One hope I am sure the Government has is that as a result of the changes to tax legislation it announced last March and perhaps one or two other things, investors will not just back away from buying more properties but will sell some. The anecdotal evidence from real estate agents is that some of their investor clients are selling properties and not buying more, though for those who do the strong preference is for a new dwelling because of the retained deductibility of interest expenses.
But before owner-occupier buyers get overly enthusiastic, thinking that all the talk about debt-funded purchases means investors are hugely sensitive to tax changes, it pays to take these bits of knowledge on board.
Using data prepared and released by Statistics New Zealand we can see how the level of mortgage debt held by investors compares with the value of their housing assets. We can do the same for owner-occupiers.
Early last year (latest data), mortgage debt of owner-occupiers was equal to 22% of the value of their housing stock. This was down from 26% immediately pre-Covid and 32% early in the Global Financial Crisis. The ratio will be lower now once 2022 house price gains get captured in the slow to release estimates of the housing stock value.
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For investors early in 2021 the ratio of mortgage debt to the value of residential property assets was 15%, up from 14% pre-Covid but down from 19% in the GFC.
It is not true to say that debt is overwhelmingly used to fund investment property purchases in New Zealand – and keep in mind the incentive which investors have had to load debt onto their property because of the old tax deduction ability. This means that measures aimed at increasing the relative cost of this debt will not necessarily yield the spit the dummy response which the government would have been hoping for last year.
This helps explain the results showing an absence of a wave of selling from my various monthly surveys. From my monthly survey of real estate agents alongside REINZ we saw that just before the March 23 tax changes a net 15% of agents said they were seeing more investors looking to buy. That proportion quickly fell to a net 41% fewer agents noticing investor buyers and most recently the reading was -53%.
Economist Tony Alexander: “Peak demand has been and gone.” Photo / Fiona Goodall
But in February last year a gross 5% of agents said they were seeing more investors looking to sell, and now that sits only slightly higher at a net 11%. The tax changes have definitely affected investor willingness to buy, but barely touched willingness to sell.
From my monthly survey of property investors alongside Crockers Property Management we can partly see why. In the first survey back in June 65% of investors said they plan holding their property assets for at least ten years, with most saying they have no intention of selling. The latest reading from last week’s survey is 61% planning to hold for at least ten years, with an average of 65% for the past three months.
Some investors are definitely offloading some properties, looking to take advantage of high prices. But those who have not done such profit-taking by now face reducing demand due to rising interest rates and the effects of changes to LVRs and the credit contracts legislation. Peak demand has been and gone.
Will investors still keep looking to sell? Again, some will. But when a net 14% say that they are finding it easy to get good tenants compared with just 3% back in June, there is an absence of pressure to sell caused by a high risk of having one’s property empty for a decent period of time. Such ease of finding tenants also means firm ability to raise rents if desired – though as yet my surveys struggle to find much evidence of a generalised lift in rent rise plans.
It all adds up to no wave of investor selling. The only wave underway currently is of first home buyer withdrawal because of the Government’s ham-fisted Credit Contracts and Consumer Finance Act changes.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
