Years before changes make any difference

The Government’s crackdown on residential property investors through an extension of the bright-line test and removal of interest deductibility will have little effect for several years, says CoreLogic head of research Nick Goodall.

Tuesday, March 23rd 2021, 11:46AM

Nick Goodall

The Government has introduced a raft of changes to skew the market away from investors to first home buyers.

The changes also include: $3.8 billion for infrastructure development; first home grant caps lifted; interest deductibility scrapped; $2 billion loan to Kāinga Ora to buy more land; higher house price caps.

Prime Minister Jacinda Ardern believes the changes will dampen demand from speculators by making residential property “less lucrative” and will make a difference.

However, Goodall says the bright-line extension from five to 10 years will have little impact for investors who already own property.

“It might make an investor buying tomorrow or the next day pause and consider the implications of not being able to sell tax-free for 10 years.

“In the meantime, the mere fact the Government has announced an extension to the bright-line test will encourage investors to hang on to their property and, in turn, it will shorten the supply of houses for sale and push prices up.

“The supply shortage is at the root of the existing housing boom.”

Goodall says the political view of the extension would be it is making the tax system more balanced.

“It is not necessarily about influencing a change in investor behaviour.”

Of more interest to investors is the scrapping of interest deductibility – although this will be phased in over four years. The Government has taken its lead on this from the UK, which adopted a similar policy.

When the tax loopholes are closed and if the Reserve Bank introduces further lending restrictions, such as debt-to-income ratios, investors could be hit hard in the pocket, says Goodall.

“This could dampen demand and therefore capital gains.

“It will weigh on investors’ minds. If they don’t get capital growth they will be more aware of expenses and costs especially as there will be no tax deductibility.

“This will put pressure on some investors in the future and they may think twice about entering the market or buying more property if expenses outweigh capital gains.”

Tags: Bright-line test investor lending property investment property values