The New Zealand government has targeted real estate speculators with a number 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 lucrative and unlock more land to increase housing supply, Prime Minister Jacinda Ardern said in Wellington on Tuesday. Changes occur as house prices rise and keep first-time buyers and lower-income people out of the market, which raises concerns about growing social inequality.
“The last thing homeowners need right now is a dangerous housing bubble, but several indicators point towards this risk, “Ardern told a news conference.” Real estate investors are now the largest share of buyers, with the highest number of purchases recorded. Last year, 15,000 people bought houses that already had five. or more ”.
Making bubbles?
Rising annual inflation in house prices
Source: Real Estate Institute Housing Price Index
The success of New Zealand a the fight against Covid-19 has seen its economy recover earlier than many others, placing it at the forefront of a global property boom, as ultra-light monetary policies encourage investment in higher-yielding assets. House prices rose 21.5% year-on-year until February and investors accounted for more than 40% of purchases that month, a record high.
To deter speculation, the government will gradually eliminate the ability of investors to claim mortgage interest as a tax deductible expense. The period in which profits from the sale of investment property are taxed will be extended to ten years from five.
“Creepy effect”
The changes “will significantly reduce financial incentives to invest in housing” and will have a “creepy effect on investor demand,” said Satish Ranchhod, a senior economist at Westpac Banking Corp. in Auckland. “Today’s announcements indicate a significant downward risk in house prices and economic activity in general.”
The New Zealand dollar fell on the news and bought 71.20 US cents at 13:26 in Wellington, from 71.70 cents earlier. Swap rates and bond yields also declined, as operators speculated that the central bank will be able to keep interest rates at historic lows for longer.
The package is the latest salvation from Ardern’s attack on the booming real estate market, which is undermining its efforts to reduce inequality. Prices soar at double-digit rates across the country, bringing the national average to NZ $ 780,000 ($ 556,000). In Auckland, the average price has reached $ 1.1 million, making it the fourth least affordable city in the world, according to Demographia.
Last month, Finance Minister Grant Robertson announced changes he said will require the Reserve Bank to pay more attention to the real estate market when setting monetary and financial policy. He also asked RBNZ to consider restrictions on interest-only mortgages and the introduction of debt-to-income ratios for investors. The bank will have to report in May.
Robertson said today that New Zealand’s real estate market has become the least affordable in the OECD and that it was “essential for the government to take steps to curb rampant speculation”.
Bright line
He said extending the so-called “hotline” test to 10 years – effectively a capital gains tax on the sale of investment real estate – and eliminating interest deductibility for investors will reduce speculative demand and will tilt the balance towards first home buyers “.
The new glossy line test will apply to properties purchased starting March 27th. The time horizon for new construction will be maintained at five years to boost supply.
As of October 1, investors will not be able to deduct mortgage interest as an expense on properties acquired as of March 27. For existing homeowners, the mortgage interest deductibility will be eliminated in the next four years so that it cannot be claimed throughout the 2025-26 fiscal year. New constructions are expected to be exempt from this change.
The government is trying to curb demand for housing while increasing supply, which has been limited by a number of factors, including planning rules and high construction costs. He said today that he will set up a US $ 3.8 billion fund to unlock more land for housing development and will also offer the first housing subsidies for more people.
“The housing crisis is a problem that has been going on for decades that will take time to turn around, but these measures will make a difference,” Ardern said. “There are no silver bullets, but all of these measures combined will start to make a difference.”