Tying up some loose ends.

Tied ropes

  • The Government today announced newly built investment properties will still be able to have mortgage interest payments deducted for tax purposes. The announcement clarified some outstanding details from the property announcement made earlier in the year.
  • Our outlook for housing remains unchanged from today’s announcement. House price growth should cool over the year ahead given rising mortgage rates, tightening lending restrictions, increased housing supply and ongoing affordability constraints.

Clarifying property tax changes.

Today the Government tied up some loose ends from its announcement back in March that mortgage interest will no longer be a tax-deductible expense for property investors. A move designed to curtail investor demand in an overheated market. Moreover, interest deductibility provides an incentive to maximise debt loads – potentially adding to financial stability risks. Just to recap, investment properties purchased on or after the 27 March this year can no longer have mortgage interest expenses deducted for tax purposes. For properties held before the 27th of March, interest deductibility will be phased out over a 3½ year period from 1 October 2021.

Importantly, the Government has recognised the adverse supply impact of the tax changes on new and desperately needed rental property. Mortgage interest expense will remain tax deductible for up to 20 years on newly built investment properties. New builds are defined as having code of compliance granted on or after 27 March last year. Today’s announcement will unlikely impact construction activity in the near-term. The pipeline of home building is long and capacity constraints in the building industry are a more pressing issue. However, over the medium term, interest deductibility on new builds should help increase new home construction. Investors that may have previously focused on exiting property may be nudged towards new builds instead. 

In our view, more important for supply are changes made at the local government level on infrastructure and the loosening of overly restrictive zoning rules. On this, the Government’s work on overhauling the Resource Management act is crucial.

Today’s announcement does not alter our housing market outlook. We expect house price growth to cool from current record levels across Aotearoa over the year ahead. Rising mortgage rates, further lending restrictions such as tighter LVRs from 1 Nov, affordability constraints, and a boom in new housing supply should all work to cool the market over the year ahead. We still expect national house price growth to cool to around 1%yoy this time next year, with house price falls a distinct possibility.

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