Ashley Church: How the Govts housing changes could impact you

by Ashley Church

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Dec 7, 2021

How the goverment housing changes could impact you

If you’re a property investor – the Government’s announcement of a suite of measures to address the housing crisis is something of a non-event – for now.

There’s nothing in the announcements that will immediately benefit you – nor are there any changes that should cause you too much difficulty right now. There are, however, some changes that could affect you in the future and you need to understand these and prepare for them.

So what did the announcement cover? To be honest – not much. Mostly, it was a clumsy mix of justifications of past housing failures mixed with some tinkering on the fringes. There were some good initiatives – particularly the decision to increase income and price caps for those who qualify for the First Home loan scheme, which is long overdue in response to a problem which has been brewing for two or three years. Other worthwhile initiatives include the investment of $3.8 billion in a contestable fund to work with councils to develop the infrastructure required for new housing developments. This is a practical measure that will help to make a real difference. Both of these moves should be applauded.

Sadly, most of the other announcements in the suite of policies are tainted by ideology – particularly in respect of the decision to increase the Bright Line test from five, to ten, years, despite no logical reason for doing so. However, the immediate impact is minimal. If you’re currently a Trader or Flipper you’re already paying tax on your developments, so this won’t affect you – and if you’re an investor, it only affects you if you sell within the new time frame and only applies to properties purchased from the date the policy becomes active. Even so – talk to your accountant to make sure you’re staying within the rules.

However, the impact of that measure pales into insignificance compared to the decision to remove interest deductibility on property investment mortgages. If you’re an existing investor the consequences aren’t immediate – but they could have a huge impact on you 4 or 5 years down the track.

First, let’s understand what this actually means. Contrary to the dishonest language of the Government release – which refers to this as a ‘loophole’ – the ability to treat interest as an expense for tax purposes is an internationally accepted aspect of business tax practice and has been for as long as anyone can remember. If your property has generated $45,000 in rental income and your expenses are $35,000 – your ‘profit’ (the amount on which you pay tax) is the difference, $10,000. The interest paid on an investment mortgage has always been understood to be such an expense – but the effect of this change is that it won’t be in future.

The consequences of this are huge and it could dramatically increase your tax bill over time. Fortunately the change will be gradual with new investors and newly purchased properties being subject to the new rules from 1 October while the changes will be phased in, for existing investors, over the next 4 years. If you’re an existing investor this gives you time to adapt but it also means that you need to talk to your Accountant and your Broker, early, to make sure your portfolio is structured in a way to minimise the impact on you.

It’s not hard to see where all this will lead and, in my opinion, the impact will be disastrous. The need for rentals increases as our population increases and this policy change flies in the face of that truth. Inevitably, for these reasons, this measure will eventually lead to a full blown ‘rental crisis’ characterised by stagnant (or falling) numbers of rental units, a big spike in the cost of renting, and huge pressure on the Government to build even more state houses to ‘fix’ this new housing crisis.

However, by the time this happens we’ll have long since forgotten this announcement and the media and housing advocates will no doubt look for something or someone else to blame for the crisis.

And here’s the saddest truth. Neither this measure, nor any of the others in the Governments announcement, will make the slightest bit of difference to house price inflation which is, supposedly, why they were doing this. Prices will continue to rise and the latest ‘suite of measures’ will become just another footnote to a long list of failed policies.

– Ashley Church is a property commentator for The Fundmaster. Email him at ashley@nzemail.com

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