- New Zealand's house prices have increased by 31.1% since last year
- Negative gearing has been abolished in New Zealand, taking effect on Friday
- The new legislation won't affect the main family home or new builds
In a further attempt to cool the New Zealand property market, Jacinda Ardern’s Labour Government has introduced a new law limiting property investors from deducting mortgage interest from their taxable income, what is otherwise known as ‘ negative gearing‘.
The Government released the draft legislation yesterday, with it due to take effect this Friday (1 Oct).
Revenue Minister David Park said the changes only affect investment properties bought on or after March 27 this year (when the policy change was first mooted).
“Interest deductions on borrowings drawn down before March 27 2021 for existing residential property acquired before this date would be phased out over the period between October 1 2021 and March 31 2025,” he said.
Earlier this year the Government extended their bright-line test from five to ten years.
The extension of the test, which evaluates whether people who sell a residential property need to pay income tax on any profit, hopes to reduce the incentive to invest in housing over other types of assets.
“Tax is neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government’s overall response.”
Finance Minister Grant Robertson
The new legislation won’t affect the main family home or new builds.
The Government has also imposed a policy determination that the NZ Reserve Bank must include stabilisation of the property market.
Mr Robertson said the Bank’s remit will be amended so the bank considers the “the impacts on housing when making monetary and financial policy decisions.”
New Zealand’s housing market
According to the Real Estate Institute of New Zealand’s September report, house prices have increased by 31.1% since last year.
This comes after the country’s Human Rights Commission launched an inquiry into its housing crisis.
Chief Human Rights Commissioner Paul Hunt said successive governments have failed to solve the crisis, leaving affordable homes out of reach for many New Zealanders.
New Zealand House Prices
The opposition National Party said the policy will see rents increase, worsening the crisis.
Will New Zealand’s decision affect Australia?
David Johnston from Property Planning Australia said “international markets can group the Antipodean nations together, thus a NZ government decision has impacted the Aussie dollar and bond yields.”
Australia and negative gearing
Abolished for a short period between 1985 and 1987, negative gearing has been common practice in Australia.
In the 2019 federal election, Labor’s Bill Shorten proposed removing negative gearing for those who purchased existing properties.
At the time, mortgage company boss John Symond said “it could tip Australia into recession.”
Earlier this year, Labor confirmed they won’t disturb negative gearing, removing it from their raft of policy positions.
The Housing Industry Association said the party’s decision “will provide certainty for the housing industry and for Australians that are looking to invest and rent.”
The effects of banning negative gearing
Despite no sign being abolished for the moment, a 2019 report from SQM Research predicted what would happen if it was:
- Rent would likely remain stable, but could increase between 7% to 12% over a two year period, assuming there is an interest rate cut passed on by the banks.
- There would be further price falls in the housing market over a two year period.
- Property sales turnover would be predicted to fall another 8% to 15% from 2019 levels.
- Increasing interest in the housing market by financial institutions, particularly industry super funds who will invest via build-to-rent schemes.
- Investors seeking to benefit from negative gearing remaining on new properties/off-the-plan development could have the risk of their property being valued below purchase price.
Owner of SQM Research Louis Christopher said “we (would) expect a rise in rental yields which will occur through a combination of additional falling dwelling prices and, eventually, a rise in rents.”
“While we take the view that negative gearing reform is a good thing over the long term, such reform should be executed as part of a wider property tax reform that should be phased in over time.”