We are now over two and a half months along from the March 23 tax changes for property investment announced by the Finance Minister. The various monthly surveys I run have allowed us to see that since late-March investors have stepped back strongly from the housing market as they wait to see what will happen. It now looks like some have waited long enough and are coming back to the market.
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This result appears in my monthly Tony’s View Spending Plans Survey which usually attracts over 1,200 responses and received 1,304 last week. Back in early-February, before the tax changes and before the Reserve Bank had confirmed the return of Loan to Value Ratio rules, a net 11% of people said that they planned spending more on investment property in the coming 3-6 months.
In March that proportion fell to 5%, then it went to negative 10% in April and 9% in May. That is, more people said they would be reducing spending on (buying) an investment property than said they would be increasing spending.
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But the latest result shows that only a net 2% of people now plan cutting back. This is very interesting and another nail in the coffin of those somewhat optimistically believing that the policy change will elicit a surge in investor selling and sharply reduced buying. In fact, my survey of real estate agents with Real Estate Institute of New Zealand tells us that the net proportion of agents around the country seeing investors stepping forward to sell stood at only 6% two weeks ago from a high 12% late in April and a net 2% seeing fewer sellers late in January.
The turning in investor opinion from a month ago has occurred across all age brackets but has been greatest for those aged 51-65 and over 65. These are the two groups least likely to be affected by the requirement for a 40% deposit because they have at some decades of wealth growth under their belts. They are also the two groups most sensitive to low term deposit rates in banks and other borrowing entities.
That first factor means they have lower sensitivity to the loss of interest expense tax deductibility and a minimum 40% deposit than younger investors who would have higher debt levels. The tax changes look like locking in inter-generational differences in housing wealth by making property ownership more difficult for younger people.
Tony Alexander: “There is very strong anecdotal evidence that investors are selling some of their older stock.” Photo / Supplied
In fact, whereas in early-March and early-April a net 26% of people under 30 years of age said they plan spending more on a property to love in, come May that proportion was 15% and it has recovered to just 19% now. Only a net 3% of those aged 30-50 plan buying their own house compared with 11% in February.
Does this imply the policies are in vain? No. There is very strong anecdotal evidence that investors are selling some of their older stock to reduce debt whilst shifting towards the purchase of a new property. This will encourage construction and already in Auckland house building is running at 104% above the average for the past decade compared with only 44% above average issuance of consents for new dwellings outside of Auckland.
Over time we can expect heightened talk of an over-supply of houses, particularly in Auckland but also in the regions where there is probably excessive optimism regarding how many Auckland Baby Boomers are going to sell and move out. The building boom is going to deliver a supply of (to them) affordable townhouses near where they currently live, which they can move into and free up $1m to $2m from selling their existing family house.
The longer-lasting impact of the March 23 tax changes is likely to be on the encouragement of extra construction financed by investors rather than outright exit from the property investment market altogether, even though from a risk diversity point of view this would be a wise thing for many people to do. Many investors thinking of such diversification are shifting towards exposure to commercial property rather than selling up and leaving their funds in a bank account where they will shrink after deduction of tax and inflation.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
