Housing Policy Changes - how they effect Owners, Investors, Renters
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Housing policy: What the changes mean for homeowners,
investors, first-home buyers, renters and bach owners
While some moves had been predicted, such as the extension of the bright-line test, others were a surprise. The move to end investors’ ability to offset interest paid on home loans against rental income was described by one economist as “massive”.
Here's what the changes mean for various players in the market.
Some of the most significant changes come for property investors.
Until now, they have been able to claim back the interest cost of a home loan against the rent received on the property, significantly reducing their tax bills. Put simply, if they earned $20,000 a year in rent from a property but paid $12,000 in home loan interest, only $8000 of the rental income would be subject to tax.
Under the new rules, the whole $20,000 would be.
No deductibility will be available for properties bought after March 27, and the amount that can be deducted will drop for other properties until it is phased out in four years’ time. New builds may be exempt, but Cabinet is yet to consult on this.
While this is a big change for investors to build into their calculations, with interest rates so low, the impact is more limited than it would have been at pretty much any time in the past. But interest rates will eventually rise and it could become more painful at that point.
The bright-line test is also being extended, although new builds will be exempt.
At present, any property other than an owner-occupied home that was bought between October 1, 2015, and March 28, 2018, and sold within two years, or purchased after March 29, 2018 and sold within five years, is subject to tax on its capital gains.
Now, any properties bought from March 27 will have to be held for 10 years to escape the tax.
The tax is applied at the marginal income tax rate of the owner and has been described by tax commentator Terry Baucher as a “de facto capital gains tax”.
It’s expected this will result in an extra $650 million a year for the Government.
Financial Advice New Zealand chief executive Katrina Shanks said the bright-line test extension would make investors think more carefully about the investment strategies.
“Combined with the decision to eliminate interest rate tax deductions investors can currently claim on properties, will significantly influence whether they enter and stay in the market.
“New Zealand has a large number of mum and dad property investors, many of whom have just one property as the main source of their retirement plan, and they will now have to look at this model with a new lens.”
If you live in a home that you own, you won’t be directly affected, although you may no longer see the value of your property shooting up at the 20 per cent-a-year rate of recent times.
The bright-line test doesn’t apply if you used a property as your main home for more than 50 per cent of the time you own it, or you use more than 50 per cent of the property’s area.
People can use an “own home” exclusion twice in any two-year period to avoid the bright-line test.
The changes may mean that official cash rate increases are further away than might otherwise be the case.
Westpac economist Satish Ranchod said they were now “off the table for the foreseeable future”.
Baches were already covered by the bright-line test, and the impact of that is extended for any new baches bought as of this weekend.
The tax is paid at a person’s normal income tax rate, so if you’re a high-income earner with a second property you’re selling, you could potentially be taxed 39 per cent of the gains.
However if you use the property as your main home for more than 50 per cent of the time you owned it, you may be able to avoid paying tax with the “own home” exclusion mentioned earlier.
If you’ve been using Airbnb or other short-term rentals to help cover the cost of holding a bach, you may now have an extra tax bill on those, phased in over the coming four years.
It’s a little unclear what this will all mean for renters.
If some investors decide it’s not worth holding a property without the perk of deductibility, that could mean some tenancies change hands. Some landlords might try to increase rents to cover their increased tax bill.
“Many landlords are likely to increase their rent in the coming years as they look to offset the costs, thereby making rentals even more unaffordable than they are currently and making it even harder for renters to save a deposit for their own property,” said Real Estate Institute acting chief executive Wendy Alexander.
- LVR Restrictions introduced in October 2013.
- Interest rates are one-year fixed on a 30-year term.
- Savings = 30% of the household income.
“There is also a chance that a handful of unscrupulous landlords might look to even profit from the situation.”
The Government is also tweaking the rules so that a rental increase can only happen once per year per property, rather than per tenant. That means a new tenant moving in will pay the same rent as the one who moved out, unless there hasn’t been a rent increase in a year.
NZ Property Investors Federation president Sharon Cullwick said that could mean that increases were bigger when they did happen.
It’s intended that the changes will mean house prices increase less quickly, providing more opportunities for first-home buyers, and less competition from investors.
There are also changes to the First Home Grant and Loan schemes.
To qualify, buyers will now be able to earn up to $95,000 as single people and $150,000 as a couple.
Price caps increase from $650,000 to $700,000 in Auckland, $650,000 in Queenstown and Wellington, $600,000 in Nelson, Tauranga, Western Bay of Plenty, Hamilton, Waipa, Hastings and Napier, $550,000 in Christchurch, $550,000 in Dunedin and $500,000 through most of the rest of New Zealand.