Interest and tax changes that may dampen house prices
The relentless rise of house prices has dominated the property market for several years. Last year, house prices rose 27.6% across the country, and the one question that everyone wants to be answered this year is, “When will they stop?”
While there is no simple answer to that question – there are so many parts to the house-price issue – recent changes to interest rates and tax rules could be enough to tip the scales.
The changes made in 2021
As the year ended, prices were still on the rise. The latest Real Estate Institute figures showed the national median price increased to a new high of $925,000 in November.
Last year, the New Zealand government announced housing policy changes aimed at increasing the supply of houses and curbing demand for investors. They included:
• Bright-line test extended from five to ten years
• Investors are no longer able to write off interest expenses
• Price and income caps on ‘First Home’ products lifted
Extending the Bright-Line test
Previously, anyone who sold a residential property that they owned for less than five years, apart from their family home or inherited property, was liable to be taxed on the capital gain.
That has been extended to ten years (except new builds which stay at five years).
Along with reinstated measures such as loan-to-value ratio restrictions on new mortgage lending, which require investors to have more equity in their properties, the change could be good news for first-home buyers.
Removing tax-deductibility of mortgage interest payments
Property investors will no longer be able to offset interest expenses against rental income when calculating their tax – a change that could ease demand and open the market for first-home buyers.
Currently, when owners of residential investment property calculate their taxable income, they can offset the interest portion of their mortgage payments, along with other expenses such as rates and insurance. This considerably reduces the tax they need to pay, giving investors a significant advantage when deciding how much they would be prepared to pay for a property.
Here’s a summary of the changes:
• Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021.
• Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. The amount you can claim will be reduced over the next four income years until completely phased out.
• If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021. Interest on it may not be claimed as an expense from 1 October 2021.
Caps lifted on First Home Loans and Grants
More first-home buyers are now eligible for First Home Grants and First Home Loans, thanks to income cap increases and house-price cap increases in targeted areas.
The maximum income people can earn to receive this assistance will be lifted from $85,000 to $95,000 for single buyers, and from $130,000 to $150,000 for two or more buyers.
But then there are rising interest rates to consider
The Reserve Bank has already increased the Official Cash Rate (OCR) and it could go even higher. Most banks have, in turn, started to jack up interest rates, with the average of the two-year fixed rates offered by the major banks sitting at 4.21% in December 2021, marking the seventh successive month of mortgage rate increases since they bottomed out at 2.52% in May 2021.
Alongside tighter lending rules, this could have a big influence on property demand, bringing little relief for first-home buyers. Even if housing prices soften, mortgage rates are expected to keep rising, which means any benefit of lower prices may be eaten up by rising mortgage interest rates and higher mortgage payments.
Change is coming (slowly)
Some experts argue that these changes will tip the balance of power towards first-home buyers and long-term investors. Others counter that the changes could encourage investors to hold on to their properties, limiting the available supply and keeping prices high. While nothing can be set in stone, there’s one thing that can be agreed – there’s hope that house prices will finally, and slowly, start to shift.
Ready to jump on the property ladder in 2022? Call the team at Global Finance today – we would love to help!
**These are general guidelines and are by no means a reflection of bank or lending policies