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New tax rules for property owners

Housing Market Written by Tony Alexander, Sep 30 2021
Guest post from Tony Alexander

Guest post from Tony Alexander

The government last week clarified details of its housing tax policy changes announced on March 23, and they were slightly less bad than expected. The key features remain the same with all purchases of existing properties after March 23 delivering no ability of investors to deduct interest costs when calculating taxable income.

Those holding properties on March 23 will steadily lose all their interest deductibility over a three and a half year period starting on October 1. New purchases of existing properties from March 23 face an extended brightline test of ten years. But purchases of new builds face no tax changes.

The key item which is slightly better than expected is that any dwelling which has received its Code of Compliance Certificate from March 2020 will retain its status as a new build for 20 years. That is, an investor buying an existing property in two years which was finished yesterday, will still be able to deduct their interest costs for the ensuing 18 years.

This applies even if the first owner was not an investor

The details confirm that investors are incentivised to purchase new builds and we can expect increased interest in such as time goes by – maybe. The problem for the government is that at the same time as they have applied an incentive to purchase a new dwelling, the costs of erecting one have blown out and become highly variable.

Developers are facing constantly rising prices of raw materials across the board, shortages of many of those materials (70% are imported), alongside shortages of contractors, and shortages of council inspectors. Getting a house built has become more difficult than perhaps at any other time in the past half a century.

For this reason, banks are increasingly saying to builders that they will only finance their activities if they place explicit cost escalation clauses in their building contracts. At the same time, banks are increasingly working out the ability of a person to afford a home loan for a new development based on a 20% cost blowout rather than the more traditional 10% buffer.

At the margin, we are starting to see some investors looking for new purchases back amongst the limited quantity of listings. Are we about to see the availability of listings improve? A number of things suggest we will – but not for a while.

Three factors contributing to more houses going up for sale

First, interest rates have already risen about 1% for most mortgage fixed rate terms and history tells us that when borrowing costs rise, listing numbers tend to go up.

Second, some vendors have held properties back because of lockdown. The end of lockdowns globally tends to bring those vendors back into the market.

Third, we can already see some evidence of a few more investors coming forward to sell in the monthly survey of real estate agents which I run with REINZ.

But these are early days. Interest rates are still well off frightening levels, FOMO (fear of missing out) has jumped up since lockdown started and remains strong, and reports around the country tell us the buying frenzy continues.

The importance of this is not just that it suggests upward pressure on prices for the rest of this year into 2022. It also tells us that vendors continue to face the exceptionally strong risk that if they sell before they buy, or build, they could be left renting for a long time, and eventually paying for their new house in a market with prices perhaps 10% - 20% higher than the one they sold their property in.

It largely looks like buyers will have to wait until we are well into 2022 before listings may become somewhat more available.

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