Fascinating to see the hubbub over the announcements today from Labour of a revised policy over housing sales. From the Nats there is a wild panicked squealing as their fat little piggies suddenly realise that perhaps they should not have all their spare money in property. Accusations of a new Capital Gains Tax from Ardern, despite there already being a “Bright Line” test in existence, which is now extended. Incidentally: anyone know what the bright line is that they are referring to? Seems a very murky dull line to me. Collins is having a field day – loving being the centre of attention as she says that Labour has lied. Ardern has lied. Robertson has lied. The nation has been lied to. et cetera….
So what is the actual policy that has happened? Stuff says:
Investors
“Some of the most significant changes come for property investors. Until now, they have been able to claim back the interest cost of a home loan against the rent received on the property, significantly reducing their tax bills. Put simply, if they earned $20,000 a year in rent from a property but paid $12,000 in home loan interest, only $8000 of the rental income would be subject to tax. Under the new rules, the whole $20,000 would be.”
“No deductibility will be available for properties bought after March 27, and the amount that can be deducted will drop for other properties until it is phased out in four years’ time. New builds may be exempt, but Cabinet is yet to consult on this. While this is a big change for investors to build into their calculations, with interest rates so low, the impact is more limited than it would have been at pretty much any time in the past. But interest rates will eventually rise and it could become more painful at that point. The bright-line test is also being extended, although new builds will be exempt.”
Owner-occupiers
“If you live in a home that you own, you won’t be directly affected, although you may no longer see the value of your property shooting up at the 20 per cent-a-year rate of recent times. The bright-line test doesn’t apply if you used a property as your main home for more than 50 per cent of the time you own it, or you use more than 50 per cent of the property’s area. People can use an “own home” exclusion twice in any two-year period to avoid the bright-line test.”
First-home buyers
“It’s intended that the changes will mean house prices increase less quickly, providing more opportunities for first-home buyers, and less competition from investors. There are also changes to the First Home Grant and Loan schemes. To qualify, buyers will now be able to earn up to $95,000 as single people and $150,000 as a couple. Price caps increase from $650,000 to $700,000 in Auckland, $650,000 in Queenstown and Wellington, $600,000 in Nelson, Tauranga, Western Bay of Plenty, Hamilton, Waipa, Hastings and Napier, $550,000 in Christchurch, $550,000 in Dunedin and $500,000 through most of the rest of New Zealand.”
Captain Nemo says: Let’s face it, it is not like we were not warned. It is a policy that is well overdue, and one that needs to happen. What interests me is whether it will work or not. Commenters on Stuff are battling it out on line, with typical comments being heard like:
“Destroying retirement plans of mums and dads and with their mismanagement of the economy and loss of jobs, many mums and dads will be struggling to live on retirement which is not too far away” (user: TaxHardWorking)
“All waffle. First home buyers effectively still shut out because of the need for a huge deposit. If the government had really wanted to help people into their first home, it could have legislated for minimal or no deposit. The caps limit is a joke. The reduction in investment properties will lead to a severe rental home shortage which can only be solved by affordable ownership.” (user: Mrs Doubtfire)
“I can’t but think that this will result in a significant reduction in rental stock as the mom and pop investors decide that renting their properties is no longer a sensible thing to do in terms of their return. Removing the depreciation provisions could be the final straw, especially in conjunction with the bright line test increase.” (user: Kentwood)
Hmmm. I’m not so sure. If people are discouraged from holding multiple properties due to tax bills, and if they put them back on the market and sell them, who are the buyers going to be? Well, assuming that there aren’t large amounts of property investors keen to pay tax – virtually all of those being sold will be going to people who currently do not have a house. That would be what we call: First Home Buyers. So, it should help to solve that problem. First Home Buyers will no longer be shut out of the market in bidding wars from multiple-property-owning investors. Prices should / will / come down. Probably not immediately, but definitely over time it will. Will the property market collapse? Probably not – although that has happened before and to be honest, it would be a good thing.
What about renters? On this, Stuff only has this to say:
Renters
“It’s a little unclear what this will all mean for renters.”
Hmmmm again. For the last several years property investors have been swanning around feeling virtuous, saying that by renting out their houses they are doing the world a favour. Meanwhile, people have been renting a house because they could not buy their own – so on the surface of it, there will be new chances for renters to become home-owners. Not everyone wants to own a home though – many people will still need to rent. And so there needs to be a structure where people can be a professional rental owner – making a business out of it and paying tax on it, same as any other business. I’m expecting more to come on this.
