Property investors should have more confidence in new builds after the release of the latest information on the Government’s tax policy changes, one economist says.
On Thursday, the Government released a consultation paper with details of its proposals to phase out investors’ ability to offset interest costs against rental income and extending the bright-line test.
One of the points from the 143-page document was that new builds would be exempt from the changes and that investors would still be able to claim home loan interest on them.
Opes Partners property economist Ed McKnight said this was heartening for investors as it provided greater confidence in new builds as an investment option, particularly as the definition of what a new build was, was quite broad.
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“It opens up new builds as an avenue for investors who might not have gone down that route before.”
Alongside the tax changes which incentivised new builds, there had been several other changes over recent months which made them a more attractive proposition to investors, he said.
These included changes to loan-to-value ratios, which meant a lesser deposit was required for a new build, ASB introducing its “back my build” variable rate, and ANZ changing its servicing criteria to allow investors to borrow more if they purchased a new build.
The Healthy Homes standards also played a part as new builds were more likely to meet the standards than older, existing dwellings, he said.
“These factors have completely changed the economy of property investing, swaying it in favour of new builds.
New-build properties are exempt from the Government’s tax policy changes for investors.
“While new builds won’t appeal to investors who are really into extensive renovations to add value, for many passive investors they are now the way to go.”
Boosting new builds was also good for the construction sector, which was essential to the Covid economic recovery, and created more energy efficient housing which helped towards climate change goals, McKnight said.
While the consultation paper provided some clarification of the proposals, some questions were left unanswered – in particular the question of how long the new build exemption might last.
But property accountant Anthony Appleton-Tattersall, who is an investor, said a positive detail was that the three options given suggested the new build exemption would either be in perpetuity, or for a lengthy period of time, with 10 and 20 years mentioned.
“Also positive was that the new build exemption, for a fixed period, might be available to subsequent purchasers of new builds.”
Property accountant Anthony Appleton-Tattersall says there is good and bad news in the consultation paper.
But a negative piece of news was there was no proposed exemption for existing new builds prior to Mardch 27, 2021, he said.
“If a property received its Code of Compliance in February 2021 and was acquired on March 15, 2021, no new build exemption.
“But if this property was sold to another party within 12 months from the CCC, that party would get the new build exemption. This is a grotesque outcome.”
Appleton-Tattersall said it was important to note the proposals were not final law and should not be taken as such, as some change from the current position was likely.
While many investors might feel that other “consultation” on law changes relating to property in the last few years had been mostly ignored, he said people should still make a submission on the proposed changes.
NZ Property Investors Federation executive officer Sharon Cullwick says new builds will only appeal to some investors.
NZ Property Investors Federation executive officer Sharon Cullwick agreed investors should make their voices heard on the details of the proposals, but said the gist of the new policies would not change.
While the exemptions for new builds were good, such incentives would only make new builds more appealing to a small group of investors who were less focused on yields, she said.
“Besides, getting lots more new builds built is likely to be problematic due to construction industry capacity constraints, Council delays and the fact the costs of everything just keep going up.”
Cullwick said there were always some risks with taking on a new build, especially if the Government decided to make more sudden policy changes in future.
For some investors, the new build exemption did not outweigh the impact of the tax policy changes overall.
Auckland investor Andrew Bruce said residential investors were being unfairly penalised, and he would be restructuring his portfolio and focusing on the commercial property sector as a result of the changes.
“I don’t know any investors who plan to totally sell up and get out of all property, but I know many who will be restructuring or selling down properties, so they have less debt.”
New builds might be more appealing to some, but there were too many unanswered questions around the proposals to say how that might pan out at this stage, he said.