If you’re interested in property investment in New Zealand, you’re likely no stranger to the increased lending restrictions put in place this year. These restrictions were intended to discourage small time property investors from scooping up properties that would otherwise have been bought by first-time home owners. However, we’re still seeing plenty of people in the market for a first or subsequent investment property.
This article is current as of 27 October 2021.
The brightline test doubled from 5 years to 10 (except for new-builds which are still 5 years). So if you sell an investment property within 10 years you’ll be required to pay tax on the sale. The tax is payable for each year the property was used as an investment property (i.e. the owner didn’t reside there).
The Reserve Bank now has the ability to determine debt to income ratios. However, they’ve advised there are no plans to use this ability in the near future.
The change that has had the biggest impact was the change to LVRs (loan to value ratios) for investment properties. From May 2021, the maximum LVR for investment properties became 60%. There are very small amounts of money the bank can lend over this, but it’s so small as to not be relevant to most.
As a nation we still see property investment as the best way to grow wealth and to ultimately fund our retirements. The crazy increase in property values of late has no doubt only reinforced this view. But given the measures now in place, why are we still seeing property investors in the market?
The capital growth property owners have seen in the last few years has resulted in a couple of things. It’s added fuel to Kiwis’ desire to own as much property as possible. It also has given home owners a lot of equity in their current property to use as a deposit for additional investment property.
As we’ve discussed in previous articles, your ability to get an additional mortgage comes down to deposit and income. Many who have been in the housing market for just a handful years likely have enough equity in their property to use as a deposit on an investment property, even with an LVR restriction of 60%. They then just have to meet the income requirements. While it does get harder to meet the income requirements as you grow an investment property portfolio, many households have the income to support a mortgage for at least one investment property.
For fun (he has some weird ideas about fun), Mortgage Lab CEO Rupert Gough recently did some maths. He looked at how equity has grown in the last while, comparing a couple of different places in New Zealand. Check it out if you like numbers, or just take our word for it – it’s a lot.
All this capital growth also means there are plenty of relatively young homeowners who now have enough equity in their first home to have a deposit for an investment property. Retirement is a long way off for them so they have time to ride out any future dips in the market. This means they are willing and able to make a purchase in a hot property market.
In addition, LVR restrictions on investment properties do not apply for new builds. These exemptions, alongside tax benefits applied to new-build properties make new-builds an attractive and feasible option for many investors. This isn’t necessarily all bad news for first home buyers. The key problem with the housing market is the lack of stock. So anything that encourages new builds will help create a housing market with a healthier house:buyer ratio. This would ultimately provide more opportunity for first home buyers.
So whether or not the restrictions put in place to discourage property investors from buying established properties does work, the actual solution to the market challenges remains the building of new properties. There is a current national deficit of rental properties; this has contributed to increasing rent prices. Discouraging property investors may alleviate some of the struggle for first home buyers but it will likely increase the pain of renters – who are often also aspiring homeowners. Brings to mind the image of the snake eating its own tail… Here’s hoping for real improvements to resource consent processes, an increase in building labour and better access to building materials.
In the meantime there are absolutely still opportunities in the market. People are still buying rental properties, others their first homes. So if you want to buy a rental property, and help ease some of the pressure on the rental market, we can help. And if you’re a first time buyer, who just wants a place to call your own, we can help. And if you’re looking at buying a new build, even better.
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