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.
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