Have the government’s policy changes affected the housing market?

Posted by Pam Hight on Oct 18, 2021

Has the government policy changes affected the housing market

Houses are selling for record prices, and at record pace all over New Zealand. Here in Taranaki, we are seeing no sign of things slowing down. According to REINZ the average house price across the region increased from $452,000 in August 2020 to $565,000 in August 2021. And while New Plymouth has seen the largest spike, from $508,000 to $651,100, during the same period every township in Taranaki is seeing prices increase. In fact, while New Plymouth now sees the highest dollar value median price, Stratford District has seen the highest percentage increase with median prices increasing 67.7% in one year.

So have the housing policy changes that were introduced in March 2021 had any impact on the current housing market that we see today? When the government announced these changes, their aim was to help slow down the housing market and increase housing supply. It may still be too early to fully assess the impact of policy changes just yet, and the unpredictable effects of the COVID-19 outbreak may have altered the policy’s impact. Below we break down the policy further and look into how it may have impacted the housing market.

Recap on the Government's housing policy changes 2021

Implemented in March of 2021 the housing policy came after several years of escalating house prices and not enough new homes being built to meet the growing demand. Several areas were targeted by these policies, including making affordable housing less attractive to investors so more first home buyers could get their first house. In this section, we’ll look at each of the policy changes and assess their impact.

Doubling the bright-line test from five to 10 years

The bright-line test, which taxes money earned on people's additional homes if sold within a certain period of time, is being doubled from five years to 10. This change specifically targeted owners of multiple properties and would have meant they were taxed if they sold that property within 10-years unless it was the family home. 

To help alleviate the housing supply issue the government elected to make new builds exempt from this policy change. This means any new build home will keep the old bright-line test of five years. This was seen as an effort to encourage investors to focus their efforts on building new homes, rather than purchasing existing supply. For a more detailed outline of the Bright-line test changes, visit the Inland Revenue Department website here.

Launch a $3.8 billion Housing Acceleration Fund to boost the pace and scale of houses being built

This is aimed to help enable thousands of new homes to be built. The government will foot the bill for pipes and new roads to support housing development. This has been identified as a way to increase housing supply and therefore bring overall prices under control. This fund is split across private and government-funded housing projects and includes land acquisition funds for Kāinga Ora to increase the pace, scale and mix of housing developments. Read more on the Housing Acceleration Fund via the Ministry of Housing and Urban Development here. 

Increase the caps on first home grants and loans (income and house price) to enable more first home buyers to buy homes

Lifting the house price caps for both new properties and existing properties in those places where access to a First Home Grant or a First Home Loan has become increasingly out of reach of first home buyers. The First Home Grants have a limit on how expensive a property can be when the new first home buyers receive funding. As house prices have increased these ceilings have quickly become too low for even affordable housing and so the government has amended these limits to more accurately reflect current house prices.

Raising the income caps for single buyers and two or more buyers means that more people are able to access these initiatives where they hadn’t been able to before. The income cap for a single buyer will be raised to $95,000, and for two or more buyers to $150,000. This, again, more accurately reflects the incomes required to afford a first home in the current market. Learn more by visiting the Ministry of Housing and Urban Developments website here.

Limit deductions on interest expenses for residential property income

There will now be no interest deductions available on residential investment properties acquired after 27 March 2021. However, for properties acquired before 27 March 2021, the interest on these home loans will become progressively non-tax-deductible against rental income from 1 October 2021. 

This means that property investors are discouraged from buying existing properties after the 27th of March 2021 as there will not be the same level of financial benefit. For more information head to the Inland Revenue website here. 

How the government's policy changes have affected first home buyers?

With first home buyers being top of priority, and the government’s goal was to get more first home buyers into their first home. Unfortunately, the property market is continuing to see a low supply of listings available on the market, which has continued to boost property values as buyers continue to face limited choice. The problem the market is also seeing with first home buyers is they are looking to purchase but at the same time not selling a property. Therefore the market is not able to replenish as easily as it could if it was an owner-occupied property for sale that is also looking to sell in the same market. 

