies?
Or maybe it has something to do with living costs/rent taking up most of a single income, and then heaven forbid you have just 1 child that goes to daycare at $7 - $8 per hour. $300 per week, or $150/w if you factor in 20 hours fees free.
Totally agree Rick Strauss
If there was one thing the last lot did a good job of was undoing the property Ponzi.
The Ponzi was started by John Key and his Laundered international money (Very cleaver for a banker).
What a legacy he left killing the Kiwi Dream of a house and a beach batch if you were very lucky.
National will again kill this country if the Ponzi is restarted.
What's the mater with investing in business, shares, commercial property, and other productive investment.
We must leave the house Market alone for people to have a home a get NZ back on track.
With Luxon invested in residential property shows his skill as a great business man very, very poor why would he not sell up and invest in some productive assets.
We have been a one trick pony sense the GFC residential property look where it's got us the worse mess we have ever seen this country in.
I find the whole partisan blame thing a bit tiresome to be honest.
Interest rates have and will continue to be the strongest influence on property prices. There's a reason that the property ponzi problem emerged around the same time in so many similar countries and it has little to do with the particular political parties in power at the time. More the fact that they all subscribe to roughly the same system and ideology.
This is not to say that particular policies can't exacerbate the effects.
Here's some food for thought. As productivity increases, more credit is made available, leading to more debt servicing costs as people compete to purchase existing assets. In other words, we aren't all working two day weeks as predicted in the 70's because all of that extra productivity is soaked up by the finance industry. It's not a sudden interest in iPhones and avocados as some would have you believe.
FIRE is out of control.
I find the whole partisan blame thing a bit tiresome as the blame is being laid in completely the wrong place.
Let's be clear. The government - it wouldn't have mattered which party( was in at the time - did the right thing by directly helping both businesses and people keep their heads above water. Meanwhile the Reserve Bank of NZ (RBNZ) threw caution to the wind and juiced the economy to absurd levels by making credit practically free!
And yet somehow this is all government's fault? Does nobody understand what happened?
Absolutely the RBNZ stimulus of the property market was an incredible handout of, what, around $11 billion of taxpayer money in the end.
The problems people have with policy are separate to that. E.g.
- overtaxing work and undertaxing speculation on existing houses
- raiding the retirement scheme once, now looking like twice, to make younger generations pay more
- taxpayer subsidies of demand
- constraining of supply by walking back on the MDRS
I think everyone is aware both Left and nominally Right have run terrible policy in this enabling of a huge housing bubble with all manner of crises ensuring from it. What they then look for is a party to do something better.
Cutting taxes on property speculators while raising costs on others (and while also subsidising demand and giving money to wet properties) is not that. And it's actual current policy that's worth critiquing.
Cutting taxes on property speculators while raising costs on others (and while also subsidising demand and giving money to wet properties) is not that. And it's actual current policy that's worth critiquing.
I agree. On the other hand, I'm a firm believer that real change only happens in response to a crisis. We aren't quite at crisis point yet with regard to the property market (from the perspective of the majority of owners). We're definitely heading there though. Capitulation will be the next step that sharpens the collective mind. Following that, another big step down that will have a lot of people that thought they could manage comfortably suddenly realising this affects them too. This is the point where real change will start being discussed but I think it would be best addressed after the market has spoken (i.e. after the decline - not further attempts to stop it).
It could be brutal for many in the so-called lucky generation who are beyond working age and think they have a golden retirement all sewn up.
As far as government policy goes. I can only hope that once this disaster is done we have someone in power with the political capital necessary to put in place policies to avoid it happening again.
A few simple things I'd like to see:
- Introduction of net-neutral land value tax offset by rates and income tax reductions (no exceptions - family home included, but option to defer payment to the estate).
- Lending rates based on purpose (i.e. contributes to GDP means a lower rate, borrowing for purchasing of existing assets means a higher rate).
- Phasing out of the accommodation supplement tied to increase in government provided housing supply.
- Tighter regulation of the short term rental market. Such as either registering to be able to rent on this market full time and agree to regulations similar to the rest of the hotel/motel industry, or being limited to say 3 months max per year - i.e. enough to allow for home owners to rent out their primary residence while absent.
None of this will be possible today as there are too many benefiting from the artificial state of the market. Once enough are forced to face the reality of the situation these things will become possible for many more to accept.
Did you mean ...
Exhibit A: The RBNZ dropping LVRs entirely
Exhibit B: The RBNZ dropping the OCR to 0.25%
Exhibit C: The RBNZ throwing money at the banks through various schemes
Exhibit D: The banks dropping mortgage rates down to 2.5% and throwing prudential lending checks into the bin
Exhibit E: Rampant inflation caused by broken supply chains and a RBNZ juiced economy.
That's what you meant, right?
I dont get the argument on the brightline test. For anybody who brought under the "10 year rule" unless they brought in the last 12 months , then selling now they will likely take a loss and no brightline liability is incurred. I base this on house prices now been lower than prices from late 2020 and the rule becoming effective in March 2021 - just as the housing market reached its peak.
The only investors that are likely to benefit from the change to the brightline rule - would be those who brought in late 2019 - early 2020, some of those investors may have a gain - but the reality is as they brought under the 5 year rule they would only need to wait a maximum of 12 more months to not incur any tax liability.
Agreed. I don't own an IP, probably never will (seems like the juice is hardly worth the squeeze these days) and am hardly pro-landlord, but it seems strange that a business can for example finance a vehicle and claim interest deductibility on that, but you can't for an investment property.
I'd take the position that if you're claiming interest deductibility on an investment property, then you're "in business". As far as I can tell, the business model is generating capital gains (using the rental income to offset the cost of acquiring those capital gains). Therefore, you should pay capital gains tax. Easy peasy.
