A flood of investment properties could hit the market from mid-next year if National sticks to its promise and slashes the bright-line test back down to two years, industry experts have told OneRoof.
They said “mum and dad” investors who bought in 2020 when interest rates were low were now having to dig deep to top up their mortgages.
However, a change to the bright-line test would allow them to sell up and bank any profit without being hit with a tax bill.
Bright-line is New Zealand’s answer to a capital gains tax and requires people who sell a residential property within a set period of time to pay income tax on any profit they make.
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The bright-line test currently stands at 10 years for properties bought after March 27, 2021 and five years for properties purchased prior to this date. However, National has pledged to reduce the bright-line test back to two years no later than July 2024.
Vendors selling their main residence are exempt from the bright-line tax, but those selling an investment property, holiday home or home they have left empty while they are overseas are liable.
Loan Market mortgage adviser Dave Williams said some mum and dad investors who bought when interest rates were at 2% would be struggling to repay the mortgage with interest rates now upwards of 7%.
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Those who were unable to cover their mortgage repayments with rental income may be questioning whether property is the right investment tool for their retirement, he said.
“It will be interesting to see what your mum and dad investors will be saying about it because I think there will be quite a few that will say, ‘Look this just isn’t for us. As soon as [bright-line] moves back to two years, we are going to get rid of the investment property and take our money and run’.”
If this happened, Williams said there could be a surge of properties on the market from July.
CoreLogic chief property economist Kelvin Davidson has no doubt more investment properties will be listed as a result of the bright-line rule changing. Photo / Supplied
CoreLogic chief property economist Kelvin Davidson had no doubt there would be more investors looking to sell up as soon as changes to the bright-line rule were made.
“There will be a number of investors losing money every week just waiting for bright-line to expire. Because you might be losing money day-to-day, but could look at it and go, ‘It would be way worse if I have to pay capital gains tax’. You might be sitting on a $200,000 capital gain but if it’s taxed at 33%, that’s like $66,000. You would be probably happier just battling away waiting for bright-line to expire.”
While it depended on each individual property and when it was purchased, Davidson said anyone who bought in the second half of 2020 was almost certain to be sitting on a capital gain.
Property investor and owner of iFindProperty Nick Gentle said it wasn’t just interest rates and the increased tax bills that were hurting investors, but also the insurance costs which had in many cases doubled.
Gentle, who also runs a business selling property, said they were expecting an increase in listings as a direct result of changes to the bright-line rule.
“It will be folks who bought in 2019, 2020, 2021 when interest rates were low and the value shot up and then interest rates went up and then the tax rules were changed on them and they are probably just starting to see their tax bills.”
Property investor Nick Gentle says rising interest rates, tax bills and insurance costs are all hurting investors. Photo / Supplied
While the most common rentals people have are their former family homes, Gentle said it was unlikely to have an impact on these owners as they usually owned them for a long time.
Bayleys Canterbury investment sales specialist Angela Webb expected most of the properties to hit the market as a result of the bright-line rule change to be newish two and three-bedroom townhouses.
“People who bought in 2020-2021 and got all excited about being an investor, they will now be finding it quite hard, especially if they only fixed for a year or two at low mortgage rates. The rents have gone up, but they haven’t gone up enough.”
Webb said there was already a slight oversupply of two-bedroom townhouses for sale in Christchurch with the number sitting at just over 100 on her last check, so there could be even more of a glut next year.
Bayleys Canterbury investment sales specialist Angela Webb expects to see more near-new townhouses hit the market when the bright-line rule is reversed. Photo / Supplied
There were also some property traders who had been holding properties who might also decide to sell them once they didn’t have to pay tax on the profit, she said.
However, on the flipside, Webb said other potential changes to property rules under a National-led Government had also seen investors start to make enquiries about older homes again.
“People have more confidence in buying second-hand properties again for investment properties and with rents rising people can make numbers work with the higher interest rates.”
But New Zealand Property Investors Federation president Sue Harrison did not expect its members to suddenly sell their properties because of the change in the bright-line rule, adding it was more likely to be the high tax bills that would make them sell.
Harrison said most members usually bought and held and would stick with that plan and sell at the appropriate time so they could reduce their mortgages and have money for their retirement.
She said the rising taxes was the far bigger problem for investors and the incoming government had already signalled changes around this at the same time. Under a National Government the interest deductibility rules would be reinstated over several years with it staying at 50% in 2024, before moving to 75% in 2025 and 100% interest deductibility from April 2026.
However, National is currently in coalition talks with minority parties Act and New Zealand First to form a government so the exact details around its policies could change based on these negotiations.
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