House prices across New Zealand have more than quadrupled since the new millennium, and policy-makers are being forced to confront issues around value growth and sustainability in a bid to ensure homeownership remains a tangible goal for the next generation.
With a suite of tools on the table to effect change, Bayleys investigates the introduction and possible impact for homeowners of some of those most talked-about and likely to be utilised against unsustainable housing inflation.
**JUST ANNOUNCED: BRIGHT-LINE TEST EXTENSION **
Where some have called the Bright-line Test a Capital Gains Tax (CGT) in disguise, extending its current term from five to 10 years, effective 27 March 2021, will see sellers of residential property liable for tax on any gains accrued by the property if sold within the 10 years.
With pressure mounting on policy-makers to address unsustainable housing inflation, and Jacinda Ardern firmly ruling out the introduction of a CGT during her term as Prime Minister, the Bright-line Test appears to be as close to a land tax as Kiwis will get.
While this may give fledgeling investors pause for thought before engaging in speculative activity, thus impacting a very specific portion of the investor market, many expect the traditional long-term property investors will stay the course, holding on to their assets and accumulating gains over time while providing valuable housing stock to the rental market.
The Government has made the family home and all new builds exempt from Bright-line Test rules.
**JUST ANNOUNCED: INTEREST DEDUCTABILITY **
Citing CoreLogic’s March Buyer Classification Data where property investors held the largest market share for property transactions, the Government has announced plans to end the ability for property investors to offset their interest expenses against rental income.
While consultation on implementation is ongoing, this will apply from October 1, with the move aimed at removing the tax advantage property investors have over first home buyers and purchasers moving from one home to another.
Bayleys expects this will achieve the Government’s goal of slowing the rate of value growth by dampening speculative activity, however we do not anticipate a regression in property values given the supply-demand imbalance that continues to put upward pressure on property values.
JUST ANNOUNCED: ADDITIONAL INFRASTRUCTURE FUNDING
In its latest housing announcement, the Government unveiled plans to contribute $3.8 billion towards funding much-needed infrastructure for housing developments in its Housing Acceleration Fund.
Residential developers have long-cited issues around funding as a central impediment to increasing supply and while more detailed information as to where the money is utilised will be due this June, the move is a step in the right direction to facilitate more affordable housing options in locations most in need.
It will be some time before the effects of urban development are measured, however, a move to greater density has the potential to continue to facilitate a premium for standalone homes and those on larger land sites.
Data suggests some house prices have risen nearly 17 times higher than incomes in the last 12-months, with New Zealand cites as one of the ‘least affordable’ housing markets across the globe.
It is of little surprise commentators have long called for the introduction of Debt-to-Income limits (DTIs) however, the issue remains highly contentious, with many saying first-home buyers would be unfairly penalised, further adding to the imbalance between the ‘haves’ and the ‘have-nots’.
When presenting the Reserve Bank of New Zealand’s (RBNZ’s) annual review to Parliament’s Finance and Expenditure Committee in February, RBNZ Governor Adrian Orr said it was “extremely difficult to segment any market and any individual with macro-prudential tools,” and that “pretending we could fine-tune for a particular set of groups comes with great challenges and implications.”
While those purchasing their first home traditionally have lower incomes and less equity than those purchasing subsequent properties, the introduction of DTI limits would require a careful balancing act between reigning in high-risk lending and helping low-income people into their own home.
Orr has similarly warned Finance Minister Grant Robertson that “higher prudential requirements generally imply higher deposit requirements, lower credit ceilings and higher interest costs for the mortgage borrower.”
“All of these factors disadvantage lower-income and lower wealth households,” he explained.
RESTRICTIONS ON INTEREST-ONLY LENDING
As of December 2020, 39 percent of bank lending to residential property investors, worth some $32 billion, were on interest-only terms, and Finance Minister Grant Robertson has since requested more information from the RBNZ as to whether interest-only mortgage terms cause ‘high-price variability’, or encourage ‘extreme risk-taking’.
Results of this consultation are expected to be released come June this year.
New Zealand can look to Australia as a blue-print for implementation with our neighbours restricting interest-only loans in 2017.
At that time the proportion of lending to property investors on interest-only terms was more than 40 percent, falling to the mid-teens before stabilising with a lasting effect on investor activity and the rate of value growth.
RELEASING LAND FOR SUPPLY
Long touted as one of the biggest contributing factors to our housing woes, facilitating residential development, increasing density and releasing land for these activities continues to be at the forefront of the Government’s housing plan.
In Auckland, urban/rural boundaries are being developed faster thanks to the successful Unitary Plan which took effect in 2016. An unexpected consequence of this has been the prolific rise in property values, specifically in locations that have been rezoned to allow greater density.
Lessons learned from the Auckland Unitary Plan showed that the benefits of development took several years to materialise, and we can expect a similar lag before a change in policy frees further available land.
REDUCING COMPLIANCE COSTS
The 30-year-old Resource Management Act (RMA) has been blamed for suffocating New Zealand’s housing supply and paving the way for a severe supply-demand imbalance that has pushed housing inflation well-past sustainable levels.
While successive governments have looked to reform the underperforming act, Labour expects to replace the regime with three new pieces of legislation aimed at making it easier for local councils to plan and build more effectively, ultimately reducing the cost of building a new home.
Despite its position as the scapegoat of sorts, Bayleys understands the RMA is only part of the problem, as the slow process of converting the use of land, as well as providing supportive infrastructure and ultimately funding these initiatives create obstacles to development and an impediment to the goal of increasing supply.