Impact on homeowners
This rule will have no direct impact on homeowners (i.e. main home) / mixed used assets (for e.g. bach owners) as these are exempted from the proposed legislation. Under the proposed ring-fencing rules, a property would qualify as a person’s main home for a particular income year if it was used predominantly as their main home for most of that year. This includes a home owned by a trust subject to certain legal requirements.
In any case, homeowners generally cannot claim any deductions against their family home under existing tax rules.
Impact on sellers
If you are selling:
- properties intended for owner-occupation without any development potential: ringfencing rules are unlikely to have any effect
- investment properties without development potential (for e.g. units): ringfencing rules are likely to have an adverse effect on buyers’ interest, and therefore final sale price. Consider sprucing it up to cater to a wider (owner-occupier) audience.
- investment properties with development potential: ringfencing rules may have an adverse effect depending on the type of development that can be built on such land.
Impact on buyers
For buyers who are buying properties for owner-occupation, this rule will have no direct effect. As above, homeowners generally cannot claim any deductions against their family home.
Impact on ‘buy and hold’ investors
This rule would likely have a greater effect on those who are buying Auckland properties for investment purposes and thus affecting sellers who are putting such properties onto the market. In the past, investors were willing to buy a property even though the rental income did not fully cover the mortgage and other expenses (especially in an affluent area such as the Eastern Bays) for the following reasons:
- they were speculating that capital gains in the future would make the negative cashflow worth it.
- all losses resulting from the rental property could be deducted against one’s income, thereby reducing the burden of negative cashflow.
With the introduction of this rule and the general market stabilising rather than booming, there may be less Auckland investors who are willing to purchase such investment properties going forward.
But investors remained active in the residential property market in November, according to the latest CoreLogic Buyer Classification data. This shows that “they are not yet deterred by government measures” (it could well be that in November, the detailed ringfencing rules were not yet published). 25% of November’s residential property purchases across New Zealand were made by multiple property owners with a mortgage (mortgaged investors). It would certainly be interesting to see the future breakdown for Auckland investors.
As mentioned, the greatest impact will probably be on investors currently holding onto negatively geared properties, especially if they were bought recently in the Eastern Bays and Remuera where yields are frequently below 3%.
Therefore, as an investor, if you are in such a situation, you should
- look hard at ways to increase yield
- consider carrying out all your maintenance (such as painting and sprucing up your bathroom etc) before the proposed 1 April 2019 commencement date of these rules.
For (1), you can potentially increase yield by:
- subdividing and building another house to collect more rent
- renovating the house to potentially obtain more rent (but be really careful about over-capitalising)
- creating more rooms by either making an addition bedroom, converting the garage into a sleepout or converting basement into bedrooms (subject to consents)
Yields can also be increased by reviewing the rent to ensure that it is in line with the current market and/or potentially breaking the mortgage to achieve lower rates. Talk to a mortgage broker who can conduct a specialised portfolio review.
Impact on developers
The proposed rules will not apply to land that is identified to Inland Revenue as being taxable on sale. This would include land held in dealing, development, subdivision, and building businesses, and land that was bought with the intention of resale.
However, some consideration will necessarily need to be made as to the potentially reduced buyer pool. If a view is taken that some property investors (especially the more recent ones) will be discouraged from investing in properties, then certain developments (for e.g. terraced housing or mass apartments) may be riskier as the buyer pool has just shrunk. Luxury developments meant for owner-occupation will, however, be unlikely to be affected.