Housing Announcement and Reforms 23/03/2021

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#2679035 23-Mar-2021 10:18

wellygary:

The most interesting move is the removal of interest deductibility as an expense.... Now I can see this pushing a number of small investors out of business and making them sell up (probably the government's intention)..

But the unintended consequence is that it is a disincentive for large scale corporate investors to move into the "build-to-rent" sector. ( which the government does want)

Good point. I get the feeling they want everyone out of the rental sector except for Mum and Dad retirement investors. Short term, houses get dumped and go to FHB's. So you start moving the 60:40 own vs rent to a better ratio. They are continuing a focus on social housing, so thats a top up to the rental market?

Im not sure how many renters are permanent renters and how many are FHB hopefuls, they will need to monitor the metrics so that the desired move from renting to owning is gradual and doesn't cause holes, such as a selling rentals exodus. No one knows, but they MUST keep an eye on all this as it plays out, as its anywhere from "yes, we do see a slight move to its a mass sell off"

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#2679041 23-Mar-2021 10:29

wellygary:

The most interesting move is the removal of interest deductibility as an expense.... Now I can see this pushing a number of small investors out of business and making them sell up (probably the government's intention)..

But the unintended consequence is that it is a disincentive for large scale corporate investors to move into the "build-to-rent" sector. ( which the government does want)

I think what's more likely is that investors will just push the effective increased cost directly onto tenants en masse. Why would they not? What're you going to do - buy a house?

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#2679155 23-Mar-2021 11:48

The press release:

The Government has announced a housing package that will increase the supply of houses and remove incentives for speculators, to deliver a more sustainable housing market.

“This is a package of both urgent and long-term measures that will increase housing supply, relieve pressure on the market and make it easier for first-home buyers,” Jacinda Ardern said.

“The housing crisis is a problem decades in the making that will take time to turn around, but these measures will make a difference.

“There is no silver bullet, but combined all of these measures will start to make a difference,” Jacinda Ardern said.

$3.8 billion housing acceleration fund

Housing Minister Megan Woods said the Government is speeding up the pace and scale of house building with a $3.8 billion Housing Acceleration Fund.

“We estimate the Housing Acceleration Fund will help green light tens of thousands of house builds in the short to medium term.

“Investment in infrastructure has been identified as one of the key actions the Government can take to increase the supply of housing in the short term.

“This fund will jump-start housing developments by funding the necessary services, like roads and pipes to homes, which are currently holding up development.

“The Government will also assist Kāinga Ora to borrow an additional $2 billion that will assist in bringing a range of development forward through strategic land purchases,” Megan Woods said.

Extra support for first home buyers

First home buyers will also get more help to get into the housing market with increases to First Home Products’ income caps and changes to regional price caps.

In 2019 the Government changed the rules so people only need a 5% home deposit before they can apply for the help. Today that is being expanded to ensure more people are included. This expansion comes alongside the recent RBNZ Loan-to-Value Ratio changes announced that will see investors require a 40 percent deposit from May 1 2021.

“Income caps to get financial assistance will be lifted from $85,000 to $95,000 for single buyers, and from $130,000 to $150,000 for two or more buyers. The changes to the house price and income caps will take effect on 1 April 2021,” Megan Woods said.

Changes to regional price caps on new build and existing properties will also reflect the increased price of housing.

“This package of measures will help first home buyers into the market and boost activity and create jobs in the construction sector, as we recover from the impacts of COVID-19,” Megan Woods said.

A further package specifically targeted at Māori housing is being developed for Budget 2021.

Extension of bright-line test to 10 years

Grant Robertson said property investors now make up the biggest share of buyers in the market so it’s essential the Government takes steps to curb rampant speculation.

“Extending National’s bright-line test and removing interest deduction loopholes for investors will dampen speculative demand and tilt the balance towards first home buyers.

“The New Zealand housing market has become the least affordable in the OECD. Taking action is in everyone’s interests as continuing to allow unsustainable house price growth could lead to a negative hit to the whole economy.

