Has This Government Killed Your Property Investment Dream?

For many Kiwis that want to ensure that they are not reliant on Government handouts in retirement, property has been seen as a great asset to invest in; however there is currently a lot of uncertainty as this Labour-led Government is finalising policy.

So will this new Government kill your property investment dream?

I would like to think that a property investment dream is still possible with this Government and I’ve written this post for my finance blog to try and get some sense in regards to what might happen.

Your Property Investment Dream

The Rules For Property Investors Can Change

It’s been highlighted in the lead-up to the election that if Labour and The Greens were to win then the rules for property investors would change. What is now still unclear is what impact adding NZ First to the mix will do.

To try and get a clearer picture I went to the three parties websites to confirm what they had said.

Labour Policy For Property Investors

The Labour policy states that they would extend the bright line test from the current 2-years to 5-years and  that any losses would be ring-fenced so they can not be used to offset tax on other income. The pre-election hype was stating that this “loophole” needed to be closed and that “the biggest users of this loophole are large-scale speculators who own multiple rentals and use losses on new acquisitions to continually reduce their tax. The speculators’ tax loophole helps them outbid home buyers for properties because the taxpayer effectively subsidises part of their cost of servicing mortgages.”

While the ability to offset tax losses against other income can be helpful when getting started, ring fencing losses is something that most genuine property investors would not be too concerned about. It would be interesting to see how this will be implemented as we expect they want to limit this to losses from property investment only and so when a person has other losses from business or other investments the accounting could get quite complex.

They campaigned in the two previous elections saying they would implement a tax on the capital gains earned on properties, but were unclear about whether that would include farms and businesses. In the lead up to this election the Labour Party spoke of a number of new taxes and it was highlighted that a capital gains tax may be introduced, but after continued criticism they took the new taxes off the table for their first term in Government. Stuff then reported on 1st September 2017 that Labour leader Jacinda Ardern has given her deputy a ticking off for confirming Labour will campaign on a capital gains tax in the next election.

My expectation is that Labour would really like to introduce a capital gains tax but my hope is that it would only take effect when a property is sold.

They would also ban foreign buyers from buying existing homes.

The Greens Policy For Property Investors

The Green Party is typically light on policy and would rather make statements of intent. From their website under the housing policy they state they want to “reduce speculative investment in the housing market by tightening the rules around loss attributing qualifying companies and introducing a capital gains tax on all but the family home.” There is no further detail on how they intend to make these changes and it’s interesting that they still refer to “loss attributing qualifying companies” which were effectively phased out in 2011, so I expect that they have given the details of the policy very little thought.

We would guess that they would fall into line with a major party policy.

The NZ First Policy For Property Investors

The NZ First housing policy does not mention any tax changes and is focused on ensuring that only New Zealand citizens and Permanent Residents can buy freehold land along with the aim to reduce pressure on housing by slashing 72,400 foreign migrants. They would also ban foreign buyers from buying existing homes.

So what does this mean for property investors?

While we wait for any announcements I personally do not think much will change soon.

Much of the “policy” is really just comment to please voters who may think that property investors are wealthy people that are avoiding tax. The published “policy” from all three parties is really tinkering and most will make little or no difference to property investors.

Changing the bright line test to 5-years is pointless really as those people who have purchased with the intention of selling should be paying tax under the current rules. This proposed change may catch a few people who are forced to sell due to changing circumstances, but I really cannot see it will make much difference really.

Ring fencing tax losses may see some people looking towards other investments solely due to affordability. As mortgage brokers we have seen very few property investors that are focused on using negative gearing to the extent that we saw 10-years ago, and therefore tax losses are not a major factor when looking at cashflow. This may make accountants happy as property investors will need to deal with a more complex situation especially where they have a company (LTC) that has property and other investments, or where the investment property is owned in their personal names.

