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Bayleys March Market Round-Up

New Zealand’s housing market and its stakeholders are still buzzing this month following major announcements made by the Government regarding its suite of housing policies on March 23rd.

Making its intention clear when announcing the new policy, Prime Minister Jacinda Ardern and Finance Minister Grant Robertson said they wanted to “tilt the balance of power back to first home buyers and away from speculators.”

To achieve this, they chose to extend the existing Bright-line Test from five to 10 years; lift caps on First Home Loan-eligible properties and applicant incomes; create a new $3.8 billion Housing Acceleration Fund; and perhaps, most controversially; phase out property investors’ ability to deduct interest expenses from their investments over the next four years.

Early impressions from economists across the market are that recent housing announcements will almost certainly have a dampening effect on investor appetites, with the potential to decrease rental supply and see the rate of value growth slow from the unsustainable levels we have been experiencing.

Where the extension to the Bright-line Test and lifting caps for First Home Loan grants were both predictable moves, the Housing Acceleration Fund has been met with mixed reviews.

In its press conference announcing the changes, the Government said it has “listened to property developers” in calls for greater support to fund vital infrastructure associated with new housing developments such as roading, however, $3.8 billion can only go so far.

The most controversial change will stop property investors from offsetting the interest portion of mortgage payments with expenses, thus affecting cashflow and giving cause for recalculation.

While alarming to hear the Government acted against both advice from the Inland Revenue Department (IRD) and Treasury in phasing out interest deductibility the tone we’re hearing has also been somewhat problematic with language seemingly utilised to create an “us” versus “them” rhetoric concerning property investors which is not going unnoticed.

The use of the term “loophole” regarding interest deductibility for property investors is both emotive and factually incorrect, given it’s a long-standing principle of business.

While the country continues to grapple with a supply and demand imbalance that has seen owner-occupiers pick up where investors have left off, since higher 40 percent deposit requirements were introduced at the beginning of the month, the wider effects of recent changes on the economy remain to be seen.

Some are picking a slowdown in the rate of value growth will have an impact on the gradual economic recovery post-COVID, meaning a rise in the Official Cash Rate (OCR) is becoming less likely anytime soon.

Looking ahead, Bayleys is watching developments closely, however, early market indicators point to a gradual slowing of value growth from mid-year as policy begins to kick in.

In-depth reports:

• [Independent economist Tony Alexander examines the latest housing announcements and their effect on the wider economy,](http://www.tonyalexander.nz/resources/Tony's%20View%2025%20March%202021.pdf 'http://www.tonyalexander.nz/resources/Tony's View 25 March 2021.pdf') and the future performance of the residential property market. Rather than forecasting what will happen to values, he looks at the latest developments from a winner’s and loser’s lens; finding owners of developable land, construction and infrastructure businesses, exporters and most importantly, first home buyers stand to benefit from recent policy-changes.

Research firm CoreLogic’s quarterly Pain & Gain Report shows more than 98% of New Zealand’s homes sold between October and December 2020 recorded a profit. This is the highest figure recorded for a quarter for the past 25 years. In light of recent housing announcements which are expected to slow the rate of value growth, the $276,000 quarterly median gross resale profit figure should offer some solace for homeowners given the extraordinary capital gain recorded across the country.

• In its research paper, ‘Economy Watch’ BNZ head of research Stephen Toplis explains the government has made intention clear it wants housing inflation to fall below income growth. However, expects the effects of recent housing announcements will be of little significance in relation to exceptional capital gains property owners have received over recent years. The removal of interest deductibility for property investors, however, has great potential to impact the rental market by way of reducing supply, and/or raising rents, while feeding back into economic gauges such as the Consumer Price Index (CPI).

Topical articles:

• In the face of mixed reviews as to the effectiveness of the Government’s latest suite of housing measures, Reserve Bank Governor Adrian Orr explains the difficulties policymakers face when attempting to balance social and economic objectives. His statement clarifies the stance there is no silver bullet to quell unsustainable housing inflation, and policy that targets property investors specifically has the potential to have unexpected effects for other purchasers.

Migration data from Statistics New Zealand shows the number of Kiwis returning home is now at a nine-year low with population growth declining some 57 percent in the year to the end of January 2021 when compared year-on-year. This forced slowdown in population growth is assisting New Zealand’s undefined housing supply-demand imbalance, however, economists are mindful of the potential for oversupply so long as borders remain closed.

• March sales data from property platform OneRoof and its data partner Valocity suggestshigher deposit requirements for investors have impacted value growth in neighbourhoods with a typically high investor presence. Typically using month-to-month data as an indication of wider market sentiment can be problematic as the numbers are extremely sensitive to variables, however, anecdotal evidence supports the theory that property purchasers, especially investors were very active in the lead-up to the introduction of higher deposit requirements on March 1.

The International Monetary Fund (IMF) entered into New Zealand’s housing debate earlier last month proposing the introduction of stamp duties and a capital gains tax to “reduce the attractiveness of residential property investment.” Bayleys agrees with the organisation where it says a “comprehensive policy response” is required to ease financial vulnerabilities worsened by rising housing inflation, with a focus toward supply dynamics, including; making land available for development; streamlining planning and consent processes, and greater investment into infrastructure projects above and beyond the $3.8 billion allocated in the latest housing package.

• Was the government too rash in initiating the removal of interest deductibility provisions for property investors? Political analyst Dr Bryce Edwards says official documentation shows little time was given to government departments to adequately examine the effects of this policy, and warnings from both Treasury and the Inland Revenue Department (IRD) show little is known about how far-reaching the impact of this policy will be on wider economic performance.

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