RBNZ intends to lift interest rates over the coming years, but held fire this time given the level of uncertainty about this new outbreak.read more
The NZ Government announcement on NZ housing affordability.
The announcement we did not expect: the removal of the ability of all new investor purchasers to deduct interest costs from this week, and gradual reduction in the ability of those already owning investment properties to deduct such expense over the next four years.
Here's a recap on the changes introduced recently
- More Kiwis will be able to access First Home Grants and Loans with increased income caps and higher house price caps in targeted areas which includes:
a. Home Start grant remains up to $10,000 for new build (only up to $5,000 for existing property).
b. Income cap lifted from $85,000 to $95,000 (for an individual) and from $130,000 to $150,000 (for two).
c. Auckland cap on value of property has increased from $650,000 to $700,000 for new builds (capped at $625,000 for existing properties).
The increases will take effect 1 April 2021.
- Property investors will no longer be able to offset their interest expenses against their rental income when they are calculating their tax. For new investment property purchases, this will be introduced on 1 October 2021, but applied retrospectively from 27 March 2021. For existing investment properties, this will be phased in over four years.
- The bright-line test will be increased from five years to ten years for investment properties purchased on or after 27 March 2021. However, the family home remains exempt, and it will remain at five years for newly built investment properties.
- The Government will help Kāinga Ora to borrow an extra $2 billion to boost strategic land purchases.
- The Government has introduced a $3.8 billion fund to boost housing supply and infrastructure.
The extension of the bright-line test from five to ten years was expected and does not really have any major implications. But let’s look at the announcement we did not expect: the removal of the ability of all new investor purchasers to deduct interest costs from this week, and gradual reduction in the ability of those already owning investment properties to deduct such expense over the next four years.
I had expected maybe 10% of interest costs to no longer be deductible. For the 12% of people who buy an investment property with cash there are no implications. But for the 24% on average who do so with a mortgage this changes the equation.
Whereas before rental income of $20,000 might be offset with $15,000 of interest cost to deliver taxable income of just $5,000, now that taxable income will stand immediately at $20,000 for new purchases, and eventually become that over four years for the many people already owning investment property. The tax bill will rise (at a 33% rate) from $1,650 to $6,600.
What are the implications?
My experience over the decades has been that many Kiwi landlords have not raised rents to levels they know the market could bear because they empathise with their tenants and could await capital gain to slowly accrue (sometimes swiftly) over time. Now the cost of doing that is much higher and we are likely to see stronger rises in rents over the next four years.
First home buyers will gain through having lower entry prices for a while and less competition at auctions. But their ability to save a deposit will be reduced by higher rental costs on average.
Many people who were thinking about buying an investment property may possibly hold off or buy a new build rather than existing property. Some people owning investment properties will sell. This will place downward pressure on prices which have risen on average nationwide by a ridiculous 25% since June. In many months for the remainder of this year prices could fall, but in 12 months we will almost certainly still have prices well above where they were in March 2020.
There will be extra demand for new properties which may open up a price difference with existing residences, though some details still look like they need to be worked out regarding interest cost deductibility for new builds.
Eventually we will reach a new equilibrium in the housing market – probably within 12 months. From that equilibrium prices will probably rise on average long-term by 4% to 5% per annum rather than the average 6.8% seen since 1992. House construction will be boosted, especially with the moves to help fund infrastructure. But the pace of supply growth will be limited by the Government’s increasingly expressed determination to limit migrant inflow from next year when the borders full open again.
That will be good for up-skilling and lifting great numbers of Kiwis into the construction sector. But the trade-off will be less speedy construction growth than would otherwise be the case.
Three final points
The news reduces the chances of the Reserve Bank raising its official cash rate before the end of 2022 – though it does not rule that out. The likelihood of debt to income ratios and restrictions on interest-only lending being introduced this year has fallen substantially. And prospects for renters at the low end of the socioeconomic spectrum have become decidedly worse and the news today will bring a rise in homelessness and extra blowout in the state house waiting list as the pool of rental properties shrinks and becomes more expensive.
Clients may be concerned about whether the tax deductibility change will impact the level of their current or future borrowing. At this stage, there are no changes to the way banks calculate affordability for property investors.
Clients who own or are looking to buy an investment property, we encourage you to seek independent tax and accounting advice to see what these changes mean to your circumstance specifically.
Looking at record low mortgage rates.
Mortgage rates have not changed over the past month, leaving the entire term structure of average mortgage rates at what we believe are record lows.
What lies ahead?
As has been the case for some time, the 1-year fixed rate remains the lowest rate and that makes it attractive, and we still like it. However, with wholesale interest rates rising, and the economy rebounding such that yet-lower interest rates are now very unlikely, the key question for borrowers is: does it really make sense to fix for longer?
We think it does, and given the low margin between 2 and 3-year rates, and 4 and 5-year rates respectively, we see merit in adding some 3 and 5-year terms into the mix. Doing so will cost more, and while we think there will be plenty of time for those electing the cheaper 1-year to be able to re-fix later, adding some longer terms to the mix will increase certainty.
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Have a great day and we look forward to helping you achieve your financial goals and plans.
Up-to-date market news.See our archives to catch up on previous issues.
The announcement we did not expect: the removal of the ability of all new investor purchasers to deduct interest costs moving forward.read more
Although November will still likely show a sharp price increase, for December onward monthly price gains below the 3.5% of October and 2.6% of September are likely.read more