The dust has settled a little after the new Labour coalition government was announced on the 19th of October. It’s been an interesting time for investors as we try to work out what impact Labour’s policies on housing will have. There is still a lot more detail left to come on most of the main points of concern, but we’re able to get a reasonably clear picture now.
Over the past couple of months, we’ve been talking about these possible changes and effects with our clients a lot.
1. Capital gains tax
It is still unclear whether or not a capital gains tax will be introduced; however, if it does, it will not be implemented until the next Labour term, giving investors at least a 3-year reprieve. It is interesting to note that capital gains tax is alive and well in most other developed countries and the tax has very little to do with the general health and cycles of the property market. The side effect of a capital gains tax is that it may discourage investors from selling, creating a “lock in effect”. By default, this would suggest that there will be less stock on the market, which in turn could push prices up.
2. Extended Brightline Test
The Brightline Test is in effect a quasi-capital gains tax, and this will be extended from the current 2 years to the proposed 5 years. It is not likely to be applied retroactively. Personally, my belief is that this should have very little impact on investors who are engaged in a mid- to long-term hold pattern.
3. Banning foreign speculators from buying existing New Zealand homes
This policy aims to remove from the market foreign speculators who could potentially push prices out of reach of first home buyers. Note that Australians are exempt under this policy. This is expected to come into force in early 2018. The general consensus, however, appears to be that this will have little impact on the housing market. Some reports show that foreign buyers make up less than 3% of all property transactions, with existing homes being an even smaller portion of that.
4. Ring-fencing losses
This is by far the most discussed policy by investors and is likely to have the greatest impact.
As you will know, the intention is to remove the ability to offset losses from investment properties against your taxable income, and will be staged over a 5-year timeframe. Many new investors are highly geared and rely on these rebates to assist their cash flow. With this policy, it is the new investor, highly geared and under capitalised that may suffer.
So what to do?
Firstly, don’t panic. Five years gives some time to plan.
Build up buffers. Perhaps that increased equity that may have gone into a another deposit should now be kept aside as a buffer. The key focus here is to purchase property in strong growth locations so that over time the gains outstrip the costs.
Ensure you have a debt management process in place, reviewing interest rates and terms, so that you are not left with all your debt locked away at higher rates in the event of a lower interest rate market.
5. Will the market slow down? Is the growth over?
I’ve had a number of people asking this question. I think that the key thing to remember is that property has always been cyclical in its growth patterns. Auckland in particular has been due to flatten off and so that cannot be directly related to these changes. So, yes, we may see a general slowdown, but that is to be expected.
I’ve seen a number of fear-inducing headlines, for example: “House prices could drop as much as 10 or 13 per cent over the next three years, it has been predicted.” However, when you balance that against the very strong growth that has taken place in some locations over the last 4-5 years, the headline is not really that dramatic at all.
CoreLogic head of research Nick Goodall said he was unconvinced prices would drop substantially. For prices to fall, owners would have to be forced to sell.
In summary…
- Look for opportunities and undervalued markets.
- Don’t rule out counter-cyclical markets.
- Keep in mind that this is a long-term game.
- Build up buffers.
- Don’t let media headlines determine your investment strategy.
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