One of the world’s largest real estate bubbles is getting a new round of affordability measures. Earlier this year, the New Zealand Government said they would put home prices at the top of their agenda. This week they followed up with the first actions they’ll be taking. Property investors will soon see most tax advantages over other investments disappear. At the same time, first-time homebuyers will see lower barriers to buying.
Taxing Homes At A Higher Rate If Held For Less Than 10 Years
New Zealand is doubling the amount of time for the Bright-Line test. The test is a simple guideline determining whether the gains of a home should be taxed as income. If someone sells their non-primary residence less than 5 years after buying, they get hit with the tax. The new changes double the 5 year minimum into 10 years.
The rule impacts all properties, but mostly targets speculators of new home developments. Development pre-sales, known locally as “off the plans,” are often bought and sold by investors looking to make a quick buck on completion. The expanded Bright Line test means investors will need to hang on for 10 years, or face higher taxation.
The measure is designed to increase the risk of what’s considered a low risk yield. Buying a home with the invention of using it as your primary residence won’t be enough either. The tax authority specified you must live in the actual property for the period.
New Zealand To Eliminate Investor Tax Advantages
The capital gains-like tax is just one of the ways they’ll try to stop investor tax advantages. Housing Minister Megan Woods said, “the tax system favors debt-driven residential property investment over more fully taxed and more productive investments.” They hope to tilt that in favor of first-time homebuyers.
On that note, they’ll also be closing the “loophole” allowing mortgage interest deductions. Investors previously could write off the interest paid against rental income. That won’t be the case in the near future. They’re also considering closing the interest-only loans speculators receive, later this year.
New Zealand Aims To Boost Supply, By Accelerating Infrastructure
The Government will be spending billions on accelerating the supply of new housing. Nope. They won’t just be handing over cash to developers, like some countries. Instead, they are taking a market approach by building essential servicing infrastructure.
The country has earmarked $3.8 billion in funds to build necessary infrastructure. Services like roads and pipes to new developments will be installed. The plan is expected to speed up the pace and scale of “tens of thousands” of new homes in the short to medium term. It’ll also do it without trying to artificially support prices.
Raising Down Payments For Investors, Lowering For First-Time Buyers
The Government is raising the maximum income to qualify to use a small down payment. First-time buyers can purchase with as little as 5% down, as long as their income is below a maximum threshold. For single people, the threshold will be lifted from $85,000 per year to $95,000. Families of two or more buyers will see the income threshold rise from $130,000 to $150,000.
Expanding credit availability usually inflates prices, but this might be different. The increased availability is being paired with higher barriers for investors. Investors now need to leave a minimum of 40% down, reducing leverage to the same level found in non-housing. The idea is to make it much harder for investors to buy a home, compared to first-time buyers.
Earlier this year the Government said they would target property investors. The central bank was also asked to start considering home prices when setting policy. This week’s announcements are the first set of measures presented since then. The next round of measures are expected as early as May.
Like this post? Like us on Facebook for the next one in your feed.
Real estate makes returns, so it’s a productive investment. Rubbish.
Productive in economics means it increases productivity, not whether or not it produces anything
David,
The theory is that RE is gobbling up money that could be used in MUCH more productive sectors like tech and small business. The “productivity” RE provides is just capital that gets dumped back into REcreating a loop that only inflates prices. So it’s not really productive.
If you don’t believe it wait and see what happens.
@ David Walker – thanks for confirming that real estate is a productive investment like any other, and therefore should be subject to the same level of taxation as any other, as opposed to receiving special tax treatment. New Zealand would agree.
All “productive investments” should be taxed according to the degree to which they are artificially propped up by government intervention and taxpayers. In the case of housing, nothing less than 100% capital gains inclusion rate and abolishing the principal residence tax avoidance would be reasonable.
Great now all these investors from New Zealand will come to Canada!
New Zealand taxes foreign real estate the same way as domestic real estate, and from the looks of the tax guide, they apply the “bright line test” too.
