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Understanding the shifting of the goal posts on mortgage lending - what do they mean to you?

Tags: Auckland Magazines Residential

In May this year, New Zealand Reserve Bank Governor Graeme Wheeler, announced sweeping changes to the laws encompassing the financing of residential property purchases.

That announcement was quickly followed by the Government signaling its intention to amend the relevant legislation for both the sale and purchase of residential property.

Those new legal guidelines came into effect on October 1st – yet many home buyers and sellers in the Greater Auckland region are still somewhat confused on exactly what the new regulations and requirements mean for them.

Auckland’s median house price is around 60 percent above its 2008 level, and house prices in Auckland have been rising rapidly since late last year.

This reflects ongoing supply constraints and increased demand - driven by record net immigration, low interest rates, and increasing investor activity. Prices in the Auckland region have become very stretched - increasing the risk of financial instability from any sharp downward correction in prices.

Concurrently, low mortgage interest rates are encouraging investors into riskier assets in the search for double-digit capital growth.

While the new measures aim to moderate housing demand, policies to ease housing supply constraints in Auckland remain the key to addressing the region’s housing imbalances over the longer term.

Given the importance of encouraging residential construction activity in Auckland, and consistent with the existing LVR policy, the proposed LVR restrictions coming into effect on November 1st will not apply to loans to construct new houses or apartments.

Consistent with the pending new LVR measures, the Reserve Bank is establishing a new asset class for bank loans to residential property investors. Banks will be expected to hold more capital against this asset class to reflect the higher risks inherent in such lending.

Following a lengthy consultation process, The Reserve Bank decided that a residential property investor loan will be defined as any retail mortgage secured on a residential property that is not owner-occupied.

Given the broader risks facing the financial system, it is crucial that banks maintain their capital and liquidity buffers, and apply prudent lending standards. The Reserve Bank is proposing these upcoming adjustments to the LVR policy to more directly target investor activity in the Auckland region - where house prices relative to incomes and rent are far more elevated than elsewhere in New Zealand.

So, in layman’s terms, here is a simple guide to the new lending. Buying and selling changes which have just come into effect:

1. Residential property investors in the Auckland Council area using bank loans to purchase property will be required to have a deposit of at least 30 percent.

2.Outside of the Auckland Council area, the limit for high Loan-to-Value Ratio borrowing will increase from 10 to 15 percent, to reflect the more subdued housing market conditions outside of Auckland.

3. A New Zealand IRD number will be required as part of the land transfer process.

4. As part of the land transfer process, non-resident buyers and sellers must also provide their tax identification number from their home country.

5. Non-residents will also need a New Zealand bank account before they can get an IRD number in order to buy a property.

6. A new ‘bright line’ test will be introduced for non-residents and New Zealanders buying residential property, to supplement Inland Revenue’s current ‘intentions’ test.

The ‘bright line’ test will then apply to properties bought on or after October 1. Under this new test, gains from residential property sold within two years of purchase will be taxed, unless the property is the seller’s main home, inherited from a deceased estate or transferred as part of a relationship property settlement.

Owner-occupiers of residential property will not be affected by the new measures when they sell their main home, or if property is inherited from a deceased estate or transferred as part of a relationship property settlement.

These tax measures are expected to take some of the heat out of Auckland’s housing market, and sit alongside the Reserve Bank’s latest moves to address associated financial stability issues.

It’s equally important that people buying residential property for gains meet their tax obligations, whether they are from New Zealand or overseas.

The combination of collecting IRD numbers and introducing this new bright-line test will help ensure that non-residents pay their fair share of tax in New Zealand.

This article is from the latest Bayleys Preview Magazine.

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