Since the Government announced new tax rules that will greatly affect residential property investors, there have been many and varied predictions on how effective the measures will be.
The extended bright-line test applies to properties purchased on or after 27 March 2021 but other amendments bring existing properties further into the tax net.
The proposed changes include:-
- Extending the bright-line test to 10 years.
- Amending the main home exclusion which requires tax to be paid on gains made for periods longer than 12 months when the property is not used as the owner’s main home.
- Allowing newly built homes to use a 5-year bright-line test.
- Not allowing property owners to claim interest on loans used for residential properties as an expense against their income from those properties. This would start from 1 October 2021. but phased in over 4 years for existing homes. Newly built homes are exempted.
The Government’s stated objective is to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for 1st home buyers. Homeownership is at its lowest level since 1951, prices continue to soar and saving for a deposit can take years longer.
Property investors are upset that they are bearing the brunt of the Government’s efforts to ease the housing crisis. While low interest rates have made property investment attractive, the systemic failure by the current and past Governments to fix housing supply is actually the root of the problem.
Time will tell how the measures pan out and how many investors will ride with this or sell or raise rents to manage.
Key questions being asked are:-
Will rents go up? A third of New Zealanders rent. Have they been considered? A recent survey suggests that 50% of landlords would be increasing rents by more than 10%.
Therefore, this could impact first home buyers who are renting, with their savings for a deposit.
Will prices fall? Early survey results among real estate agents indicate a feeling that prices are still rising, and FOMO (fear of missing out) remains on the part of buyers.
What about supply? Building industry groups are warning of building delays as timber, nails and other supplies wind down because of shipping delays and manufacturing problems.
Will first home buyers now be vying with property investors for new builds?
Is this hitting more the “Mum & Dad” investors planning for retirement, than big-time players who can afford to sustain comfortable investments and may be able to set property investment mortgages against other income and continue to claim interest?
Will repairs and maintenance on rental homes go on the backburner?
There are calls to adopt other measures to address the crisis and while it is a catch-22 if there is a supply shortage, the wheels can still be moving.
Using the tax system to deal with a housing crisis does not seem the right way to go.
Councils are being urged to ease planning rules and to scrap unnecessary restrictions for developing higher-density housing. A Build to Rent state scheme could provide secure housing for renters and the existing homeless.
As we roll on to 1st October 2021 when the new legislation kicks in, you may be a property investor who wishes to consider other options.
Re-structuring, or selling and investing in commercial property, new build rental properties or a growing share market could be viable options.
If you wish to discuss any concerns or to learn more, contact us.