End of the affair: Where NZ investors are heading after the house party is over
Article written by InvestNow
Fueled by a steady population increase, limited supply growth and what amounted to generous tax subsidies, Kiwi residential real estate investors have been on the winning end of a one-way bet for decades.
But in March this year, the property investment odds blew out as the government launched its first serious assault against a sector slated as the prime suspect in the NZ housing affordability ‘crisis’.
Coming just two weeks after the International Monetary Fund (IMF) denounced NZ property price rises as “unsustainable”, Finance Minister Grant Robertson unveiled a surprise package of government measures designed to “curb rampant speculation”.
In particular, the new rules extend the previous ‘brightline’ period – within which property investment sales incur a capital gains tax – from five years to 10 years. While the brightline test, first introduced by a National-led government in 2015 with a two-year threshold, dampens capital gains from quick-flick strategies, the latest measures also hit the immediate bottom-line profits of housing investors.
Under the shock move, most NZ residential property investors will lose a powerful incentive to claim mortgage interest as a tax-deductible expense.
According to a Finance Ministry release: “The tax system favours debt-driven residential property investment over more fully taxed and more productive investments. To reduce investor demand for these investments, the Government will remove the advantage investors have over first home buyers.”
Furthermore, the government was also “considering closing a loophole on interest-only loans to speculators” and imposing debt-to-income ratios for housing mortgages, targeted especially at investors.
Indoor-outdoor flows: Through the term deposit exit to property
Robertson justified the government crackdown by pointing to data showing property investors now represent the largest cohort of home-buyers in NZ – with some figures suggesting about two-thirds of recent sales were investment property-related.
Reserve Bank of NZ (RBNZ) figures do show residential property investor loans have increased as a total of the mortgage market since March 2020. However, according to the RBNZ charts, investor loans only account for about a third of mortgages over the last 12 months with the remainder linked to owner-occupier house purchases.
More tellingly, the total house mortgage-lending market has spiked up considerably in the COVID-19 era: for example, banks lent out almost $3.5 billion to home-buyers in December 2020, equating to more than double the average monthly rate of the two years prior to March 2020 (when COVID panic peaked).
The recent flood of money into housing seems to match opposite flows out of the other stalwart NZ investment asset: bank term deposits.
RBNZ statistics reveal that over the 12 months to the end of February this year, the term deposit market shrank almost $33 billion to close the period at roughly $161 billion (about $18 billion of that is held by offshore-domiciled investors). NZ households withdrew about a net $14 billion from term deposits since June 2020, according to the RBNZ figures.
The outflows from term deposits began in August 2019 when the RBNZ cut the official cash rate (OCR) to 1% before accelerating further as the COVID outbreak prompted the central bank to slash the benchmark rate to 0.25% (where it still stands today as of April 2021).
Term deposit rates are highly correlated with the OCR with banks currently offering returns of 1% or less over most periods for the product.
Given the persistently low term deposit returns, investors have clearly sought yield in other, riskier, places with the historical favourite of housing probably benefiting the most.
Door opens for PIE funds as real estate tax floor removed
Whatever the rationale, the raft of government reforms sparked an immediate reaction among property investors. Some warned that rents would rise as investors sought to recoup the interest costs previously defrayed as tax deductions.
Other signs, though, point to a rational pause in the market as property investors take stock of the changes.
For example, a monthly survey of mortgage advisers by well-known economist Tony Alexander (previously BNZ chief economist), found investor interest in sourcing property loans slumped almost 80% month-on-month this April following declines of 46% and 5% during March and February, respectively.
“This will be exactly the result desired by the government through its continuing string of policy changes aimed explicitly at ‘dampening’ investor demand for existing properties,” the Alexander report says.
Also in April, Derryn Mayne, owner of real estate broking firm Century 21 New Zealand, pointed to a significant mood swing in the property investor market post the Robertson announcement.
“Not only is it harder to get into residential investment property, but there are many new challenges for existing landlords. Subsequently, we’re seeing small and large landlords exiting out of residential property,” Mayne said in a release. “They’re opting instead to invest in the likes of the sharemarket, managed funds, commercial property, or even syndications promising a reasonable yield on commercial buildings.”
Mike Heath, InvestNow general manager, said the Labour government reforms could end the long-standing Kiwi ‘love affair’ with investment property – or at least take some of the passion out of the relationship.
“For a long time, owning an investment house has been the strategy of choice for many New Zealanders looking to book quick capital gains or build tax-advantaged income streams,” Heath said. “Undoubtedly, property will always appeal to Kiwi investors but now they have to more carefully assess the relative benefits of other asset classes and vehicles.”
He said with housing investment now more problematic and term deposit rates stuck in low gear for a while at least, the merits of managed funds – particularly those structured as portfolio investment entities (PIE) – would likely attract more interest from a wider range of Kiwis.
“PIE funds have a locked-in tax incentive for investors on the higher marginal rates of 30, 33 and now the higher 39%,” Heath said. “Investors can also access a wide array of asset classes through PIE funds, including real estate – although not yet NZ residential housing.”
Either way, he said New Zealanders pushed out of the investment housing market today have many more options to explore regulated products on the InvestNow platform.
