29th March 2021
Housing Announcement: What are the Changes?
Last Tuesday, the government announced upcoming changes that will be implemented in the hopes of stabilising the rapid inflation of house prices and encouraging first-home buyers to enter the property market. In addition to the increase to a 40% deposit requirement for property investors made earlier this year, these additional changes are intended to decrease the amount of speculators and level out the playing field for new buyers. The changes include:
- Brightline test lengthened
The brightline test, which determines whether or not a property owner will need to pay capital gains tax when selling their property, has been increased from 5 to 10 years of ownership. However, even though the length has been doubled, economic commentator, Tony Alexander, suggests that this change alone will not curb the intentions of investors significantly but should be effective in motivating property owners to hold onto their assets for longer.
- Increased funding for housing
The government has also announced a range of funding that will aim to increase the supply of housing available. This includes $3.8 billion allocated to Housing Acceleration where councils can call upon funding for infrastructure to support growth and subdivision developments nation-wide.
Furthermore, the government has set aside $2 billion for the purchase of land to accommodate social housing and will be investing more into apprenticeships for the construction sector to aid with the demand for skilled workers in order to keep up with the need for more housing.
- Decrease of interest cost deductibility
The most contentious upcoming change is the gradual removal of interest cost deductibility for investors. The government announced that over a four-year period, the amount of interest costs able to be deducted will decrease incrementally from 75% beginning in October 2021 continuing through to 2023 when it will be reduced to 50%, followed by 25% in 2024 and eventually to 0% in 2025.
So what does this mean for investors?
Although the aim is to deter investors, Alexander strongly believes that the final change will cause rental prices to increase drastically in order to offset the losses. ASB Economist, Mark Smith, demonstrated that if landlords were to pass this cost onto tenants there could be an increase of up to 30% of rent prices in the next four years, however, he believes that such a steep rise would be unlikely. Instead, he believes it is more likely to see a moderate increase in rent and a moderate decrease in the property price initially paid by investors in order to keep up with the same returns prior to this change.
Due to this, it is possible that the government’s aim to stabilise house prices could be effective with Westpac predicting that removing deductibility could reduce the amount that houses would be purchased at by 10% over the long-term.