Residential property investors are desperate to know the market impact of the recently announced tax changes. Many see only a small dent in investor enthusiasm, others regard this as a game changer.
The impact will be felt not just in residential property but also other asset classes like shares and commercial property.
New Zealanders have been hugely biased towards residential property for saving. The fact that you can borrow and “leverage up” with bank money, makes property a unique asset class. Throw into the mix common beliefs that house prices can only go up and aren’t volatile like listed share prices, and enthusiasm is understandable.
Ultimately Kiwis love the emotional attraction of “bricks and mortar”. Unlike shares, bonds or bank deposits you can see and touch property.
Also, unlike shares, a generation of property investors don’t feel scarred by the October 1987 share market crash, where the value of high-flyers like Equiticorp, Chase, Euro-National and Anzon dropped like a stone, often to zero. Land still exists, none of these companies do.
Aside from weighing pros and cons of residential property as an investment, as a country we also need to weigh the wider social and economic impacts.
Please don’t shoot the messenger here, but residential property is not a productive asset class for our country. It may have worked as a wealth generator at an individual level, but the sector does not create the knowledge-economy jobs, innovation and export earnings our country needs. From a NZ Inc perspective, it’s not where we should aspire to direct vast amounts of investment capital.
Favouring investment in residential property has contributed to social inequities, with New Zealand housing now among the least affordable in the world. That doesn’t help the children or grandchildren of our nation of landlords, nor does it help those families locked out of the market without a “bank of mum and dad” to help them.
The new tax changes make interest on mortgages non-deductible and extend the “brightline” test to ten years. The interest deductibility change in particular is huge, and came largely out of left field. After a decade of inaction we’re not used to our politicians showing such boldness to curb rampant property prices.
Low interest rates drove many investors from bank deposits to residential property. Now those same investors may look to upscale into commercial property or shares including listed property companies.
Disallowing interest deductions will hit the cashflow of residential property investors. New Zealand Property Investors Federation president Sharon Cullwick expects a $6,000 cashflow hit on a $600,000 investment property, which is huge. This could significantly undermine confidence in residential property as a “sure-to-win” option.
While its early days, auction clearance rates for Barfoot & Thompson in their Auckland CBD auction room dipped to 57 per cent a week ago, compared to 79 per cent in the prior four weeks. One survey of over 3000 investors revealed around a third of those considering buying will no longer buy, while a quarter are considering selling properties they have.
These numbers are sobering, but it’s far too soon to tell if the hot housing market has turned. Also bear in mind some believe that despite tax changes, the market will maintain its upward trend.
The tax changes are a big win for other investment options. Low interest rates have driven many investors away from bank deposits and into residential property. Now those same investors may look to upscale into commercial property or shares including listed property companies.
This will be welcomed by commercial property syndicators, share brokers and fund managers.
We were once a country of investors that loved shares, but the 1987 crash put a decades-long end to that. We are not seeing a bloodbath of losses like 1987 but financial advantages of investing in residential property are evaporating with low investment yields and the loss of interest deductibility.
Combine this with bank deposits delivering near zero returns and it could be game on for commercial property and listed company shares. This could also be the end of our national belief that residential property investment is a one-way bet.
John Berry and Hamesh Sharma are the Chief Executive and Portfolio Manager at ethical fund manager and KiwiSaver provider Pathfinder Asset Management. This piece was originally published by Stuff April 5, 2021.