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The policy reforms that will change investor behaviour

Tags: Residential

The property market as we have known it for the last three years is set to face a shift in dynamics.


As the Labour-led Government prepares to crack-down on rampant levels of property investment across New Zealand’s residential sector, the property market as we have known it for the last three years is set to face a shift in dynamics says Daniel Coulson, Bayleys national residential and auction manager.

Thought to be both the cause and effect for rising house prices and lower levels of Kiwi home ownership, property investment has been flagged by the new Government as an area which requires dedicated policy to control.

Despite figures showing that the prevalence of property investors across the market has halved in the 12-months to October 2017, following sustained efforts from both the Reserve Bank of New Zealand (RBNZ) and financial institutions to restrict the availability of credit, since September’s general election result - a number of policies geared at cooling investment activity have been announced.

So how is this poised to affect home sales into 2018?

RENTAL REFORMS

Among the initiatives aimed at investors, the new Government has proposed significant changes to the management and maintenance of rental properties – requiring properties to meet minimum standards for heating and insulation set out under the Healthy Homes Guarantee Bill, as well as abolishing ‘no-clause’ tenancy terminations and limiting rental increases to once a year.

Figures estimate that approximately 50 percent of New Zealanders rent the home that they live in, which when paired with the mounting gap between house prices and the average income and dismal public health figures which show a correlation between damp homes and respiratory problems, and it’s little wonder the Government has made minimum standards for rental properties a key priority.

For investors this means that they will need to do more to keep their investments ‘rent-worthy’, which has the potential to further reduce interest in the sector as some less experienced or highly-geared investors might see additional administration costs too great to wear.

However, New Zealander’s have long seen property investment as a popular vehicle for wealth creation – it is stable in nature, and offers tangible, long-term value gains, which we expect will continue into next year. While these rental reforms have the potential to effect a small, sudden ‘shock-value’ type effect on domestic property sales, we expect that in the medium to long term, home sales will remain consistent with more qualified investors taking the place of those exiting the market.

While creating opportunities for buyers at the lower-end of the market (properties sub $600,000), in the long-term, these policies have the potential to impact the health of the rental sector with fewer properties available on the market to rent. Recent statistics from the Ministry of Business, Innovation and Employment (MBIE) already show that rents are rising in certain areas as investor supply reduces. More market controls could be passed on to the tenant and in effect increase rents further.

RESTRICTIONS ON PROPERTY INVESTMENT

While property investors have been the subject of targeted fiscal policy for some time now following three amendments to the RBNZ’s loan-to-value restrictions (LVR), further policy announcements look set to ensure that residential property investors will be the biggest buyer-type affected by the recent change in Government.

The Labour-led coalition has proposed to end the negative gearing loophole which allows investors to offset losses on rental property against income tax, as well as having confirmed an extension from two to five years under the ‘bright-line test’ which was originally established in 2015 to curb speculation activity. This will see those who buy and sell investment property within five years pay tax on capital gained. Owner occupiers remain active, albeit more discerning in their choices.

It’s worthwhile to note that when the bright-line test originally came into effect, there was little-to-no impact for the residential housing sector and while we suspect that the policy in conjunction with the end of negative gearing will make property investment a little less attractive for new investors, the underlying supply versus demand dynamic prevails, with data showing lending to first home buyers has already picked up, following a regression of interest from the investment sector.

BANNING FOREIGN OWNERSHIP

Contentious to say the least, banning foreign ownership of residential property has divided the nation with some saying it is dangerously close to the anti-foreign rhetoric felt across the globe.

Despite this, both Labour and New Zealand First appeared closely aligned by their stance on the foreign purchase of New Zealand homes during coalition negotiations, and have now announced greater restrictions against foreign buyers purchasing existing residential property in New Zealand, which will likely mean that they will have to divert their attention to new developments,

While foreign buyers are still able to purchase new properties and sections of land to build, we do not expect these restrictions will severely impact the domestic housing market for several reasons.

Estimates have shown that only around three percent of all residential properties sold during 2016 were to non-residents, and as the figure is virtually impossible to qualify, a number of challenges for the new Government persists in regulating this.

Tightening credit conditions have also done a significant amount of the leg-work deterring foreign buyer activity in the last 12-months, with significant lending restrictions ensuring that borrowing money has become virtually unfeasible for those who cannot provide proof of local income.

THE YEAR AHEAD

Looking ahead, it is indisputable that changes to the landscape for property investors will be the catalyst for a shift in behaviour, however we expect that rather than a mass exodus from the market, the change will come as a shift in buyer demographics and speed of transactions concluding.

We expect to see a reduction in investment for short-term value gains, with property owners holding their investments for longer and fewer new property investors entering the market. The end of ‘safety’ policies like the negative gearing tax loophole will likely deter inexperienced investors from spreading themselves too thin, which also has the potential to attract more seasoned investors back to the market.

Overall however, the fundamental issues which have propelled New Zealand’s residential property market forward will prevail into the new year – new housing supply is still unable to meet continued demand and we expect that while policy targeted at property investors will offer more opportunities for first home buyers and owner-occupiers, home values will hold consistently, underpinned by significant interest from a variety of buyer classes.

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