On 1 October 2015, new tax rules and residential requirements came into force in New Zealand affecting buyers and sellers of residential property. Specifically, these new rules:
require non-residents and New Zealanders buying and selling any property other than their main home to provide a New Zealand IRD [tax file] number;
require non-residents to have a New Zealand bank account to get a New Zealand IRD number; and
introduces a new “bright line” test to tax gains from residential property sold within two years of purchase, unless it’s the seller’s main home, inherited or transferred in a relationship property settlement.
In its housing commentary published earlier this month, the REINZ noted that the new tax rules and residential requirements had cooled demand from foreign buyers:
”The drop in the number of sales in Auckland in October has been linked to the absence of buyers following the introduction of new IRD and bank account rules…”
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Today, we receive further confirmation that investor demand has cooled via David Hargreaves at Interest.co.nz:
What a difference a month makes – particularly a month that sees new rules introduced.
There was a more than half a billion dollar drop in the amount of money borrowed by investors for house purchases in the past month, new figures issued by the Reserve Bank show…
The latest RBNZ figures show that just $1.717 billion was borrowed by housing investors in October, compared with a bumper $2.239 billion in September, which had been up from $1.989 billion in August…
More significantly, the proportion of lending to Investors compared with the overall lending total for all loans of $5.853 billion, slumped to just 29.3% of the total, compared with 34.4% of the nationwide total in September. It’s the lowest proportion that lending to investors has constituted of the total since last October and the first time the proportion has dropped below 30% this calendar year.
It is very likely that investor demand will have cooled even further in November, given the RBNZ’s new rules on Auckland residential investor loans came in to force on 1 November, which requires the bulk of investor loans to have a loan-to-value ratio (LVR) of no more than 70%. Banks are also now required to put residential property investment loans in a separate asset class and hold more capital against them.
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Earlier this month, the RBNZ warned of a potential sharp correction in Auckland as investors exit the market:
With prices becoming increasingly stretched relative to household incomes and rents, there is increasing potential for a sharp price correction in Auckland… There is a risk that a downturn could be amplified by a rise in sales by investors, given that investors have more elevated debt-to-income ratios, and appear to be purchasing on the basis of expected capital gain. Falling house prices could in turn weaken economic activity if indebted borrowers attempted to restore balance sheets by reducing consumption…
In addition, interest-only loans make up a higher proportion of investor lending than in the owner-occupier market. These statistics point to the potential for a sharp rise in investor defaults that could amplify a severe housing downturn, consistent with international evidence…
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
