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The proposed changes to the Overseas Investment Act 2005 (OIA) to restrict foreign purchases of residential land will be in force on 22 October 2018. There has been plenty of discussions on the effects these new rules will have on housing prices.
In this article, I hope to clear up many misconceptions regarding the Overseas Investment Act changes that are floating around. I will also provide a brief overview of the existing law and the changes to the OIA to restrict foreign buyers of residential property. The effects of these changes on the property market (with my ‘real estate agent’ hat on) will also be discussed.
If you are a New Zealand citizen and looking to buy or sell residential property in New Zealand, most of the below will not be directly applicable. However, you may want to understand the proposed restrictions and therefore consider the potential impact when dealing with buyers who do not hold New Zealand citizenship.
If you are not a New Zealand citizen (i.e. no New Zealand passport), read on as this will be extremely relevant.
Click here for a helpful flowchart below to explain the legislative changes and the steps you need to fulfil before you can purchase residential land.
The Land Information New Zealand website also has a very helpful section on these new rules (including application forms). Visit them here.
(As always, you should seek specific legal advice applicable to your situation. This is updated as of October 2018.)
Under the current legislation in force, you may need to apply to the Overseas Investment Office (OIO) for consent if you are:
You are an overseas person if you are:
A company, a partnership, a joint venture or a trust can also be an overseas person. You will also require consent if you are an associate of an overseas person.
You should seek expert legal advice to know whether, under the OIA, you or the entity that is going to acquire the sensitive assets is an overseas person or an associate of an overseas person.
Land will be sensitive if it comes within the types of land and area thresholds detailed in Part 1 of Schedule 1 of the Overseas Investment Act 2005. Sensitive land is dependent on individual transaction details and whether the land/property is used as a personal residence or holiday home does not matter.
The following land types and area thresholds describe some examples of sensitive land:
Generally, residential property in the Eastern Bays will not be considered as “sensitive land” under the OIA so buyers of such properties are not affected.
If consent under the OIA is required, applicants for consent must satisfy a number of criteria, including the core “investor test” criteria. In addition, consent to acquire sensitive land will only be granted if:
Unless you have been living under a rock, you would have learned via the extensive media coverage that the Labour government has introduced changes to the OIA to restrict foreign buyers of residential property. The changes will officially become law on 22 October 2018, along with the regulations (which sets out certain details under the amended OIA).
You can read the final Overseas Investment Amendment Bill here.
The Overseas Investment Amendment Bill (“Amendment Act”) aims to achieve this restriction by classifying all residential land (determined accordingly to the relevant district valuation roll) as “sensitive land” in the OIA. (One way to check is to use a property website and look for the ‘Building Type’. Properties with the Building Type ‘residential’ or ‘lifestyle’ are both captured by the new regime. Otherwise, talk to an agent or a lawyer if you are unsure.)
This would mean that all overseas persons will require consent to buy residential property.
Overseas investors could only obtain consent to buy residential land (that is not otherwise sensitive (as described above)) in certain situations. They are, broadly:
Therefore, New Zealand citizens and a person who is “ordinarily resident in New Zealand” can purchase residential land in New Zealand to live in without requiring to seek OIO consent.
To be considered as “ordinarily resident” in New Zealand, you must:
Otherwise, you will NOT be treated as “ordinarily resident” and therefore require consent. You can obtain such consent if you satisfy the tests I described above under the section “How can overseas investors obtain consent?”.
This is certainly good news to resident visa holders who may be looking to buy a house in the near future. If they have satisfied the above requirements at the time of the purchase, then no consent from the OIO will be required.
Unfortunately, everyone else (including all temporary visa holders such as work visa holders) will still be subject to screening / require consent.
Consistent with New Zealand’s international obligations:
One way to obtain consent if you are neither a New Zealand/Singapore/Australian citizen nor satisfy the “ordinarily resident” test (which is pretty stringent) is that of the “Commitment to New Zealand” test.
Some factors (non-exhaustive) to show such commitment are the following:
Under the Amendment Act (i.e. after 22 October 2018), a purchaser of residential land will be required to provide (to a lawyer) a Residential Land Statement related to whether the transaction requires consent under the Act. If the lawyer has not received such a statement, or has reasonable grounds to doubt the accuracy of a statement, he/she would not be allowed to effect the transfer of the property. There are significant penalties for both conveyancers who do not comply, and for purchasers who make false statements. The statement is not required for transactions entered into BEFORE 22 October, even if settlement is AFTER that day.
I expect that, in addition to the anti-money laundering regulations that has applied to lawyers since 1 July 2018, any purchaser of residential property will expect to face more scrutiny and should be prepared to provide more supporting documents (for e.g. passports, proof of address and source of funds for certain persons) to their lawyers in order for their lawyers to adequately discharge their legal obligations. The lawyers are not allowed to start work before they have adequately discharged their legal obligations in relation to customer due diligence. Therefore the obvious effect is that conveyancing fees and time-frames to complete transactions will likely increase due to more work being required.
