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April-May Industry Updates

Welcome to our April Newsletter

 

Each month, we’ll be digesting market news and sending you our best summary – so you can keep your finger on the pulse and only read what’s relative and important.

There is already lots of information out there, so we don’t want to regurgitate it all for you – but we will aim to translate it in plain English and actually tell you what it means and how it might affect you, so you can make better, more informed decisions.

And of course, we are always here if you want to chat about anything in more detail.

What a month to start on, we have a lot to unpack and to say there have been some changes in the property market lately is an understatement. 

It’s very difficult to argue that house prices are increasing at a sustainable rate and that the massive increase in values across the country will continue forever.

No one is denying that.

We cant help but feel that investors have become the punching bag for the bigger problems associated with housing affordability which is that we simply can’t build enough houses and haven’t
for decades.

The cost of construction and red tape seem to be the biggest hand break.

Our issue with these changes is that the property investors that we see on a daily basis are really hard working Kiwi’s trying to get ahead by investing in property and that these changes announced on the 23rd March could have a significant impact on them.

80% of investors only own one property but it seems like the picture the Government is painting is that an investor is someone driving around in a Bentley.

Let's have a look at the recent changes in the Property Market...

The Government is giving $3.8 billion towards housing supply and infrastructure which is
great, we just hope it gets actioned.

Brightline test increased from 5 years to 10 for investment property.

New builds remain at 5 years.

First Home Grants have had the price and income limits increased to try and make it easier for First Home Buyers to qualify for the grant.

First Home Grant Income cap lifted from $85k to $95k for an individual and from $130k to $150k for a couple

Auckland cap on the value of a property has gone up for new builds from $650k to $700k and for existing property from $600k to $625k

The removal of interest deductibility for investors which means they can no longer offset their interest expense against their rental income

This applies from 1 st October and will be retrospectively applied to existing investment properties over the next 4 years

All the points above have a relatively minor impact.
But the removal of the interest deductibility, that came out of left field and its those mum and dad investors hard in the pocket.
Here is an example:

Lets assume you have an interest only mortgage of $500k at 2.29%

$40k rental income received less

$5k for insurance and rates less

$11,450 in mortgage interest cost for $500k mortgage

$23,550 is your taxable income from the property

$7,771 is the tax you would pay prior to changes for this taxable icnome (assume 33% rate)

$3,779 is the new tax you would pay on the mortgage interest

$11,550 is the total tax if you purchased after 27th March

Let us know if you would like a copy of our New Interest Tax Calculator.

Unfortunately, when any cost in a business increases business usually pass on some of that cost to the end user.

The end user in the property investor market is people renting. Tony Alexander, who is arguably the best independent economist in the country, surveyed 1,700 landlords to see if they will increase their rents due to the next tax rule. 73% said they intend to increase rents to allow for the new changes.

Unfortunately the Governments plan to help First Home Buyers is going to be costing those that are saving to enter the market more money making it harder to get the deposit together.

One important point I haven’t seen a lot of media attention focused on is how the banks are going to allow for this increased costs to investors when they are calculating how much lending someone can borrow.

It seems obvious to me that given the significant increase in cost that the banks will come out shortly with new credit policy to take this additional cost into account which means it will reduce the amount of money investors can borrow and could be enough to move some more highly leverage investors into negative servicing.

It all sounds pretty negative for the investors out there getting hammered by Government policy but if we take a deep breath property prices have increased by 35.8% over the last two years as a national average as of Feb 2021 and with interest rates at record lows there is still a very good argument for investing in property and continuing to invest in property.

It will remain a solid investment and the main reason for sharing the above info is to give a heads up to our property investor clients out there that these changes are significant to cash flow and you want to make sure you are aware of how it could affect you.

Don’t make any rash decisions around exiting the market. Be proactive with planning for these tax changes and any future possible changes – we are happy to help.

It’s important to realise that the interest deductibility changes have not become law just yet and needs to get past consultation with Treasury and IRD.

Below is a quick summary on some other points of interest:

House prices:

Disruptive changes like this in the housing market always cause people to sit on their hands while they wait for the dust to settle.

We don’t expect to see house prices fall out of the sky but do expect them to slow due to more highly leverage investors leaving the market and therefore less competition. General expectations still seem to be that property will increase by about 10% over the next year instead of at the current rate which is about 25% so don’t expect to see houses get cheaper!

Demand for property is the main driver for why prices will continue to increase

First Home Buyers:

With less investors in the market for those lower entry properties that first home buyers are after there will be a less competition which is great for First Home Buyers.

Saving the deposit will continue to be the biggest hand break, especially now with increases in rents on the horizon.

Increase salary and house price caps for the First Home Grant might help out some people.

New build properties:

There will be a push towards building new for investors which is what the Government wants.

They are exempt from LVR rules so you can buy with 20% deposit instead of 40%.

You are allowed to deduct the interest as an expense (so pay less tax).

Bright line test remains at 5 years instead of 10.

This will push up the price of land as investors move to secure land over existing housing stock.

Construction supplies will be interesting to watch.

Note: banks all treat construction lending very differently, let us know if you are thinking of building and we can point you in the right direction.

Mortgage Interest Rates:

Up until these recent changes there were rumours of introduction of debt-to-income ratios and potential removal of interest only lending which now seems to be unlikely.

These changes also lighten the load on the reserve bank to have to step in a do something
like increase interest rates to help stabilise property prices so it seems unlikely they will do
this any time soon.

Unemployment is at a low level, the economy seems to be rebounding, commodity prices are increasing and a hint that inflation is on the horizon could suggest further big decreases in interest rates are unlikely and could be close to the bottom of the cycle.

Its our view interest rates wont go up for the foreseeable and worst case if they were to increase it wouldn’t be going up much because these interest rates are what is propping up our economy and the world economies at the moment which is why housing is booming in lots of other countries as people spend the cheap money which is exactly what the Governments want them to be doing.

There is an argument that if you wanted stability with rates potentially at the lower end of the cycle you could lock some lending in for 2-3 years just in case but the 1 year fixed rate continues to be the best performing strategy in terms of the lowest interest cost.

Want to learn more about these changes?

Let us know a bit about you and how we can help you – and we’ll be in touch as soon as we can!