“House price increases of the magnitude we have seen in recent months are not only harmful to affordability, they also present a risk to economic stability.

“Our plan also encourages investment in new builds. To support our goal of increasing supply, we will keep the bright-line test for new build investment properties at the current five years.

“This will give Kiwis a better chance at purchasing their first family home. I want to stress that the bright-line test does not and will not apply to the family home,” Grant Robertson said.

Removal of interest deductibility loophole

The tax system favours debt-driven residential property investment over more fully taxed and more productive investments. To reduce investor demand for these investments, the Government will remove the advantage investors have over first home buyers.

“Cabinet has agreed to remove the ability for property investors to offset their interest expenses against their rental income when they are calculating their tax,” David Parker said.

Ministers are also considering closing a loophole on interest-only loans to speculators. The Reserve Bank will report back to Ministers in May on this and any proposals around Debt to Income Ratios, particularly for investors.

Extension of apprenticeships boost

To ensure we have the people power required in the construction sector, the Government is extending the Apprenticeship Boost initiative by four months to further support trades and trades training.

It means employers who have apprentices starting over those extra four months can get some Apprenticeship Boost support as well, which could see more than 5,000 new apprentices able to benefit.

Since launching in August 2020, more than 10,000 employers have signed up and received almost $97 million in subsidies for more than 21,000 apprentices.

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#2679169 23-Mar-2021 12:10

vexxxboy:

We are building roughly 14,000 new homes a year and the population is growing by 60,000 a year. So the government can do what it likes but it wont make any difference until we can build more houses to keep up with the demand.

Average household size is 2.6 so on the face of it we need 23,000 houses per year to keep up with population growth. But that doesn't take into account extensions to houses which can increase the household size (although that's not very helpful because the average household size is gradually decreasing). Then there's also the regional mismatch, where there are (I guess) houses available in rural locations (due to increased mechanisation of farming) but not in cities.

sen8or

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#2679331 23-Mar-2021 15:29

From our accountants -

Main home exemption

The sting in the tail of the extension of the bright-line test is the proposed change to the main home exemption. If you acquire land (including your main home) on or after 27 March 2021, then you are by default subject to the new 10-year bright-line test, or the new five-year bright-line test for new builds.

Well, that’s fine because it is going to be used as my main home you may be thinking. However, be warned that you are now subject to a new main home exemption. The existing main home exemption is an all or nothing test – so if it is your main home for at least half the time you own it, then it applies.

The new main home exemption test will work differently. Now, if you have periods of 12 months or more where it isn’t your main home, then you will need to account for tax on a proportion of the capital gain derived.

So, if you own a property for eight years, use it as your main home for five years and rent it out for three years, then you will have to account for tax on 3/8ths of the capital gain. Say you buy a property for $1 million and its worth $2 million when you sell it, you’ll be liable for tax on $375,000 (being 3/8ths of the $1 million gain).

This rule doesn’t allow a market value uplift for the “cost” of the land at the time you stopped using it as your main home. Instead, it taxes a proportion of the capital gain derived over the entire period of ownership.

Can we tax it, yes we can....

Batman

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#2679344 23-Mar-2021 15:40

sen8or:
From our accountants -

Main home exemption

The sting in the tail of the extension of the bright-line test is the proposed change to the main home exemption. If you acquire land (including your main home) on or after 27 March 2021, then you are by default subject to the new 10-year bright-line test, or the new five-year bright-line test for new builds.

Well, that’s fine because it is going to be used as my main home you may be thinking. However, be warned that you are now subject to a new main home exemption. The existing main home exemption is an all or nothing test – so if it is your main home for at least half the time you own it, then it applies.

The new main home exemption test will work differently. Now, if you have periods of 12 months or more where it isn’t your main home, then you will need to account for tax on a proportion of the capital gain derived.

So, if you own a property for eight years, use it as your main home for five years and rent it out for three years, then you will have to account for tax on 3/8ths of the capital gain. Say you buy a property for $1 million and its worth $2 million when you sell it, you’ll be liable for tax on $375,000 (being 3/8ths of the $1 million gain).

