Better To Fall From A Roof Than From A Plane
This was the headline in a stuff article this morning after announcements from the Prime Minister about policy changes that will impact property investors and first home buyers. Click bait. If you’re reading this article it worked!!
Let’s review the changes and we’ll offer an opinion on what impact these will make.
The bright line test has been extended from 5 years to 10 years. This is effectively a capital gains tax on the profits you make from owning and selling a property within the specified time frame. I have always argued that if its purpose is to stop speculators, it is an ineffective tool. If you make $100,000 profit on the sale of a property and are taxed at 39%, your profit is reduced to $61,000. You might be unhappy about paying away $39,000 but you are still $69,000 better off. Happy days!! No silver bullet there.
The tough one. The government has also removed the ability to deduct interest as an expense when completing your tax return, therefore reducing your ability to reduce your profit declared. Meaning, landlords will now pay more tax, The government had already removed the ability to offset any losses you make owning a rental property from your personal income. Instead, you were able to defer any losses and offset it against future profits you make owning rental property. As you can see this had no impact on investment property demand. The new changes will be phased in over 5 tax years. The tax relief on any losses will have an impact on landlords. However, they have this time to ensure their costs are covered by their income, including tax. This will force investors to take a more commercial approach to buying rental properties. Yield will become more important and if the market allows it, rents will rise. How tight is the rental market at the moment in your area?
The reality is, if you are a speculator, these changes should have no impact on the way you operate. You may just have a smaller slice of of chocolate cake than before. If you are a long-term property investor, these changes shouldn’t put you off your long-term strategy. A disciplined commercial approach will need to be taken. Property is still a good asset class to invest in and historically grows on average at 4% per year net (after inflation, before expenses) (1) That is before yield as well.
The other changes impact first home buyers under the Kaiangaora scheme (This allows purchases access to lending with a 5% deposit). The Kaiangaora First Home Buyers scheme has lifted the income caps from $85,000 to $95,000 for a single applicant and from $130,000 to $150,000 for joint. Along with lifting the house price caps. The existing house price cap in Auckland moves from $600,000 to $625,000 and the new home house price cap from $650,000 to $700,000. I don’t see this being much use in Auckland. Even outside of Auckland the new caps are not generous. However, it may force first home buyers to seriously consider apartments. Not really a silver bullet for first home buyers.
So if you are an investor and saw the headlines and made your way out onto a ledge, it is my opinion, that you should sit down relax, and have another coffee. If you are a first home buyer, enjoy an instant coffee, save more, and look at schemes like www.Youown.co.nz
Please note this piece also contains information about tax. You should seek expert tax advice from your accountant before making any decisions about investing.
- Reserve Bank Bulletin Vol. 79, No 1 January 2016
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.
- Posted by Isbister
- On March 23, 2021