Stock supply was supposed to increase with fewer investors buying existing properties and new houses being built to accommodate this growing need. While investor purchases of affordable housing may have decreased, many investors have kept hold of their properties, especially if they were purchased before the 27 March 2021 tax deadline. Add to the issue a shortage of building materials, thanks to the COVID-19 pandemic and new houses are not being built quickly enough to cool rising price and as more people are moving home they are also adding to the list of people looking to purchase.

Many first home buyers are looking to build, which is also seeing another list of problems. With limited land for sale and building cost increases due to COVID-19 knock-on effects, building a home is not only going up in price but also getting harder to get lending for due to the increase in costs. However, the government has decided to shift the caps on the First Home Loan and Grant scheme, allowing first home buyers to receive grants for more expensive houses. 

How the government's policy changes have affected owner-occupied homeowners

In some ways, there is a vicious cycle going on for listings, with some existing owner-occupiers not moving house because they don’t have much choice about their next property. And of course, those owners are then not listing their own house, which feeds back into even tighter supply conditions.

While owner-occupied properties are not subjected to any of the new housing policy changes single-property owners are being caught up in many of the issues acutely affecting other aspects of the market. Reduced supply of housing means people’s homes have never been more valuable, but a rising tide lifts all boats, so there have never been fewer options for a move. Owner-occupiers that may have built their dream home are being put off by the aforementioned rising costs, timeframes and land availability. For many, the best bet is to stay put. 

How the government's policy changes have affected renters

The biggest impact these changes are having on renters is if property investors decide to sell their investment properties. And while many changes to the Residential Tenancies Act have been designed to make evictions harder, the sale of a property untenanted may be a condition of sale. This could result in an increase in the number of tenants seeking a property, and a decrease in the number of properties available for rent. 

On the other hand, investors who decide to hold on to their investments are increasing rent. In some cases this is to help cover additional costs spurred on by new insulation and heating standards, in other cases, it’s to match the increased prices people are willing to pay to secure their desired property. Even though it is still too early to tell what effect these are having on tenants, the reality is that rentals are becoming more expensive than ever before, making it even harder for tenants to not only find a great rental but to then save for their own property. 

How the government's policy changes have affected investors

The changes affected investors the most, and it wasn’t any surprise that first-time investors were discouraged from buying. This group is finding it harder to meet the lending criteria, especially after the Reserve Bank mandated a 40% deposit on investment property purchases from the 1st of May. There is also the added influence of the Government’s tax changes for this group to take into account, especially the extended Brightline Test. 

Established investors are likely unaffected by many of the changes, however. The 40% deposit is easy for many to achieve as their portfolio has significantly increased in value over the past few years. This means they can often afford the increased house prices and can find tenants willing to pay more due to the rental property shortage.

With investment properties, many investors purchase for long term gain. So owning a property for 10 years is quite common, which means the new bright-line tests aren’t a significant deterrent. Investors are looking into new build investments over purchasing existing properties, partly due to the Government’s extension of the bright-line period but also due to banking restrictions. The 40% deposit required to buy an existing property is part of the bank’s LVR requirements, which are tighter on investors than first home buyers. However, the LVR restrictions are looser if the investor is building a new property.

So while there are few signs so far that the new housing policy changes have had much of an effect in their own right, their impact will become clearer over time. What is evident is that house prices are still continuing to rise, stock levels are at a record low and there are more renters than there are rentals.  And while there was a noticeable increase in investment property sales as investors became nervous of increased standards for rental properties this has largely slowed down.

If you’re in the market for an investment property or you have an existing property that you’re looking to rent out, why not get in touch to discuss your options? We have an experienced team of professionals on hand to help. From guiding you on your obligations as a landlord, meeting the healthy homes standards to listing your property and finding the right tenant, we can help.

Simply contact us and someone will be in touch. If you’re interested in investing in Taranaki and haven’t already, we suggest downloading our Ultimate guide to investing in Taranaki

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