Many investors are understandably angry about the changes announced by the Finance Minister on March 23, and in particular the removal of the ability to deduct interest expenses from rental income when calculating taxable income. A special survey I conducted of 4,000 investors showed over 70% planning to raise their rents more than they had previously been thinking. Over 30% said they will pull back from buying a property, and about 25% said they would sell.
The government will be hoping for two out of these three things to happen. They have explicitly stated that they wish to “dampen” investor demand for existing property. So, if investors pull back from buying existing properties and sell some, they will consider that a success and perhaps feel emboldened to do more.
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But their willingness to go further will be constrained if rents do in fact get hiked up. At this stage it is too difficult to know if this will happen and as rents can only be changed once a year then it will be perhaps only late this year that we get decent insight. By then the pace of growth in house prices is likely to have slowed quite substantially – and investors had best hope this does happen.
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If we get to the end of 2021 and the underlying pace of house price rises is still above 10% per annum then it is highly likely that the government will look to hit investors again with some further changes. What might those changes be?
Interest cost is not the only expense investors deduct from their rental income. There are others such as local authority rates, insurance and maintenance expenses. These are all candidates for a further strike by the government if they want to incentivise investors to sell the houses they hold.
The incentive part would come from again doing what was announced on March 23 – leaving expense deductibility in place for purchases of newly built properties. At this stage the exact definition of a new build is still being worked through, but rumours suggest anything within 12-months of receiving its Code of Compliance certificate may qualify.
Such further changes will come next year if they are to arrive. But before then we have been told additional measures will come in the May 20 Budget. It is perhaps caution regarding what the Budget might contain which helps explain the stepping back of many investors from the property market at the moment.
In my latest survey of mortgage advisors undertaken with mortgages.co.nz, a net 78% of advisors said that they are now seeing fewer investors coming forward asking for advice. A month ago a net 46% were seeing fewer investors, and in January a net 24% were seeing more. So things have definitely turned around a lot.
Some additional caution could even enter the market regardless of what May 20 brings because of the extra piece of power the government is delivering itself as an add-on to a piece of legislation reforming the Reserve Bank.
In future the Finance Minister will have the power to tell the Reserve Bank which groups of borrowers it should target or exclude when it next comes to slowing down the pace of growth in the economy or financial sector risks. It seems like a safe bet to say that the group the Minister will want most affected when rules are next tightened will be investors – either in general or who are borrowing to purchase an existing rather than a new property.
It is fairly clear that the government is very serious about reining in investor presence in the housing market – for existing properties at least. But they are also still intent on boosting new construction as much as possible and are likely to continue to incentivise investors to switch their holdings towards the financing of new builds rather than bidding for what already exists.
The question then that investors intent on boosting or rearranging their portfolios need to keep in mind over the coming five years is this. As house supply rises at the fastest pace perhaps on record in New Zealand, what will happen when people decide shortages no longer exist? The answer is that there will be a big shift towards high quality buildings and away from those deemed of lesser stature. We are not at that high differentiation point yet. But history suggests it will eventually come.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
