Major change! From 1 July, the bright-line period for taxing property sales drops to 2 years, saving investors $50,000,000 a year! What will happen to house prices?

Government reforms give the market momentum

 

The Government's easing of a range of investment property and tenancy regulations could give the property market the momentum it needs to find its direction. 

 

Over the past six months, the market has struggled to find confidence and consolidate its gains. Prices have stabilised, with modest increases in Auckland in particular. Our Auckland sales data shows that the median price rose 4.5% between June and January.

 

That figure would be higher if sales data for January were excluded. Prices in January are consistently the lowest of the year because the holiday season disrupts sales. 

 

Sales volumes remained low over the same period in which prices rose. 

 

Flat sales volumes and rising prices are an unusual combination. Conventional wisdom suggests prices fall when sales volumes remain low. 

 

The Treasury's fortnightly Economic Update noted this unusual combination, summing up the property market under the heading ‘The market is sending mixed signals’. 

 

In fact, the market is not sending mixed signals. Rather, it is receiving so much contradictory information from economists and commentators that it is difficult to reach a consensus on where it is heading. 

 

Talk of a fragile economy, interest rates potentially falling—or, conversely, rising—higher unemployment and runaway inflation is unsettling. 

 

Commercial banks, the Reserve Bank and the Treasury forecast house price growth in 2024， ranging from 2% to 7.9%, with these forecasts averaging around 5%。 

 

But this is not enough to persuade many prospective investors, first-time buyers and people looking to move home to stop sitting on the sidelines.

What could change this is the Government's reforms concerning investment properties and landlords' rights, principally restoring investment property interest tax deductibility、returning the bright-line test to two years、changing landlords' rights to terminate tenancies and evict tenants and strengthening landlords' rights over tenancy terms。

 

These changes will make residential property investment a more attractive option. 

 

An influx of new investors into the rental market would be welcome and would help ease the current shortage of rental properties. A large inflow of new migrants over the past 12 months has substantially increased housing demand. 

 

In Auckland, we manage around 19,000 properties for investors. Across our portfolio, the average weekly rent for a three-bedroom home is currently NZ$668, compared with 12 months ago, an increase of 4.9%。 

 

The Treasury's latest economic forecasts suggest rent increases will not end any time soon, with rents across the existing rental stock expected to rise 3% to 4% in 2024, while increases for new tenants could exceed 5%.

 

 

Shortening the bright-line period to 2 years: lower tax bills for investors

 

The Government plans from 1 July to shorten the bright-line period from 10 years to 2 years。 

 

This means that, from 1 July, only those who sell a residential investment property within 2 years will need to pay tax on the gain.

Currently, tax is payable by those who resell an existing investment property within 10 years or a newly built investment property within 5 years.

Investors will continue to pay tax at their personal marginal income tax rate, which can be as high as 39%。 

 

Under the current rules, someone selling a home can be classified as an ‘investor’ even if it is the only property they own. A property is exempt from tax only if it qualifies as their ‘main home’. 

 

For example, people who move out of their home to live elsewhere for work for several years must pay tax proportionately if they sell within the bright-line period. 

 

Under the proposed changes, a property will be treated as an investment if it has not been used as a main home for more than half the period of ownership. 

 

The two-year bright-line test will reflect the rules first introduced by the previous National-led government. The Labour-led government extended it to 5 years, then to 10 years when the property market overheated in 2021. 

 

In an amendment paper proposing the changes to a bill, Revenue Minister Simon Watts said the aim was to return the bright-line test to its ‘original purpose of ensuring land speculators pay their fair share of tax on gains from property sales’. 

 

Before the election, National estimated the change would save investors around NZ$50,000,000 a year。

 

 

Reserve Bank forecast: investment property tax reforms could push up house prices

 

In its latest Monetary Policy Statement, the Reserve Bank noted that a wave of listings could follow 1 July, as investors who have owned properties for more than 2 years but fewer than 5 or 10 years choose to sell.

 

Under the Government's proposed policy changes, all investors will be able to deduct 80% of their interest costs from 1 April 2024. They will then be able to deduct 100% of their interest costs from 1 April 2025。

 

This change is particularly helpful for investors with large mortgages.

 

Looking ahead, the Reserve Bank believes that shortening the bright-line period and phasing out restrictions on interest deductibility will make property more attractive to investors， thereby putting some upward pressure on house prices。

 

The Reserve Bank believes the Government's investment property reforms will primarily affect house prices rather than rents.

 

In other words, landlords are unlikely to pass the tax cuts on to tenants.

 

The Reserve Bank said: ‘Recently published research found that rents in New Zealand over the past 20 years have been driven by the number of people per dwelling and nominal incomes.’

 

‘We expect changes in taxes and interest rates to be reflected mainly in land prices。”