There are three things to know about a National victory, economist says
A new CoreLogic article has tackled some of the issues surrounding potential housing/tax policy changes in the event National comes into power after the October elections.
“Many existing and would-be property investors will be keeping a close watch on the polls and whether or not National can form/lead the next government – which we now know would mean a reinstatement of mortgage interest deductibility for all properties, a Brightline Test back at two years (rather than the five or 10 system at present), and a softening of the foreign buyer ban,” said Kelvin Davidson (pictured), CoreLogic NZ chief economist.
But will be the overall impact of these changes on property investors?
A shorter Brightline test
A shorter Brightline test from July would “no doubt” tempt some investors into making their first purchase or expanding their existing portfolio due to the reduced risk of having to pay capital gains tax if they needed to then sell within a short period, Davidson said.
On the selling side, if existing investors struggling with cash flow issues who didn’t want to sell because of a large capital gains tax bill, suddenly found themselves off the hook for that bill, some extra listings and sales could follow, the CoreLogic economist said.
Softening in the foreign buyer ban
Foreign buyers could potentially be able to buy NZ properties with a price of $2m or greater, albeit with a 15% tax attached.
“On one hand, there’s no real way of knowing how many of them might actually target NZ, and for context we estimate that only about 3% of our housing stock has a value of $2m or more,” Davidson said.
“Then again, the shorter Brightline Test would add some appeal, and there may also be greater effects in areas that we already know are popular with foreign buyers, such as Queenstown where about 10% of properties are valued at $2m-plus. The extra demand could just exacerbate the shortages of stock at ‘affordable’ prices that already exist.”
Reinstatement of interest deductibility
A National victory could possibly reinstate full mortgage interest deductibility over a phased period, with 50% this tax year and 2024/25, 75% in 2025/26, and back to 100% in 2026/27.
“On this particular change, we think the idea that it would open the floodgates for investors to purchase again is probably wide of the mark,” Davidson said.
CoreLogic crunched some simple investment return numbers to illustrate this. See the table below:
Illustrative example of investment property returns
“As you can see, there’s a before-tax cash flow loss each year of around $19,300 in this scenario,” Davidson said. “Then there’s tax. Given those interest costs aren’t deductible for an existing property in the current system, that actual loss now turns into a taxable profit, which results in an extra bill of around $5,500 (at a 33% tax rate). All told, the required top-up out of other income to keep the property going in this scenario is $477 every week.
“At this stage, let’s factor in 100% deductibility again. Holding everything else the same, the weekly top-up drops to $371. Now, that saving is not to be sniffed at, and of course property investors have always tended to be willing to accept cash flow losses in the early stages of their horizon, with the pay-off being rental growth and capital gains later.”
He said the above calculations are quite simple (e.g. excludes depreciation allowances). But still, a $371 top-up every week is still substantial, even with deductibility added back in.
“The sums get even trickier if the would-be investor is factoring in lower potential capital gains in future than we’ve seen in the past,” Davidson said.
He pointed out that the biggest challenge for making the sums work on buying an existing property as an investment isn’t the lack of mortgage interest deductibility – it’s the large negative gap between rental yields and mortgage rates (and significant top-ups).
“As such, although some investors would enjoy a mood/sentiment shift and may be tempted into a purchase by a National victory, we doubt it’ll be a game-changer,” Davidson said.
“Of course, the reinstatement of full mortgage interest deductions would certainly be welcomed by existing property investors, given it’s a direct boost to their profits. It’s certainly worth noting that those that have been in the game for a longer period haven’t really been as affected by the phased removal of deductibility anyway and haven’t been selling to any great degree. But some extra cash would obviously be a solid boost for them anyway.”
What it all means
Overall, a National win would mean the reduced incentives to buy new-builds will push up demand for existing properties relative to new stock – with associated price effects, Davidson wrote.
“Indeed, there is some evidence to suggest that a new-build premium has opened up a bit in recent years, which could then go into reverse,” he said. “More generally, the combined effect of the changes could result in higher house prices than otherwise would have been the case, but perhaps not to a significant degree in aggregate. After all, affordability is still stretched, rental yields low, and mortgage rates high. Caps on debt-to-income ratios remain on the cards for 2024 too.
“All that said, however, there’s always the risk of adverse consequences, and a stronger price effect couldn’t be totally ruled out, especially if foreign buyers targeted a market such as Queenstown.”
Click here to read the full CoreLogic article.
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