Canada is in a similar housing crisis and considering the same changes. Too many ‘investors’ playing the leverage and buy game have sucked up all the RE stock in too few hands. Turning homes into a speculative asset is toxic to society and mortgage interest deductions on rental property should absolutely be stopped. Huge numbers of working and middle class have been priced out of the market by antiquated tax policies from another era. REITs, offshore speculators and near zero interest rates have made property ownership nearly impossible for many who should have access. Desperately needed in Canada ASAP.
I applaud New Zealand for actually following through and putting into action tools to hopefully tame their housing market. Not a bunch of inaction or rhetoric. Am curious the ripple effects their new policies will have over time.
Must be nice for New Zealand citizens to have a government that’s actually on their side. This is something Canadians haven’t had for at least 6 years.
You’re certified brain-dead if you want to blame a specific political party… this has been going on since 2006-2007 or so. Harper even tried adding high risk 40 years and had to repeal it due to what it was starting to do. Every single party has continued to ignore the looming problem.
I don’t know if it’s a political party or not, but home prices grew within the range of credit exapansion until 2015. After that, every where in the country saw prices rise all at the same time, with rural towns making the biggest gains.
Harper’s 40 year mortgages in 2007 didn’t cause people to pay $800,000 for three season homes in the woods in 2021, thinking it’s their last chance to buy property.
The political party’s do not control the arms length Bank of Canada, or the current bond rates. When the oil collapse happened in 2015 we saw both a cut in rates as well as bonds trending down (which dictate fixed mortgage costs). As rates started to climb back up, albeit slowly, we started to see a bit of a slowdown until this latest round of rate cuts and QE. The reason this is happening worldwide is due to central banks having to cut in order to remain competitive… and it has nothing to do with politics.
Regarding your Harper comment it actually did do that… the problem is that assets don’t trade/move based on a fixed amount (i.e. omg 800k) but based on percentage movement. Go take a look at the percentage increase during Harper’s reign versus Trudeau (and I preferred Harper for the record so I’m not sitting here pandering)… they are nearly equivalent.
This is fundamentally wrong. The BOC is not independent, you’re thinking of the Federal Reserve where it’s based on committees that can exit the group if they dispute.
The Bank of Canada is directly responsible to the Finance Minister, and is required to conduct asset purchasing at a rate they are comfortable with. They are currently absorbing 35% of any debt issued, so they aren’t at market rates.
The BOC also works to create targeted liquidity that ‘s a Federal concern, such as buying mortgage bonds to push rates lower. Canada’s currency is political, and that’s why it’s not used for international transactions. Even its oil is sold in USD and RMB.
I wasn’t a fan of many of the things Harper did. But the silly 40/0 mortgages were in place for all of 10 minutes before Jim Flaherty wisely reversed course. The impact mas minuscule. Unlike the current government, Harper’s cabinet actually had people capable of learning and self-correcting.
The truly parabolic rise in housing began after the Trudeau Liberals were elected (aside from Vancouver, which went bonkers several years earlier). We can debate the reasons for that – spiking immigration, TFWs, and foreign student visas by something like 50% while doing nothing to expand housing was probably the main driver – but the numbers are irrefutable.
During Harper’s time, Canadian housing was somewhat overpriced relative to many other developed countries, but it was not out of reach for the middle class (again, aside from Vancouver).
Wow!! Intelligent leadership! I’m so jealous!
Maybe, just maybe, someone from our Gov will catch wind of this and get it implemented here. I don’t care if they take full credit for the brainstorm. We know they don’t have the capacity to think of it themselves, or are more likely swayed by RE investors, to not express their own thoughts.
New Zealand is “Better Canada,” I’ve said that since I spent a few weeks there five years ago. Like “If Canadians just had their shit a bit more together, you’d get this.”
Canadian govt. will not be able to do anything. If they could they would have implemented the measures to add liquidity to the economy while keeping real estate lending under control. From politics perspective it gives a chance to brag that WE’VE increased Canadian household wealth. So pity to see that a country with exploding wealth has youth unemployment rate of 20%.
Mr Thunder;
Nobody believes you!