New Zealand implements new rules to prevent investor deductions

New Zealand has continued its efforts to lower the skyrocketing housing market with new rules that will impact property investors.

The new rule will prevent property investors in New Zealand from deducting mortgage interest from their taxable income and takes effect from 1 October, according to Reuters.

Finance Minister Grant Robertson explained the change is part of a series of real estate measures for New Zealand.

“Tax is neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the government’s overall response,” Mr Robertson said.

Billions of New Zealand dollars have been invested in stimulus packages and low interest rates have seen house prices soar, just as they have across the ditch in Australia.

New Zealand house prices have risen nearly 26 per cent in August, year-on-year.

In quarter two of 2021, the average property value across New Zealand was 7.9 times the average annual household income, a record high in the series’ 18-year history, according to CoreLogic NZ’s Housing Affordability Report.

The figure is up sharply from the 7.4 times recorded just three months ago and 6.6 times from 12 months ago. The long-term average is for property values to be 5.8 times the average annual household income. 

Property values in Aotearoa rose 15 per cent during the first six months of 2021, well ahead of the increase in gross average household income, which rose 1 per cent.

CoreLogic NZ Chief Property Economist Kelvin Davidson said this was a prime illustration of the acute affordability challenges the country is facing.

“Since our last Housing Affordability Report in late February, the New Zealand economy and property market have generally remained very buoyant,” Mr Davidson said.

“Even though mortgage rates have remained very low, albeit they’re now starting to rise, housing affordability has simply become worse, and that’s from an already stretched position.

“Those higher mortgage rates themselves will exacerbate the situation in the coming months, albeit they should eventually aid affordability by dampening house prices.”

The report also found it currently takes more than a decade to save a house deposit (10.6 years), beating the previous record high of 9.9 years, which was set in first quarter of 2021.

The long-term average to save for a house deposit is 7.8 years.

The culmination of these issues has made New Zealand one of the least affordable nations within the Organisation for Economic Cooperation and Development (OECD).

Tauranga and Auckland are New Zealand’s least affordable main centres, requiring 49 per cent and 43 per cent of gross household income respectively, to service an average mortgage with an 80 per cent loan-to-value ratio. 

Despite ultra-low mortgage rates in the past three to six months, Hamilton households require 38 per cent of their income to make payments, the highest level since just prior to the Global Financial Crisis in the second quarter of 2008.

Similarly, mortgage holders in Wellington spend 36 per cent of their income on mortgage repayments and Dunedin households spend 39 per cent. Christchurch’s figure is comparatively low, albeit rising, at 28 per cent.

According to the ABC, New Zealand’s Human Rights Commission recently launched an inquiry into the housing crisis in the country, as many people have become homeless.

New Zealand’s Chief Human Rights Commissioner, Paul Hunt, said in a statement in August that affordable homes were out of reach for many New Zealanders, especially young people. 

“It is having a punishing impact, especially on the most marginalised in our communities,” he said.

“The housing crisis in Aotearoa is also a human rights crisis encompassing homeownership, market renting, state housing and homelessness.”

In March, the government hit investors with new taxes, and authorities pledged more support for first-home buyers by boosting the supply of affordable homes.

Property investors in New Zealand were also required to have a 40 per cent deposit and have seen a reduction in the ability to claim interest as a tax deductible expense.

An extension of the Bright-line Test for additional property purchases was also introduced in March.

New rules summarised

The new rules will limit tax deduction for interest expenses created by residential property investors. It applies to all properties acquired on or after 27 March, 2021.

Interest deductions for existing residential property acquired before this date will be phased out over the period between October this year and the end of March, 2025.

The rules do not affect the main family home or new builds.

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