If you are buying a property with a short settlement time-frame, I would suggest engaging with your lawyer early to get ‘pre-cleared’ so that any such issues can be dealt with and delays to settlement can be avoided.
Under the “increasing housing on residential land” test, overseas persons could purchase residential land if it was used to increase the supply of housing. Properties built on land purchased under this pathway must not be lived in by the owner, and generally must be on-sold once they are completed.
Developers of large multi-storey apartment buildings of 20 or more units can apply for an exemption to sell a percentage of the units to overseas buyers “off the plans”, without the need for consent or the requirement to on-sell once the unit is complete. However, buyers would not be allowed to occupy the units themselves. There will be an amendable threshold (initial threshold of 60 percent) of percentage of units per development that could be sold in this manner to overseas buyers.
The impact of such a recommendation (if adopted) remains to be seen. There are many factors that go into play when considering a development project, including the general availability of financing and the market conditions.
At least the on-selling requirement of the originally proposed bill has now been slightly relaxed and this would likely re-attract some interest from offshore investors who would otherwise be deterred by the original on-selling requirements (which were tougher than in Australia). Given that units purchased by overseas buyers will be investment properties, it should also increase the supply of rental housing. Deterring these overseas investors would have prevented the growth of housing supply, and therefore likely put pressure on rental prices.
The Amendment Act will come into force on 22 October 2018. In terms of the actual consent process, cost and timings, these are set out in Schedule 2 of the Regulations. The starting cost for an application (for individuals) to apply for consent to buy residential land (under the commitment to reside in New Zealand test) is NZ$2040. This is excluding any legal fees that may be necessarily in such an application. Not cheap indeed!
If you are buying a property together with your partner and at least one of you is eligible to buy, you can purchase the property.
Other than as already discussed above, the pool of potential buyers will likely shrink a little if all goes according to Labour’s plan. At the very least, there will be more hurdles for non-New Zealand citizens to overcome when buying. This would necessarily mean that all sellers will face a higher risk of deals falling over and cannot take for granted that OIO consent for the buyer is not required (as is the case now for most residential properties in the Eastern Suburbs).
Overseas buyers (under the Amendment Act) may also include conditions relating to OIO consent in their offers, and therefore expect to offer more when competing with other buyers who do not require such consent. Banks will also attach conditions to their pre-approvals which the borrowers (i.e. buyers) have to satisfy in relation to their status under the new rules.
There may also be flow-on effects on auction clearance rates as the pool of buyers who can buy unconditionally at auctions will likely shrink. This may have effects on the auction clearance rates (read more here about Auctions vs Set Date of Sale in this market)
However, given that the indication of presence of foreign buyers in New Zealand is 3% (according to Statistics New Zealand), the exact effect on prices remains to be seen, given ongoing high demand and restricted supply, especially for desirable suburbs in the Eastern Bays.
If there are any plans to sell in the near future (i.e. within the year or so), sellers should consider whether selling now or in the next few months will adequately meet their other objectives. In the greater scheme of things, however, the OIA changes should not factor too high on considering whether or not to list and sell. The personal motivations for selling remain key and choosing a competent real estate agent to advise on marketing make a difference.
Owners of existing homes (which would be classed as “sensitive” under the Amendment Act) will not be affected as the Amendment Act is not retrospective. Therefore existing ‘foreign owners’ of residential property will not be forced to sell their property once the legislative changes are in force. However, they would face the new restrictions should they choose to buy again. This would likely suggest that these owners will not readily sell (unless they are required to under their own circumstances) and the houses available for sale on the market will likely decrease. This should provide a countervailing support for housing prices if the possible pool of buyers shrink.
Unless interest rates in New Zealand head upwards (and there does not seem to be any sign of that at this point in time) or there is some external adverse economic event, the holding power of owners remains strong.
The first thing to consider is whether the legislative changes will directly affect you. If you are a New Zealand citizen, then this does not matter.
This is especially so if you are a returning Permanent Resident and cannot fulfil the minimum residency requirement of 12 months and present in New Zealand for 183 days prior. We find many such buyers in the popular suburbs such as Glendowie and St Heliers in the Eastern Bays, given the good school zones and beach lifestyles. If so, then you should consider:
If you need consent, you can find out more information about the application process and apply for consent here. According to the Overseas Investment Office, simple consents could take up to 10 working days to be granted. The fee for individuals is $2040.
You may think that holding out for cheaper prices in the future will be a better move. Historically, housing prices have increased over a long horizon and nominal prices have increased faster than consumer prices. Although past performance is certainly no guarantee of future gains, if the right property comes along and you are financially equipped to hold it over a long period, then it may be a good idea to start making those offers. Even if you have not purchased at the absolute bottom of the market, you would still have gained utility from purchasing and building your own home, and equity at the same time. There remains strong demand for housing in New Zealand (see for example the strong demand for the recently announced Kiwibuild, which has high income caps – an indication that the prices of such builds need to cater to Kiwis earning such incomes to prevent a possible oversupply) and buyers remain out in force, albeit more picky, with little market supply.
Please get in touch and I am happy to have a chat over coffee!
(Contact details below)