The New Zealand government targeted real estate speculators with a series of new measures to tackle runaway house prices and prevent the formation of a “dangerous” bubble.
The government will remove tax incentives for investors to make speculation less lucrative and free up more land to increase housing supply, Prime Minister Jacinda Ardern said in Wellington on Tuesday. The moves are as rising house prices keep starters and people with lower incomes out of the market, raising concerns about growing societal inequality.
“The last thing homeowners need right now is a dangerous housing bubble, but a number of indicators point to it. to that risk, ”Ardern said at a press conference. “Real estate investors now make up the majority of buyers, with the highest number of purchases ever recorded. Last year, 15,000 people bought houses that already owned five or more. “
Bubble Brewing?
Annual house price inflation is on the rise
Source: Real Estate Institute House Price Index
New Zealand’s success in The fight against Covid-19 has seen its economy recover faster than many others, putting it at the forefront of a global real estate boom as ultra-loose monetary policy encourages investment in higher yielding assets. House prices rose 21.5% in the year to February and investors accounted for more than 40% of purchases that month, a record high.
To discourage speculation, the government will phase out investors’ ability to claim mortgage interest as a tax-deductible expense. It extends the period in which gains on the sale of investment properties are taxed to 10 years from five years.
‘Cooling effect’
The changes “will significantly reduce financial incentives to invest in housing” and “have a chilling effect on investor demand,” said Satish Ranchhod, senior economist at Westpac Banking Corp. in Auckland. “Today’s announcements point to significant downside risk to house prices and economic activity in general.”
The New Zealand dollar fell on the news, buying 71.20 cents at 1:26 pm in Wellington, from $ 71.70 earlier. Swap interest rates and bond yields also fell as traders speculated that the central bank will be able to keep interest rates at record lows for longer.
The package is the latest salvo in Ardern’s attack on the booming real estate market, which is undermining its efforts to reduce inequality. Prices are up in double digits across the country, bringing the national median to NZ $ 780,000 ($ 556,000). In Auckland, the median price has reached NZ $ 1.1 million, making it the fourth least affordable city in the world, according to Demographia.
Last month, Treasury Secretary Grant Robertson announced changes he said will oblige the Reserve Bank to pay more attention to the real estate market when determining monetary and financial policies. He also asks the RBNZ to consider restrictions on interest-only mortgages and the introduction of debt-to-income ratios for investors. The bank will report in May.
Robertson said today that the New Zealand housing market has become the least affordable in the OECD and that it was “essential that the government take steps to curb rampant speculation.”
Clear line
He said extending the so-called “bright-line” test to 10 years – basically a capital gains tax on the sale of investment properties – and removing the interest deductibility for investors “will dampen speculative demand and tilt the balance sheet. to first home buyers. “
The new bright-line test will apply to properties purchased from March 27. The time horizon for new construction remains five years to stimulate supply.
As of October 1, investors will no longer be able to deduct mortgage interest as an expense for properties acquired from March 27. For existing property owners, the mortgage interest deductibility deductible will be phased out over the next four years so that it cannot be claimed. completely by the tax year 2025-2026. New builds are expected to be exempted from this change.
The government is trying to curb demand for housing while increasing supply, which is constrained by a range of factors, including planning rules and high construction costs. It said it will set up a NZ $ 3.8 billion fund today to free up more land for housing, as well as make initial home grants available to more people.
“The housing crisis is a problem that has been decades in the making and it will take time to reverse, but these measures will make a difference,” Ardern said. “There is no miracle cure, but the combination of all these measures will make a difference.”