Aside from the global pandemic, the NZ housing market has hogged the local media headlines for the last year or more. House price increases are rampant in most parts of the country, perhaps 22% and climbing, and this has supported a view that the housing market has become a one-way bet, benefitting property owners and bolstering investor demand at the expense of those wanting to get onto the housing ladder. Something needed to be done.
Recently, the government announced several policies to bolster housing affordability and supply. Ultimately, as a country we need to build more homes and apartments, but it will take time for that to occur. In the interim, the most recent headline-grabbing policies attempt to slow the buying demand from residential property investors, who typically account for around 30% of all property purchases and perhaps own more than 600,000 properties. Two moves were made in this area:
Some property investors and those in related industries such as accountants and real estate agents have been quite vocal about the change, though maybe it’s not as bad as it first seems. Consider this example:
For a property investor with $1 million in lending, an interest rate of 2.5% (for planning purposes) equates to $25,000 in interest payments each year. If tax is payable at the 33% rate, then depending on other costs such as council rates and maintenance etc. that investor might have to pay an extra $8,250 in taxes each year. Given the rate of capital gains that have been achieved lately – of course acknowledging past returns don’t guarantee future results – many property investors could do well by leaving their current strategy unchanged.
In addition to the tax changes, the Government has announced changes to the First Home Loan and Grant Scheme by increasing both the income and house price caps. More on these policies can be found here.
In announcing these policies without prior consultation, our democratically elected representatives caught more than a few people off-guard. This has caused concern in business and accounting circles, who especially objected to the tax deduction being labelled a loophole in the policy announcements despite being consistent with internationally-accepted accounting guidelines. The basic principle is that costs incurred in generating business revenues are legitimate deductions from taxable profits. Interest is a cost, so it should be deductible.
The simple answer is that at this early stage nobody knows. NZ’s major banks have businesses built on the housing market, and even their opinions are nearly all different.
However, most commentators and experts generally agree that:
Here at Milestone Direct, in our humble opinion certainly steps need to be taken to resolve the housing crisis, though nobody wins when the lack of housing supply is pitched as a “us versus them” battle in the public arena between investors and first home buyers. Scattered reports are emerging of open hostility to anyone perceived to be a property speculator, which is a shame in a country where we all like to think of ourselves as equals. Perhaps media criticism of some excitable or outspoken property investors is valid, and we appreciate that many first home buyers may be tired of being outbid at auction. That said, property investors provide a valuable service to most tenants, and it is often overlooked that most NZ property investors are mum & dad investors with one investment property – there are no massive corporations that own blocks of houses and apartments which is common in places such as the United States. Before property investors became the latest target of the blame game, various other scapegoats have been held responsible for NZ’s housing woes, such as foreign buyers. When foreign buyers were banned from buying NZ property a couple of years ago there was no impact on house prices, which continued to climb. After that, immigration was blamed by many, but Covid-19 stopped immigration in its tracks and housing prices continued to rise. Time will tell whether the same happens this time around…
This is an interesting situation to say the least and given the uniqueness of the non-deductibility of investor’s interest, there are a number of possible developments. At this stage our team has more questions than answers, including:
If you’d like to discuss anything above, please get in touch by leaving your details below. We’ll circle back to you within a workday.