New Zealand - A warning

First the UK did it to taper demand for investment property. Specualtion was driving up property prices beyond where its Treasury saw comfort.

Now NZ have acted and will also follow the UK is phasing out interest deductions against rental property.
https://www.smh.com.au/politics/fed...low-soaring-house-prices-20210323-p57d9s.html

In both cases the PM said - We arent eliminating negative gearing. We are merely discouraging use of deductions for interest at the taxpayer expense. Property is being made unaffordable by investors.

Could it happen here too ? Its a easy way to leave negative gearing as a concept and cap borrowing to buy investment property either directly or through a trust.

 

Yes could happen here. It's one way to help dampen demand from investors without raising rates

 

It one of the fastest and easiest ways. A non-monetary policy shift to dampen specualation. Some argue rents could rise but its possible it wont as supply could increase due to over supply and more first buyers might find affordability again.

The real blocker is what it could do to construction. But then is all construction good ? Building more homes for profit for specualtors to snap up may not be a absolute economic benefit.

I imagine it could lead to a swing from property to shares and lenders may see a high risk in that. They are already putting blockers to equity outs to buy shares.

 

With interest rates this low, the effect of negative gearing on ones cash flow is fairly low. Curtaining negative gearing at this point is more a phycological exercise than a blow to the hip pocket. The market would adjust to this very quickly and the overall long term effect would be negligible.

The boom here and in NZ is driven by low rates and an undersupply of desireable properties. It's not been driven by investors either.

A short term fix might be to increase rates by 0.15% to make people reflect. Rates won't always been this cheap.

The real solution needs to be long term. We'll always have high house prices whilst employment is concentrated in the capital city CBDs. The government should be encouraging employers to diversify their workforce into regional centres, thereby diluting population density. To acheive this however, is a very long term and expensive plan and the results will be difficult to demonstrate.

 

I'm not so sure Peter. The negative gearing issue is driving affordability for investors. Access to cheap loans and equity out easily change a neg geared cashflow to positive geared when someone buys another . Paid by taxpayers. In time neg gearing does dissolve and become positive gearing. At present in AU investors buy another and repeat. But in the NZ proposal that isnt what they are attacking. Its nastier. They will deny all interest deductions whether its a positive or negative geared property or one is positive and another negative. So in theory unless the property or entity is excepted and allowed a deduction most owners will face taxable income even if they have negative cashflows. A double whammy. The UK experience had rapidly changed their investment market and its still going. Like the UK, NZ are phasing this in over a few years.

I know many who have sold UK property as its not affordable to keep if you do have a loan. You are paying a lot of tax when you arent even making money. eg a property owner with $35K of interest deductions could face $16K of tax with breaking even on cashflows.

NZ seems to have offerred incentives to minimise impacts with a huge increase in support for new builds supply, increased first home buyer concessions and CGT tax brightine concession for new builds. (ie keep 10 years no CGT)

Borrowing $$$ to invest in NZ resi property will become a exception under these sorts of proposals. Cash rich investors will still be investors and wont be impacted. Perhaps even institutional housing investors.

 

Is this actually confirmed? Most of the comentary we read in the media about NG is fairly uninformed on how it actually works. I haven't seen any informed commentary either way. If it is true I agree that it's a completely irrational approach and grossly unfair.

There's no arguing that it's great if you can buy property without needing a loan.

 

If they are denying all interest as an expense, I can see a lot of investors selling up. That's really nasty.

 

I think it would kill construction industry in Aus, plus the government wants us to provide rental properties so they don’t need to, plus the government wants to keep housing affordable for FHB. So I’m thinking they will more likely make it difficult for anyone to own more than one or two rental properties. Maybe even higher interest rate for investors or tighter lending.

 

Let's be real, it's not going to happen any time soon here. Labour lost the unloseable last election proposing changes to negative gearing, and have since dumped it as one of their policies. It's not the Coalitions style to touch that sacred cow, so they are never going to shoot themselves in the foot proposing changes to negative gearing either.

If it ever happens it will be years away

 

No, no Scomo has too many probs at the moment. He doesn't want to see more people jacked off.

 

Vic Govco did this with the TAC (Transport Accident Commision, and I forget what else) after Ford, Alcoa, and other industries closed in Geelong, it helped Geelong

Never say Never, though I can't see it happening it wouldn't surprise me

I have two NG properties, but don't actually earn enough these day's to make it worthwhile (I don't earn enough to offset sfa).

We all know (via history) that one party proposes something and receives an overwhelming negative response that sooner than later one party or the other will soon introduce a watered down version (only to amend it over a few years) to obtain the revenue

It will happen

 

I agree, there will be many other things coming across his desk before this.

 

Sounds insanely cruel. So to get this straight:

ALL interest is not deductible. This is not simply the axing of negative gearing. Interest is simply not deductible at all. And this is not grandfathered.

So taking the median $1m property, 100% LVR, 3.5% interest, 3.5% rental yield:
Current rules: Neutrally geared. Net cashflow $0.
New rules: Tax = 47% x $35k rent = $16.5k. Net cashflow -$16.5k.

This will break a lot of (most) investors no? And if interest rates go to say 6%, then this holding loss is $41.5k p.a.

Very interested in how this pans out. Shorten-omics followers looking to run with it as a case study no doubt.

 

I can't see where the bottom is for property as an investment if interest is not deductible. People will not be able to fund the losses. Rental yields would need to be at minimum 2x the interest rate.

And so I think they achieve their goal of moving investors out of the market; who's buying? Are there REITs allowed to buy all this up from them? Moving landlord from the mom and pop store equivalent to big business? Is that the future, like I rent my house from Big Company, like from Coles or Westfield? Thus concentrating the profits in the hands of the few FYI, but it'll take them 20 years to realize that.

 

Without investors, more government housing required then?

Council Flats

 

or less as more can afford homes?

 

That looks so appealing.
Bring on the slum flats like the ghettos of Paris.

 

If supply increases and current investors cannot deduct there interest than how do they cover the loss without increasing rents?
A lot would have to sell and you would think at a loss if purchases are recent.

 

i hope they build them STRONG , some of those Maoris and Islanders are HUGE