This rule doesn’t allow a market value uplift for the “cost” of the land at the time you stopped using it as your main home. Instead, it taxes a proportion of the capital gain derived over the entire period of ownership.

Can we tax it, yes we can....

Hang on...

So in contrary if you buy a house and don't rent it out, can you avoid the tax?

Fred99

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#2679372 23-Mar-2021 16:08

Batman:

Hang on...

So in contrary if you buy a house and don't rent it out, can you avoid the tax?

I don't think you can now anyway if you don't live in it, it's subject to conditions (brightline test, if you've got a history of buying and selling regularly, whether you're associated with property developers etc). You could call it a holiday home or a rental, the brightline test etc still applies.

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sen8or

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#2679383 23-Mar-2021 16:21

I'd suggest you'd have to speak to a specialist tax accountant. All this tweaking around whats allowed, whats not, when exemptions may apply, what proportion is subject to increase etc is a minefield. I can see commercial property investment becoming far more appealing for investors, none of the changes announced apply to commercial properties and the rules around leases is quite different. Downside is that it can be significantly more expensive to get in to

Fred99

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#2679384 23-Mar-2021 16:21

Here's a take on the removal of negative gearing from Interest.co.nz.

You should probably visit the site to read the comments, some of which are delusional to the point of being hilarious:

The tax reforms the government is proposing for residential investment properties should go to the heart of the housing crisis and tip the balance of power in the market away from speculators and more towards first home buyers and long term investors.

This will be achieved by extending the term of the Bright Line Test for taxing capital gains on housing and by removing the tax deductibility of mortgage interest payments on residential investment properties.

Extending the Bright Line Test is not a surprise, but few thought the Government would have the guts to remove mortgage interest deductibility because this won't just affect property investors, it will have a flow on affect on the sacred cows in the banking industry who have grown fat on the back of the billions of dollars of debt that has helped fuel the housing crisis.

The fact that the Government has been prepared to stick its neck on the line over this issue, which will undoubtedly rouse the ire of a multitude of self interest groups, shows how seriously it is now taking the housing crisis and its flow-on social impacts.

One of the key things the Bright Line Test has going for it is that it is relatively straight forward.

At the moment, anyone who sells a residential property apart from their family home or an inherited property that they have owned for less than five years, is liable to be taxed on the capital gain.

The government intends to extend that period to 10 years, although the test for new builds will remain at five years.

So if an investor purchases a brand new property, they will only be taxed on any capital gain if they resell within five years. If they purchase an existing property, they will be taxed on the capital gain if they resell within 10 years.

It should be noted that investors can still make and keep a capital gain on property if they sell before those time limits, the tax just takes the cream off the top.

But along with newly reintroduced measures such as loan-to-value ratio restrictions on new mortgage lending, which require investors to have more equity in their properties, the change should take much of the speculative heat out of the market.

However the removal of mortgage interest as a tax deductible expense could potentially have an even bigger impact.

At the moment investors are able to offset the interest portion of their mortgage payments, along with other expenses such as rates and insurance, against a property's rental income when calculating the taxable income it produces. This considerably reduces the investor's tax bill.

However first home buyers and other owner-occupiers receive no such tax advantage.

That gives investors a significant advantage when deciding how much they would be prepared to pay for a property, potentially making it easier for them to outbid first home buyers in particular and adding to upward price pressures in the process.

Removing that tax advantage for investors should help level the playing field between investors and owner-occupiers. It could also have more far reaching implications for the housing market.

In the past, investor-led groups have let out a familiar cry whenever changes in regulations that they didn't like have come into effect, such as recent changes to the Residential Tenancies Act. "It will force investors out of the market," they say. But of course that hasn't happened - investor interest in residential property is as high as it has ever been.

But this time, things may genuinely be different.

Removing the tax deductibility of mortgage interest could have a serious effect on some investors' cash flows, particularly those who have borrowed to the eyeballs, and that may indeed force some of them to either reduce the size of their portfolios to pay down some debt, or cash up and exit the market altogether.