End of the affair: Where NZ investors are heading after the house party is over
Article written by InvestNow
Fueled by a steady population increase, limited supply growth and what amounted to generous tax subsidies, Kiwi residential real estate investors have been on the winning end of a one-way bet for decades.
But in March this year, the property investment odds blew out as the government launched its first serious assault against a sector slated as the prime suspect in the NZ housing affordability ‘crisis’.
Coming just two weeks after the International Monetary Fund (IMF) denounced NZ property price rises as “unsustainable”, Finance Minister Grant Robertson unveiled a surprise package of government measures designed to “curb rampant speculation”.
In particular, the new rules extend the previous ‘brightline’ period – within which property investment sales incur a capital gains tax – from five years to 10 years. While the brightline test, first introduced by a National-led government in 2015 with a two-year threshold, dampens capital gains from quick-flick strategies, the latest measures also hit the immediate bottom-line profits of housing investors.
Under the shock move, most NZ residential property investors will lose a powerful incentive to claim mortgage interest as a tax-deductible expense.
According to a Finance Ministry release: “The tax system favours debt-driven residential property investment over more fully taxed and more productive investments. To reduce investor demand for these investments, the Government will remove the advantage investors have over first home buyers.”
Furthermore, the government was also “considering closing a loophole on interest-only loans to speculators” and imposing debt-to-income ratios for housing mortgages, targeted especially at investors.
Indoor-outdoor flows: Through the term deposit exit to property
Robertson justified the government crackdown by pointing to data showing property investors now represent the largest cohort of home-buyers in NZ – with some figures suggesting about two-thirds of recent sales were investment property-related.
Reserve Bank of NZ (RBNZ) figures do show residential property investor loans have increased as a total of the mortgage market since March 2020. However, according to the RBNZ charts, investor loans only account for about a third of mortgages over the last 12 months with the remainder linked to owner-occupier house purchases.
More tellingly, the total house mortgage-lending market has spiked up considerably in the COVID-19 era: for example, banks lent out almost $3.5 billion to home-buyers in December 2020, equating to more than double the average monthly rate of the two years prior to March 2020 (when COVID panic peaked).
The recent flood of money into housing seems to match opposite flows out of the other stalwart NZ investment asset: bank term deposits.
RBNZ statistics reveal that over the 12 months to the end of February this year, the term deposit market shrank almost $33 billion to close the period at roughly $161 billion (about $18 billion of that is held by offshore-domiciled investors). NZ households withdrew about a net $14 billion from term deposits since June 2020, according to the RBNZ figures.
The outflows from term deposits began in August 2019 when the RBNZ cut the official cash rate (OCR) to 1% before accelerating further as the COVID outbreak prompted the central bank to slash the benchmark rate to 0.25% (where it still stands today as of April 2021).
Term deposit rates are highly correlated with the OCR with banks currently offering returns of 1% or less over most periods for the product.
Given the persistently low term deposit returns, investors have clearly sought yield in other, riskier, places with the historical favourite of housing probably benefiting the most.
Door opens for PIE funds as real estate tax floor removed
Whatever the rationale, the raft of government reforms sparked an immediate reaction among property investors. Some warned that rents would rise as investors sought to recoup the interest costs previously defrayed as tax deductions.
Other signs, though, point to a rational pause in the market as property investors take stock of the changes.
For example, a monthly survey of mortgage advisers by well-known economist Tony Alexander (previously BNZ chief economist), found investor interest in sourcing property loans slumped almost 80% month-on-month this April following declines of 46% and 5% during March and February, respectively.
“This will be exactly the result desired by the government through its continuing string of policy changes aimed explicitly at ‘dampening’ investor demand for existing properties,” the Alexander report says.
Also in April, Derryn Mayne, owner of real estate broking firm Century 21 New Zealand, pointed to a significant mood swing in the property investor market post the Robertson announcement.
“Not only is it harder to get into residential investment property, but there are many new challenges for existing landlords. Subsequently, we’re seeing small and large landlords exiting out of residential property,” Mayne said in a release. “They’re opting instead to invest in the likes of the sharemarket, managed funds, commercial property, or even syndications promising a reasonable yield on commercial buildings.”
Mike Heath, InvestNow general manager, said the Labour government reforms could end the long-standing Kiwi ‘love affair’ with investment property – or at least take some of the passion out of the relationship.
“For a long time, owning an investment house has been the strategy of choice for many New Zealanders looking to book quick capital gains or build tax-advantaged income streams,” Heath said. “Undoubtedly, property will always appeal to Kiwi investors but now they have to more carefully assess the relative benefits of other asset classes and vehicles.”
He said with housing investment now more problematic and term deposit rates stuck in low gear for a while at least, the merits of managed funds – particularly those structured as portfolio investment entities (PIE) – would likely attract more interest from a wider range of Kiwis.
“PIE funds have a locked-in tax incentive for investors on the higher marginal rates of 30, 33 and now the higher 39%,” Heath said. “Investors can also access a wide array of asset classes through PIE funds, including real estate – although not yet NZ residential housing.”
Either way, he said New Zealanders pushed out of the investment housing market today have many more options to explore regulated products on the InvestNow platform.