Capital gains tax is something that we are not expecting in this first term of a Labour Government but is something that they have indicated they would like to introduce. The real question with any capital gains tax is timing –  when would any capital gains tax be due? In most cases any capital gain is realised on the sale of a property and therefore deemed payable at that stage which is generally okay as you would have the cash available then. If a capital gains tax is imposed on a revaluation process while you still own the property then things can become quite difficult as you may not have the ability to pay the tax if you have no cash available and your ability to borrow additional monies may be limited.

Restrictions on property ownership – a restriction on foreign buyers owning homes may have an effect on property prices in some areas but I expect that it will be less than people might expect. From the statistics that I have seen from Core Logic in the last 12-months non-New Zealand buyers of property have been minimal and therefore I do not see this having much impact on property values and especially those properties that would typically be purchased by property investors.

What will be created by the politicians and the media first is a level of uncertainty.

There will no doubt be some changes, but I’m not expecting that they will make much difference at least in this first term.

The more important and potentially worrying things are;

Changes to The Reserve Bank – we have heard both Grant Robertson (Labour) and Winston Peters (NZ First) say they want to make changes to The Reserve Bank. While it appears that Labour did not accept all of Winston’s ideas, they still plan to make the most significant change to monetary policy since the Reserve Bank Act was brought in. At this stage there is lack of detail, but economists (and the public) will want to see that The Reserve Bank remains independent and focused on maintaining a stable economy.

Interest rates – unstable governments tend to cause concern for anyone investing in a country and while New Zealand has experienced a good stable economy since coming out of the GFC there are a lot of economists that have concerns over what direction this new Government will take this country. There is a lot of talk about the trade deals, new taxes, pay increases and a blow-out in social spending that could see the economy decline. If this starts happening we can expect to see higher interest rates which will be an issue for home owners, businesses and of course property investors.

If this Government last the full term they will try for a second term and that is when things will get more interesting. So much will depend on how this term goes with the three parties, and therefore the public will need to see that a mix of parties like this could continue before these parties start putting out their next set of policies. We already know that Labour had planned to bring in a range of new taxes but put these off until their next term, so I guess we will all watch with interest in another 3-years … assuming that this Government survives that long.

Change & Uncertainty Creates Opportunity

While there will no doubt be some uncertainty many ‘would be’ property investors will wait – they will wait to see what might happen and therefore they will not be in the market. As well as this there will be a few property investors that will sell-down some properties.

As we all know, having less buyers and more properties means more opportunity to pick up well priced investment properties.

Of course you would have heard that Labour intend to build 100,000 houses over the next 10-years with the yet to be established KiwiBuild programme and will also build more state owned houses to be provided as rentals via Housing New Zealand.

How will this change things? 

It’s hard to see the KiwiBuild programme getting started very soon as there are some huge challenges for anyone getting a new programme like this off the ground. Apart from getting the structure of this agreed by the three parties, there is the need to fund it and more importantly staff the KiwiBuild programme at a time when the building and construction sector cannot get enough staff to deal with current projects.

I’m sure the Labour Party will want to see this progress as this was one of their major policies designed to “fix the housing issues” but it will not be easy for them. I’m equally sure that the National Party in opposition will continue to remind the public what Labour had promised and the KiwiBuild programme will be an easy target for them. While we might see some efforts to get the KiwiBuild programme started, it’s hard to see this making any impact within the next few years.

The housing market will continue to be a focus for politicians and the media and while it is the uncertainty will remain.

The key thing is to get prepared early so you are ready to take advantage of this market – review now with your adviser.

Keep Your Property Investment Dream Alive

If you are an existing property investor or someone looking to get into this market then I think it’s important that you understand why you are investing and why there will continue to be a need for investment properties.

You are investing for your long-term financial security – you are not speculating in the property market but are instead using property as an investment that will produce for you a steady income from rents over time.

There are people that want to rent good property – the great thing with property is there is a demand for rental accommodation with some great people that will pay a fair price to rent good property. The key here is people want “good property” and are prepared to pay for them.

Property investment is just one way to secure some income in retirement.

It is something that has been done around the world for hundreds of years and will continue to be done for hundreds more. Of course the rules around the world are different and the rules will change from time to time, but fundamentally there are good reasons to invest in property.