This would tilt the market further in favour of first home buyers and other owner-occupiers.

But some of the details on how the change will be introduced are still to be worked out, with announcement on the change saying it would apply from October 1 this year but would be progressively phased in over four years and that new builds may potentially be exempted.

But the timing of making such a change is perfect.

Mortgage interest rates are at record lows, which means the effect of making the change now will be minimised, compared to making it later when interest rates may be much higher.

Making the change now should help ensure that those investors who remain in the market are better capitalised and more able to withstand the effects of higher interest rates and other market shocks when they start to kick in.

However one change is certain.

The days of highly leveraged property investment are numbered and we are likely to see a substantial cooling in the market as a result.

quickymart

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#2679487 23-Mar-2021 19:42

Interesting changes announced today, but I don't know how much they will benefit me as a potential first home buyer trying to get into the market. I didn't see a great deal about increasing the number of new builds, although (and someone correct me if I'm wrong) I may have seen somewhere about how the government would pay to do the reticulation (streets, road lighting, power, water etc) into new subdivisions? That will help developers a bit, surely.

blackjack17

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#2679509 23-Mar-2021 20:21

quickymart:

Interesting changes announced today, but I don't know how much they will benefit me as a potential first home buyer trying to get into the market. I didn't see a great deal about increasing the number of new builds, although (and someone correct me if I'm wrong) I may have seen somewhere about how the government would pay to do the reticulation (streets, road lighting, power, water etc) into new subdivisions? That will help developers a bit, surely.

Why on earth should the government aka tax payers help pay for developer's new sub divisions?

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Fred99

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#2679512 23-Mar-2021 20:39

quickymart:

Interesting changes announced today, but I don't know how much they will benefit me as a potential first home buyer trying to get into the market. I didn't see a great deal about increasing the number of new builds, although (and someone correct me if I'm wrong) I may have seen somewhere about how the government would pay to do the reticulation (streets, road lighting, power, water etc) into new subdivisions? That will help developers a bit, surely.

I can only give an anecdote about what I expect the longer-term impact of removal of negative gearing may be, that from the reverse situation in Australia in the mid-late '80s.

Until "negative gearing" was introduced there was no way to offset interest costs against rental income and no CGT.

They introduced "negative gearing" and it caused a near instant boom in property prices that dwarf what's ever happened here, despite simultaneous introduction of a CGT.

Buyers were almost all investors not FHB, auctions were unbelievable frenzies for the same properties that one year before sat ignored in local RE agent windows until the photos faded.

The reverse (removal of a tax concession) will have the reverse effect. It's a very good time to do it, because interest rates are at historical lows, the initial impact will be low, but over time as interest rates normalise, it will have a large impact - far more impact than extending the brightline test or just a plain introduction of full CGT will.

Fred99

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#2679515 23-Mar-2021 20:54

blackjack17:

Why on earth should the government aka tax payers help pay for developer's new sub divisions?

So are you also saying "Why on earth shouldn't FHB of new houses in new subdivisions pay the full cost of all other infrastructure investment needed to support increased population, so they pay 100% full share for the cost of a new school, wing on a hospital, arterial road upgrade, water reservoir, waste digestor at the sewage plant etc etc?"

They (taxpayer) already do, but that's apparently through a consensus that endless population growth in cities is good.

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#2679516 23-Mar-2021 21:19

Touting to be a huge announcement I would have thought it was just a wimper.

It's not going to help anybody new into the market and sure as hell not going to drive house prices down.

They have waited far too long to roll up their sleeves and get them dirty.

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Fred99

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#2679520 23-Mar-2021 21:37

JaseNZ:

It's not going to help anybody new into the market and sure as hell not going to drive house prices down.

Removing negative gearing will over time, and it's a very ballsy move - exactly what's needed to slowly rein in dangerously stupid levels of leverage on rental property, which has the potential to cause a liquidity squeeze and stagflation. This as QE is eased - which must happen, regardless of how enjoyable "free money" has been.

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