Taking The Boom Off The Boil
New Zealand’s financial regulator has taken two very interesting preemptive steps in an attempt to take the Auckland property boom off the boil.
By way of background, like Australia, NZ has a capital gains tax (CGT) regime, but unlike Australia the CGT rate is set to zero. This is clearly of interest to investors, who are able to play the property market and, so long as they are not property traders, walk away with tax free property profits (from capital appreciation).
Another bonus for investors is that there is no stamp duty in NZ, so your investing capital is preserved, unlike in Australia where it is eroded by high stamp duty costs.
But this generous CGT loophole is being somewhat blocked with a new proposal. Soon, in order to qualify for 0% capital gains tax, the investor must hold the property for at least two years. Adding a minimum time in order to qualify for the CGT concession is hoped to dissuade speculators, as the profitability of flipping or trading real estate is diminished.
(It should be noted that no capital gains tax is applicable to flippers or traders anyway, as if their intent on purchase was to flip / trade the property then any profit would have been caught by the normal income tax provisions and taxed as ordinary income, but adding a two year minimum certainly clarifies those who invest ‘on the fringe’ of property trading versus holding for growth.)
The second change is designed to take demand out of the Auckland market, and hence some of the heat. Starting October 1, investors seeking a bank loan to purchase Auckland property (where prices have risen 60% since 2008) will need an extra 10% deposit (i.e. a deposit of at least 30%), as the maximum a bank can lend will decrease to 70% LVR.
Naturally, this leaves the door wide open for creative non-lenders to capture market share, so expect an increase in vendor carry-back loans, loans sourced from private money, etc.
But the boom, if there is one, is not nation wide. Elsewhere values are stagnating or even falling. Take Wanganui for example, where REINZ stats reveal property prices slipped 16.4% in the year to April. Reflective of this, the Reserve Bank of NZ is allowing banks to write more ‘high-LVR loans’ in the non Auckland market in an attempt to redirect demand.
Balancing an economy is never easy. Cheap money from low interest loans may fuel housing demand, but a strong NZ dollar must be a worry for an economy that is so heavily dependent on tourism and agricultural exports.
I expect the Australian government will be watching very carefully, as the political winds are shifting and an appetite is emerging to be less generous towards tax concessions offered to property investors. If these strategies work, they could be implemented here – particularly in Sydney and Melbourne where the property markets rage on.
Further information / Resources
RB NZ announcement: http://www.rbnz.govt.nz/news/2015/fsr-13-may-2015.html
REINZ stats: https://www.reinz.co.nz/reinz/public/reinz-statistics/reinz-statistics_home.cfm
RB NZ information on LVR restrictions: http://www.rbnz.govt.nz/financial_stability/macro-prudential_policy/5393159.html
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