As it's a business, you should also have to seek business lending to fund your property investment. Maybe that's ignorant of me though as I've never borrowed money to start a business, so not sure to what extent it differs from personal lending.
So much of the problem with property investment seems to come from this weird No Man's Land that the industry occupies, where it is sometimes a business, and then sometimes "mum and dad trying to get ahead" and not a business (depending on what will get the best outcome).
If it's a business, treat it like a business (no different to running a cafe, or selling feet pics on OnlyFans) tax the "business model" accordingly and then we can move on to more productive arguments.
The business lending is an interesting one, and I think there are a couple of obstacles to making that work and in general NZ business lending seems pretty broken (no expert here :).
By RB mandate, business lending can only be a set (and small) percentage of any bank's "book" as it is seen as inherently more risky. This is total BS of course as the lending is ALWAYS made against the personal assets of the business owners (always property - almost always residential property) and so carries the same risk rating as residential lending.
This makes new businesses much less able to compete against well-funded, larger businesses and may be a contributing factor to the inherent formation of duopolies and oligopolies in out marketplaces.
Interesting context, thank you.
I've been in business for a while now myself, but the only borrowing I've ever done is a couple of vehicle finance arrangements - I've never had to go through the whole "post up my family home as collateral for a marginal restaurant"
Most property investors are presumably borrowing against the house already (at least to start their investment "journey") by tapping into equity. Make them borrow at business rates, which seem to be significantly higher than personal rates.
In that case, when the business of property investment is being treated like any other business (both on the borrowing side and the taxation side) if you can make the numbers work and be successful with it, then fill your boots for all I care.
Yep, that idea has merit but I think perhaps the bankers are not keen on the "business" lending charade (being that all the lending is essentially proxy residential lending) being too exposed.
It would certainly slow property investment, which has positives and negatives (negative for people like myself that only invest in net-new properties).
Lastly, it would also increase bank profitability for no increase in risk so it would result in even more off-shoring of cash-flow.
I personally don't care so much about slowing (or accelerating) property investment as I do about bringing it "in line" with all other forms of business activity.
Tax it fairly, make the rules the same, and then if somebody can make it work for them, then good on them as far as I'm concerned in the same way that while you'd never catch me opening a cafe or a restaurant (and many people try and fail) some do make it work.
This is certainly merit to that argument, and it may well be correct. The other argument is that by providing a deduction to a landlord, but not an occupier, the landlord has a lower cost of ownership of the same property and therefore can in theory pay a higher price. Both of these arguments can be true at the same time, however people typically side with one over the other based on their political leanings.
An example of this cost of ownership is two people buy identical townhouses next door to each other, if they rent to one another, rather than live in their own, they both live in an equivalent home but have a lower cost of living due to the deductions available (avoiding the issue of ringfencing of losses if they exist for the sake of this example).
A solution which could satisfy both arguments is to allow owner occupiers the same deductions as landlords. This will, however, degrade the simplicity of our tax system and open up to gaming.
I've ned money to ever borrowstart a business, so not sure to what extent it differs from personal lending.
There is no difference, and interest should never be deductible whatever its purpose since interest is unearned income (i.e. non productive income - it arises from the exploitation of an existing asset). Notwithstanding this a government may wish to allow deductibility for productive businesses since production is something a government may wish to encourage.
It will only be fair if you brought a capital gains tax in for all investments, and not just residential housing. Currently, the only form of capital gains tax in NZ is reserved for residential housing - the brightline test. It would be 'fairer' (in the sense of tax equality) to remove it.
agree on the CGT bit. I am supporting to let residential properties run like a normal business, take away the excessive meddling so that landlords do what landlords should be doing.
the key issue is that the sense of unfairness is purely from tenants point of view, which make it actually not fair to landlords.
from a tax point of view, capital gains should be taxed, so that we balance the tax on capital incomes to the tax from wages. though, I'd also keep close watch on how governments spending our tax dollars. last government got criticized not because of tax grab, but because of their irresponsible spending.
I am supporting to let residential properties run like a normal business, take away the excessive meddling so that landlords do what landlords should be doing
Normal businesses produce stuff. Residential rentals don't. That's why the latter should be treated differently.
Bearing in mind it is agreed that 33% of all dwellings are rentals and not all rentals have maximum gearing (mortgage) I doubt the predicted problems blamed on tax changes will occur. Wage workers get their tax taken out of their pay. Landlords pay tax the next year. So landlords still have to pay labours “tenant tax” over the next 12 months based on last years profit. I am yet to meet a banker who understands our business.
"First, it said restoring interest deductibility for investors in residential property would boost their valuation of existing homes and boost their debt servicing capacity. This would increase demand for existing properties and presumably push up prices."
How? Currently anyone purchasing an investment property is going to be losing money, paying 7% interest rates while receiving 3-4% gross rental yields, plus wearing massive cost increases in insurance and rates. If the numbers dont work to buy an investment property now, nobody is going to be saying "hey lets pay even more money to buy an investment property so I can lose even more money each year".
I have a property that if rented out, rates and insurance alone would eat 25% of the rental income. I have no idea how investors are buying anything with debt.
"Secondly, reducing the brightline period to two years would increase the after-tax profits earned by investors selling properties within the period. “This could increase speculative housing activity at the margin,” the Reserve Bank said."
Speculative activity is already taxed under other provisions of the Income Tax Act such as the intention test. Those buying, renovating and selling have always paid tax on capital gains, and will continue to pay tax on capital gains. Flippers dont wait 2 years to sell a property - holding costs would eat all their profits.
It could also prompt investors struggling with debt-servicing costs to sell their properties now, instead of waiting out the 10 year taxable period.
This will reduce house prices not increase them. Did anyone at the RBNZ actually study Econ 101?
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