The New Zealand government has 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 profitable and unlock more land to increase the supply of homes, Prime Minister Jacinda Ardern said on Tuesday in Wellington. The movements come because rising house prices are for the first time keeping buyers and people with lower incomes out of the market, raising concerns about growing social inequality.
‘The last thing homeowners currently need is a dangerous housing bubble, but a number of indicators suggest in the direction of that risk, ”Ardern said at a news conference. “Real estate investors are now the largest share of buyers, with the highest amount of purchases recorded. Last year, 15,000 people bought homes that already owned five or more. ”
Borrel brou?
Annual rise in house price inflation
Source: Real Estate Institute’s 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 investments in higher-yielding assets. House prices rose 21.5% during the year to February, and investors accounted for more than 40% of purchases that month, a record high.
To curb speculation, the government will phase out the ability of investors to claim mortgage interest as a tax-deductible expense. This will extend the period in which profits are taxed on the sale of investment property to five years from five.
‘Chilling Effect’
The changes “will significantly reduce the 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, said. “Today’s announcements point to a significant downward risk for house prices and economic activity in general.”
The New Zealand dollar fell on the news and bought 71.20 US cents at 13:00 in Wellington, down from 71.70 cents previously. Swap rates and bond yields also declined as traders speculated that the central bank could keep interest rates at a low record for longer.
The package is the latest salvo in Ardern’s assault on the booming real estate market, undermining her efforts to reduce inequality. Prices are rising at double-digit rates across the country, bringing the average median to NZ $ 780,000 ($ 556,000). In Auckland, the average price reached NZ $ 1.1 million, which according to Demographia is the fourth cheapest city in the world.
Last month, Finance Minister Grant Robertson announced changes that he believes will require the Reserve Bank to pay more attention to the real estate market when drafting monetary and financial policies. He also asked the RBNZ to consider restrictions on interest-free mortgages and the introduction of debt-to-income ratios for investors. The bank is due to report in May.
Robertson said today that the housing market in New Zealand had become the least affordable in the OECD, and that it was “essential that the government take steps to curb turbulent speculation.”
Clear light
He said the extension of the so-called ‘clear line’ test – effectively a capital gains tax on investment property sales – and the removal of interest rate pulls for investors, would speculate demand and tip the balance. in the direction of first home buyers. ”
The new shiny line test applies to properties purchased from 27 March. The time horizon for new buildings will remain at five years to encourage supply.
From 1 October, investors will not be able to deduct mortgage interest as an expense on properties acquired from 27 March. For existing property owners, the deductibility of mortgage interest will be phased out over the next four years, so that it cannot be claimed. not at all by the tax year 2025-26. New buildings are expected to be released from this change.
The government is trying to limit the demand for housing while also increasing supply, which is limited by a range of factors, including planning rules and high construction costs. It said today that it would set up a NZ $ 3.8 billion fund to unlock more land for housing development, and also make the first housing allowance available to more people.
“The housing crisis is a problem that will take decades to turn around, but these measures will make a difference,” Ardern said. “There is no silver bullet, but together all these measures will make a difference.”