Range of measures impacting home ownership receives mixed reception

On 23 March 2021, the Government announced it would be implementing a range of integrated measures to accelerate the building of new houses, including freeing up build ready land and investing in infrastructure. Four key measures were announced, which are explained below.

Whilst there is widespread agreement that the housing market in New Zealand needs to stabilise, thereby making it easier for first home buyers to get on the property ladder, these specific measures have received a mixed reception. Certainly, there is no silver bullet. Supply has not kept up with demand. But some measures are already having unintended consequences, which are discussed further below.

Housing Acceleration Fund

The Housing Acceleration Fund aims to increase the supply of houses and improve affordability for home buyers and renters.

The key components of the fund are:

• An infrastructure fund ($3.8 billion) to unlock a mix of private sector led and government led developments in locations facing the biggest housing supply and affordability challenges

• Additional funding for the Land for Housing Programme to accelerate development of vacant or underutilised

Crown-owned land, in order to deliver a broader range of affordable housing options for rental and home ownership.

First Home Loan and Grant

On 1 April 2021, the income caps increased, and the house price caps increased in targeted areas.

The income cap (maximum yearly income before tax) for a single person increased from $85,000 to $95,000. For two people, it increased from a combined maximum yearly income before tax of $130,000 to $150,000.

Doubling the bright-line test to 10 years

The bright-line test means if you sell a residential property within a set period after acquiring it, you will be required to pay income tax on any profit made through the property increasing in value.

The bright-line period was previously 5 years. The Government doubled this on 27 March 2021, extending the bright-line period to 10 years for residential property, except newly built houses acquired before 21 March 2021, which remain at 5 years (for tax purposes, a property is generally ‘acquired’ on the date a binding Sale & Purchase Agreement is entered into, even where the agreement is still conditional).

Inherited properties, and properties which have been the owner’s main home for the entire time they owned it, continue to be exempt from all bright-line tests.

Removal of interest deductibility on loans for residential property

The Government is changing the rules that allow property owners to claim interest on loans used for residential properties as an expense against their income from those properties. The legislation will apply from 1 October 2021.

Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021. The percentage of interest that can be claimed will reduce by 25% each income year until 2025. Please see table above. Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense.

Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.

For further detail on these changes, see the Advisory Resources section of the REINZ members’ website, including useful IRD information sheets on interest deductibility and the extension of the bright-line test. IRD also has an advice line. HUD has released very useful fact sheets, and there is helpful information on the Kāinga Ora website.

Unintended but not unexpected consequences for landlords and tenants

Despite no doubt the best of intentions, some measures, such as the removal of interest deductibility on loans, are already having unintended adverse consequences. This change will affect landlords financially and is likely to adversely affect vulnerable tenants.

Some landlords will pass on those increased costs to low-income tenants through rent increases. Making rentals even more unaffordable will make it even harder for tenants to save a deposit for their own property.

Other landlords have been forced to sell rental properties (and remember this announcement came hot on the heels of the Residential Tenancies Act change removing no fault termination, which led to a flurry of terminations before the law change took effect).

Disincentivising ordinary New Zealanders from owning a rental property means there will be even less rental accommodation available. This contributes to overcrowding, with more vulnerable tenants living in unhealthy, uninsulated sleep-outs and garages over winter.

Independently of these measures, the LVR restrictions targeting residential property investors are having the effect of cooling investment in residential property in any event.

These risks associated with removing mortgage interest deductibility were highlighted by HUD before the Government’s housing announcements. Alongside REINZ, the New Zealand Property Investors Federation, Real iQ, First Home Buyers Club, Tenants Protection Canterbury and a number of economists have also been vocal in their criticism of the removal of mortgage interest deductibility and their intention to lobby Government in this regard.

Melisa Beight

General Counsel, REINZ