New Zealand / Housing

New housing policy immediate effect on property investors may be limited - CoreLogic

18:38 pm on 23 March 2021

Measures to deter property investors are expected to have only limited impact initially but may cause many would-be and small investors to reconsider.

Photo: RNZ / Nate McKinnon

The government today announced its plans to abolish the tax deductibility of interest payments, expand the bright-line test on investor sales, and increase financial assistance for first home buyers.

Property research firm Core Logic said the biggest effect on investors would come from the move on interest measures.

"This will impact investors' profitability, which in conjunction with reduced expectations of capital growth... will cause some investors to reduce their portfolio and may reduce future purchases too," its head of research Nick Goodall said.

He said doubling the bright line test from five to 10 years was a step closer to a more comprehensive capital gains tax, but the impact was likely to be limited in the short term.

"It also may have unintended consequences of encouraging investors to hold properties longer, which actually limits properties available for supply which can actually contribute to stronger value growth," Goodall said.

Further spending to improve supply was good, but the devil would be in the detail, he said.

The increase in first home buyer price caps might add to demand, and could see first home buyers able to afford more expensive houses, rather than get more people into the market.

Infrastructure moves won't change market overnight - economist Brad Olsen

Among the raft of measures is a $3.8 billion contestable fund for infrastructure to fund the roads and sewerage connections normally paid for by developers and councils. Economist Brad Olsen said the cost of providing such infrastructure had been an impediment to the building of new homes in the past.

"The call has been for a long time 'government step in with some infrastructure, supercharge some activity' ... none of this is going to change the housing market overnight but infrastructure funding has been one of the serious bugbears we've been hearing for the last one and a half years and so this is very much a step in the right direction."

Listen to Brad Olsen and Sharon Cullwick on Nine to Noon

He said the extra money should help provincial areas where smaller councils find it particularly difficult to meet costs.

Property investors warn of rental squeeze

The Property Investors Federation believes tax changes announced today that are meant to discourage property speculation will penalise investors and take more rental properties off the market.

Federation spokesperson Sharon Cullwick told Nine to Noon the roughly $6000 that her members would no longer be able to claim back on a $600,000 home would only discourage investors from owning rental properties.

"You'll probably find that it will slow down the market which isn't good for tenants, we still need places for those people that can't afford their own property... we still need to have the investors that really cover that middle section."

Cullwick also cast doubt on measures to increase supply, saying they wouldn't help until the shortage of builders is addressed.

Banks warn of chilling effect

Meanwhile, retail banks have warned the new measures may not just chill the housing market, but also the broader economy.

Westpac said the announcements offered significant downside risk for house prices and economic activity more generally.

It said the interest rate moves reduced the incentives to invest in the sector and would have "a chilling effect" on demand, and were likely to have a significant drag on rising prices.

"We expect this to reverberate through economic activity more generally. The housing market plays a key role in shaping economic conditions more generally," senior economist Satish Ranchhod said.

"In particular, growth in house prices tends to be associated with increases in household spending and residential construction."

A slowdown in house prices would slow economic recovery, and any lift in inflation, which would make the Reserve Bank even more reluctant to raise its official cash rate.

ANZ economists said the measures increased the risk that the house prices would slow more sharply.

"But importantly, it increases the risk that house prices actually fall - it's very difficult for policy makers to engineer a soft landing," the economists said in a research note.

Kiwibank chief economist Jarrod Kerr was sceptical about the measures having any immediate effect.

"We are forecasting annual house price growth will peak at 25 percent across the country in the June quarter. The tweaks to demand should take some heat off the market.

"But house price growth is still expected to remain in double-digit territory by the end of the 2021, eroding some of the changes made today to help first home buyers."