New Prime Minister sworn in! What does the new government mean for the property market? Key developments for investors to watch this week

After a long wait, the new three-party coalition government was finally formed last week. This morning, Christopher Luxon was sworn in, officially becoming New Zealand’s Prime Minister.

So what does the new government mean for the property market?

The government will first tackle the Resource Management Act (RMA) reforms and Three Waters reforms, both of which could be repealed quickly. Other policy areas, such as tax cuts, will take longer. Significant changes are also coming to other property policies:

	The plan to allow overseas buyers to purchase homes has been dropped. There now seems little point in discussing what impact a tax on overseas buyers purchasing properties worth more than NZ$2,000,000 might have on the market, as this is unlikely to happen during the current government’s term. We should instead focus on where the new government will find enough funding for its tax cuts.
	The timetable for fully restoring mortgage interest deductibility will be accelerated. Under the latest schedule, 60% of interest can be deducted this financial year, rising to 80% in the 24/25 financial year and 100% in 25/26. This will reduce tax bills to some extent for existing and prospective investors. But will it change the rules of the property investment market? Perhaps not, because rental yields remain low and mortgage rates remain historically high, leaving landlords with insufficient rent to cover their substantial interest costs.
	The government may shorten the bright-line test period from July next year. National’s tax team previously promised to reduce the bright-line test—the period after which an investment property or existing home can be sold without capital gains tax—from ten years to two. We do not yet know whether the coalition government will implement this policy. However, a two-year bright-line test could encourage more investors to buy properties, although it is unlikely to fundamentally change the market. At the same time, investors who find themselves free of capital gains tax earlier than expected may also be encouraged to sell.
	The Reserve Bank of New Zealand will focus solely on reducing inflation. In 2018, the Bank was given a dual mandate to promote price stability and support maximum sustainable employment. The new coalition government, however, wants it to focus only on bringing inflation back into the target range of 1–3%.

Overall, we can envisage these policies having some positive effects on the property market, but when we assess their likely scale, their impact appears limited.

Reserve Bank of New Zealand Governor Adrian Orr

This Wednesday, the Reserve Bank of New Zealand will announce its final Official Cash Rate (OCR) decision of the year. The OCR is widely expected to remain at 5.5%. Wednesday’s focus will therefore be on the Bank’s stance rather than the decision itself, along with changes to its forecasts for GDP, employment, inflation, the OCR and house prices.

High inflation has still not been fully brought under control. Even if there are no further OCR increases in this cycle, the Reserve Bank of New Zealand still wants to avoid giving the impression that it is starting to consider rate cuts. That is because growing market expectations of an earlier OCR cut could push commercial banks’ mortgage rates down, potentially reigniting the property market and adding to inflationary pressure.

In short, the general expectation is that the Bank will leave the OCR unchanged this Wednesday while continuing to use firm language, such as saying the battle against high inflation is far from over.

Last week, the Reserve Bank of New Zealand released its latest lending data. Lending activity in October totalled NZ$5,800,000,000, including home purchase loans, refinancing between banks and top-up loans. This was about NZ$200,000,000 higher than a year earlier, marking the third consecutive monthly increase. However, with overall lending still starting from a low base, a recovery will not happen overnight. Weak growth in low-deposit purchases may partly explain this. In fact, property investors with deposits below 35% cannot obtain loans at all. Owner-occupier buyers with deposits below 20% account for less than 7% of the market, well below the Bank’s 15% limit.

This Tuesday, Stats NZ will release the New Zealand Activity Index for October, a timely indicator of GDP, along with employment data for the wider economy. Both measures have remained solid recently. Although the economy has not been growing rapidly, the activity index and actual employment numbers at least show that it has not gone backwards. The recent strength of the labour market has also helped borrowers adjust to higher mortgage rates, which is particularly important for the property market.

This Thursday, Stats NZ will release new dwelling building consent figures for October, which are very likely to continue declining. However, builders are still busy with previously approved housing projects, so workloads remain reasonably healthy. There is also a sense that the decline in new approvals may soon bottom out. This may be based more on anecdote than fact, but it still warrants close attention.

This Thursday and Friday, ANZ will release its business and consumer confidence indices for month 11. Attention is likely to centre on business costs, pricing and inflation. Encouragingly, these key economic indicators have recently shown a gradual improvement. Clearly, this is also what the Reserve Bank of New Zealand most wants to see.