Your thoughts?
Bryce Edwards writes in the Guardian:
“Investors themselves have only helped the government sell the new policy by squealing loudly about the injustice of the loss. But Green MP Julie Anne Genter’s response on Twitter of “Cry me a river” is likely to have hit the mark for a wide section of the public wanting radical action to fix the housing market.
“No one saw this particular policy coming – possibly because it was a last-minute addition to the government’s suite of measures. Although the overall package was many months in the making, official documents show that government departments were not given time to look at the effects of this particular policy. Given the escalating pressure to deal with the crisis, it seems likely that Ardern and her ministers felt the need to bolster today’s announcement with something stronger than originally planned.
“The policy may be effective. A widespread consensus is developing amongst analysts and economists – as well as landlords – that this particular measure will make property investment much less attractive. A fair proportion of landlords are likely to depart the market or at least purchase fewer rentals as a result. This could have a significant impact on house prices – more properties will be available for sale to owner-occupiers. ANZ chief economist Sharon Zollner says that the change “will have a chilling effect on investor demand”, and hence a “massive” impact on prices.”
https://www.theguardian.com/world/2021/mar/23/targeting-new-zealands-property-speculators-is-popular-but-wont-fix-the-housing-crisis
“A massive impact on prices?” What would massive look like – and how quickly would it take to happen? The changes kick in this coming weekend – very few will have the chance to buy a house before then, and none will suddenly be able to sell their house by then. It should have an instantaneous effect on investors buying another additional house, ever again. So, axing demand from property investors instantly – perfect chance for first home buyers. Will that cause an instant drop in price too? I doubt it – first home buyers are still just as desperate, and there is a lot of pent-up demand out there from them. It will depend on how fast investors put their additional stock on the market.
I don’t see the axing of the ability to claim interest as an expense as such a big thing, given that interest rates are so low at present. I reckon most of them will suck it up and stick it out. If they wait over 10 years, they will still get their capital gains – tax free. It is only if they are greedy that they sell early and get taxed as a result. Could even see a more stable rental market. They are not allowed to put the rent up more than once a year. And I believe there is also a limit on how much they are allowed to put it up, as well?
Thank you John and SJD. It’s going to be an interesting year ahead of us. Despite Collins claiming that Labour had lied and introduced a new Tax, the Bright Line test was brought in by the Mats under Key, so it is not new. Extending it out doesn’t suddenly make it a Capital Gains Tax – it has always been a device aimed at limiting speculation. As speculation has been virulent lately, so to the means to combat it also needs to be ramped up. Seems fair to me !
Here’s an answer to my question on What is the Bright Line test:
“The bright-line test is not a tax itself – it is a method of applying income tax. It applies income tax on the profits of any houses sold that meet specific criteria. It was introduced as, technically, you were always supposed to be taxed if you were intentionally buying homes to flip them for a profit – but proving that you had this intent was basically impossible. The test works by saying “if you sell this house within this time period you were clearly intending to profit from selling it when you bought it”. The last National Government introduced it with a two-year period, meaning it would only net homes sold within two years of purchase. Labour extended it to five years in 2018 and is extending it to 10 years now.”
https://www.stuff.co.nz/national/politics/300260832/how-the-government-is-changing-rules-for-renting-out-your-main-home-and-the-brightline-test
and
“The bright-line test is the rule that determines whether a person who sells a residential property has to pay tax on the money they make in the deal. The idea is that if you meet the criteria of that clearly defined rule, you will pay tax on any profit you make from the sale compared with what you bought the place for.
Being captured by the bright-line test is not the only way you might have to pay tax on a property sale, though. If you bought a property clearly with the intention of selling it for profit, in theory Inland Revenue can demand you pay tax, no matter how long you held it for.”
https://www.stuff.co.nz/business/300260273/what-is-a-brightline-test-anyway?rm=a
Property investors are fighting back: https://www.stuff.co.nz/business/property/300262320/property-investors-petition-for-reversal-of-rule-changes
“But investors unhappy about the proposals are backing an Act petition to reverse the changes.
“We are not aligned to any political party however we have asked people to sign the Act petition,” said New Zealand Property Investors Federation president Sharon Cullwick.
“We are looking into anything we can do to stop the mortgage tax deductibility [change] and the bright line.”