The New Zealand government has targeted real estate speculators with a set of new measures to deal with uncontrolled house prices and prevent the formation of a “dangerous” bubble.
The government will remove tax incentives for investors to make speculation less profitable and unlock more land to increase housing supply, Prime Minister Jacinda Ardern said on Tuesday in Wellington. The changes occur at a time when rising house prices keep first-time buyers and lower-income people out of the market, raising concerns about increasing social inequality.
“The last thing homeowners need now is a dangerous housing bubble, but a series of indicators point to toward that risk, ”Ardern said at a news conference. “Real estate investors are now the majority of buyers, with the largest volume of purchases ever recorded. Last year, 15,000 people bought houses that already owned five or more. “
Bubble Brewing?
Annual increase in house price inflation
Source: Instituto de Imóveis House Price Index
New Zealand’s success in The battle against Covid-19 saw its economy recover earlier than many others, putting it at the forefront of a global housing boom, as ultra-peripheral monetary policies encourage investment in higher-yielding assets. House prices rose 21.5% in the year through February and investors accounted for more than 40% of purchases that month, a record high.
To deter speculation, the government will gradually eliminate investors’ ability to claim mortgage interest as a tax-deductible expense. It will extend the period in which profits from the sale of investment properties are taxed from five to ten years.
‘Chilling effect’
The changes “will significantly reduce financial incentives to invest in housing” and will “have an inhibiting effect on investor demand,” said Satish Ranchhod, senior economist at Westpac Banking Corp. in Auckland. “Today’s announcements indicate a significant downside risk for home prices and economic activity in general.”
The New Zealand dollar fell with the news and bought 71.20 cents at 1:26 pm in Wellington, down from the previous 71.70 cents. Swap rates and bond yields also fell, as traders speculated that the central bank will be able to keep interest rates at historic minimum levels for longer.
The package is the latest salvo in Ardern’s attack on the growing housing market, which is undermining his efforts to reduce inequality. Prices are skyrocketing at double-digit rates across the country, taking the national median to NZ $ 780,000 ($ 556,000). In Auckland, the average price reached NZ $ 1.1 million, making it the fourth least affordable city in the world, according to Demographia.
Last month, Finance Minister Grant Robertson announced According to him, the changes will require the Banco da Reserva to pay more attention to the real estate market when defining monetary and financial policy. He also asked RBNZ to consider restrictions on interest-only 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 housing market has become the least accessible in the OECD and that it was “essential for the government to take steps to curb unbridled speculation.”
Bright Line
He said that extending the so-called “bright line” test for 10 years – effectively a capital gains tax on investment property sales – and removing interest deductibility for investors “will lessen speculative demand and tip the balance. toward first home buyers. “
The new bright line test will apply to properties purchased from March 27th. The time horizon for new construction will remain at five years to stimulate supply.
As of October 1, investors will no longer be able to deduct mortgage interest as an expense on properties acquired as of March 27. For existing homeowners, the mortgage interest deductibility will be eliminated in the next four years so that it cannot be claimed at all until the fiscal year 2025-26. New buildings are expected to be exempt from this change.
The government is trying to contain the demand for housing and, at the same time, increase supply, which has been limited by a number of factors, including planning rules and high construction costs. She said today that she will establish a NZ $ 3.8 billion fund to unlock more land for housing development and also make donations for the first home available to more people.
“The housing crisis is a problem that takes decades to be reversed, but these measures will make a difference,” said Ardern. “There is no magic solution, but combined all these measures will start to make a difference.”