Over the past month we have witnessed two fundamental reforms to New Zealand’s property market.
First, the Reserve Bank of New Zealand (RBNZ) reintroduced loan-to-value ratio (LVR) mortgage restrictions, which from 1 March 2021 required both investors and owner-occupiers to stump-up bigger deposits:
There are 1230 words left in this subscriber-only article.
Start your free 14-day trial today!
Second, and more importantly, the New Zealand Government on 23 March announced major property tax reforms targeted at investors, specifically:
- extending the term of the Bright Line Test for taxing capital gains on investment property from five years to 10 years; and
- fully removing the tax deductibility of mortgage interest payments on residential investment properties.
These reforms applied immediately to all new investments and will be extended to all investment properties from 1 October 2021, phased in over the following four years.
Before these reforms were announced, New Zealand property prices were growing at an alarming rate, rising 27% year-on-year in February, according to the REINZ:
Auction results over March suggest that the government’s policy reforms are working to slow the market with clearance rates falling sharply over the month, according to Interest.co.nz:
Westpac economists also released research tipping that New Zealand house prices will flatline over the remainder of the year due to the policy changes before falling next year:
The planned changes to the tax treatment of property investors are perhaps the most meaningful intervention into the housing market in decades…
The key is that while highly-leveraged investors may be hit hard by the policy changes, they will no longer be the marginal price-setters
in the market. Homebuyers and unleveraged investors will now take the fore…
Sales will certainly slow, since leveraged investors are unlikely to be adding to their portfolios from here… the tax changes have
removed the upside for prices that we were previously expecting…
We’re now forecasting house prices to flatten out over the rest of this year, an abrupt change from the rapid price gains we’ve seen
over the past nine months…
An “abrupt change” is an understatement given Westpac two months ago tipped 17% price growth for New Zealand property in 2021.
Together, the LVR and tax reforms have knocked the wind out of the property market’s sails.