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Tony Alexander’s latest comments on investing in housing

By Bob Mountfort

Investors have just received the good news that they don’t need to worry so much about costs associated with contamination from meth smoking any longer – pity about those caught out by the poor science last year. Y2K anyone?

Overall though factors affecting investors are for now falling on the negative side with more to come. The brightline test has already been extended from two years to five years and in all probability the government will introduce a full-blown capital gains tax (which should in theory also target farms and businesses) if they get re-elected in 2020.

The Healthy Homes Guarantee Act has set new minimum standards for heating and insulation which landlords must meet within the next five years.

The fast price appreciation part of the house price cycle has ended in Auckland and will do so elsewhere as this year proceeds. Interest rates for fixed rate debt may rise slightly later this year and through 2019. We’ll see – most interest rate forecasts globally have been wrong since 2008. Net immigration flows are slowly easing off. Construction is slowly picking up.

At some stage, possibly with progressive introduction from 2019-20, ring-fencing will occur for any losses an investor may make in a year from a property. That is, losses will not be able to be reduced by the amount of one’s personal income tax rate by offsetting said loss against other income from the likes of wages and salaries. No more negative gearing.

That will have an immediate cash flow impact for some for sure. But the losses under ring-fencing will be able to be carried forward and if and when properties move to a positive cash flow position the tax bill will be reduced then.

For investors this simply means provision will need to be made for slightly greater net cash outflows each year until profit from the investment appears. Investors with a good job may well be able to handle this. Those on lower incomes and with a more tenuous employment profile however will be less able to carry themselves safely through a period of income loss and it is probably primarily these types of people who will be locked out of property investment as a means of generating an extra retirement asset when the ring-fencing change comes along.

Established investors will likely be fine. New investors however will be mainly affected.

There is another angle to consider here which suggests any price/selling impact from the introduction of ring fencing will be very limited if noticeable at all. Since July 2016 new purchasers of investment property have had to have a 40% deposit (since January this year 35%). This means that for two years now new buyers have locked themselves into far smaller interest bills than earlier buyers. This means a structural shift has occurred downward in the proportion of new investors who will be running losses.

By the time ring fencing comes in there will be far fewer investors running net negative cash positions than existed two years ago and exist now. Of course we have no solid information on what proportion of investors are in this position.

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Tony Alexander is the Chief Economist at the Bank of New Zealand.  The above is an excerpt of Tony’s Weekly Overview of 14 June.

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