The New Zealand government has been targeting real estate speculators with a series of new measures to combat falling house prices and prevent the formation of a “dangerous” bubble.
The government will remove tax incentives for investors to make speculation less profitable and to unlock more land to increase housing supply, Prime Minister Jacinda Ardern said in Wellington on Tuesday. The moves come as rising house prices keep first-time buyers and lower-income earners out of the market, raising concerns about growing social inequality.
“The last thing homeowners need right now is a dangerous housing bubble, but a number of indicators indicate by this risk “, Ardern declared in a press conference. “Real estate investors are now the largest share of buyers, with the largest number of registered purchases. Last year, 15,000 people bought homes that already owned five or more. ”
Bubble Brewing?
Annual increases in house price inflation
Source: Real Estate Institute Housing Price Index
The success of New Zealand in struggling with Covid-19 has seen its economy recover faster than many others, leading it to a global real estate boom, as ultra-weak monetary policies encourage investment in higher-yielding assets. Home prices rose 21.5% year-on-year in February, and investors accounted for more than 40% of purchases that month, a record high.
To discourage 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 real estate investments are taxed will be extended to 10 years out of five.
‘Cooling effect’
The changes “will significantly reduce financial incentives for housing investment” and have “a terrible effect on investor demand,” said Satish Ranchhod, a senior economist at Westpac Banking Corp. from Auckland. “Today’s announcements indicate a significant risk of falling 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, down from 71.70 cents earlier. Swap rates and bond yields have also fallen as traders have speculated that the central bank will be able to keep interest rates at a record high for longer.
The package is the latest rescue from Ardern’s attack on the booming real estate market, which undermines its efforts to reduce inequality. Prices rise to double-digit tariffs across the country, bringing the national average to US $ 780,000 ($ 556,000). In Auckland, the average price reached $ 1.1 million, making it the fourth least accessible city in the world, according to Demographia.
Last month, Finance Minister Grant Robertson announced the 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 called on the RBNZ to consider restrictions on interest-bearing mortgages and the introduction of debt-to-income ratios for investors. The bank is due to report in May.
Robertson said today that New Zealand’s real estate market has become the least accessible in the OECD and that it is “essential for the government to take action to reduce rampant speculation”.
Bright Line
He said extending the so-called “bright line” test to 10 years – effectively a capital gains tax on real estate investment sales – and eliminating investor interest deductibility would “reduce speculative demand and tip the balance.” by the first home buyers. ”
The new light test will apply to properties purchased from March 27. The time horizon for new construction will remain at five years to encourage supply.
From October 1, investors will not be able to deduct mortgage interest as an expense for properties purchased on March 27. For existing property owners, the mortgage interest deductibility will be phased out over the next four years, so that it cannot be claimed at all until fiscal year 2025-26. New constructions are expected to be exempted from this change.
The government is trying to reduce housing demand, while increasing supply, which has been constrained 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 provide more housing subsidies.
“The real estate crisis has been a problem for several decades, which will last a long time, but these measures will make a difference,” Ardern said. “There is no silver bullet, but all these measures combined will start to make a difference.”