Buy-and-flick real estate investors will face a significant hurdle come October 1 when the government's new property tax measures come into effect.
The “bright line” test imposes tax on gains made on residential property sold within two years of purchase, unless it is the vendor’s main home, inherited from a deceased estate or transferred as part of a relationship property settlement. The tax will apply to all properties bought on or after October 1.
Since the changes were announced in May, experts have been anticipating a flurry of activity from speculators rushing to snap up property before the October deadline. It is important to remember that tax already applies to gains on residential investment property, but this has been difficult to enforce given the decisions relied historically on an assessment of intent. The upcoming changes draw a bolder line in the sand over what should and shouldn’t be taxed.
Analysis of Real Estate Institute of New Zealand data from May to June shows Auckland sales volumes actually fell a seasonally adjusted 3.9 percent, while the median house price rose 3 percent. This looks to be a reflection of tight inventory and suggests that even if investors are looking to land bank in anticipation of the changes, they are facing heavy competition and limited choice in the current market.
While it is reasonable to suggest a short term spike in prices driven by the increased investor activity, it is difficult to pin the blame solely on speculators in what is already a heated and complex market.
Those considering selling their property within the next six months may be eager to accelerate the process in order to attract investor dollars, as well as primary home buyers. Although individual timelines and goals will usually overpower any opportunistic decisions to rush a home onto the market.
The true impact of speculator activity on the Auckland property market will only become evident in the months after the hammer comes down in October.
However, even then some critics are sceptical of whether the two-year threshold will go far enough to deter investors and land bankers. Some have expressed concern that the changes will only effect a small number of short term speculators out to make a quick buck, whereas others will simply wait it out to avoid the tax. Doer-uppers are not as likely to be affected considering the consenting and building process will eat up a considerable chunk of the two-year period.
The tax is likely to put off those highly active speculators intent on making quick gains. This should go some way to bringing house prices down, although the flow-on effect is expected to take some time. It could also result in more rental stock as landlords look to earn a steady income from their investment properties while the two years ticks on.
Other changes in the May Budget announcement include the introduction of stricter rules on foreign investment. Purchasers of investment properties will soon be required to declare their Inland Revenue Department (IRD) numbers to Land Information New Zealand (LINZ) at the point of transaction. Non-residents will also be required to open New Zealand bank accounts, obtain their own IRD numbers and declare tax identification details from their home country. The government will collate the data, not itemised by surname, to indicate the origin of property investors.
The move has been welcomed by many calling for transparency and monitoring of foreign investment. It will ensure those buying property in New Zealand are held accountable for any tax they may incur and it will paint a more accurate picture of investor demographics.
A small reduction in the number of offshore buyers may result, but there is evidence to suggest that many foreign buyers have intentions of making their permanent homes in New Zealand.
New Zealand is experiencing record high levels of permanent and long term arrivals with 58,300 migrants entering the country in the year to June 2015, according to Statistics New Zealand. The annual gain has been setting consecutive records for the past 11 months, driven by both more arrivals and fewer departures. This undoubtedly has an impact on the property market with migrants and returning New Zealanders either looking to purchase or rent homes, largely within the Auckland region.
Only time will tell whether the changes will have any significant and long-lasting impacts on the residential property market. At the very least, the requirements are a step towards making it easier for first home buyers to reach their goals and have opened the door for further changes if these are shown to fall short.