Property investors make up asignificant share of buyers in the NZ residential housing market, creating competition for first-home buyers. In an effort to“tilt the balance”, the Government unveiled its plan on March 23 to help first home buyers into the market. With a strong focus on turning down the heat in the market, two key changes were announced to reduce investor interest.

1. The bright-line test has been extended to 10 years. This means that any gains made from selling an investment property purchased on or after March 27, 2021 and sold within 10 years of purchase will encounter an effective capital gains tax.

2. The Government will remove the ability for property investors to deduct loan interest progressively over the next four years. This change is not being applied to new builds.

Following the announcement, we spoke to Quinovic Principals Simon Tavendale of Quinovic Palmerston North, David Graham of Quinovic Viaduct and Tessa Keeling of Quinovic Riccarton about the Government’s plan and the impact on the rental industry. Here are three key actions that property investors can take
to prepare for these changes.

1. Assess Your Investment Portfolio As A Whole

First and foremost, it’s essential that investors determine whether they are able to sustain the negative impact on cash flow. Simon noted that this will be “particularly onerous considering provisional tax rules, which mean investors will be required to make tax payments on paper profits earlier than they realise”.

The impact of these changes also varies between different locations and investment portfolios.

Tessa points out, “Investors who have borrowed significantly to purchase an investment property will be most affected.”

This is because the extra tax is more likely to be significant enough to deter them from purchasing further investment property. However, investors in areas that have comparatively reasonable housing prices, like Christchurch, are less likely to have borrowed so much and be dissuaded by the extra tax.

“Similarly, this will be more of a problem for investors with a larger portfolio as they have often leveraged heavily against existing properties to raise capital for the next investment property.”

When assessing your investment portfolio, it’s also important that you consult with a tax professional to fully understand tax implications for your situation.

2. Engage A Professional Property Manager

The need for professional advice is stronger than ever. As Tessa explains,

“It will be even more important for investors to form a strong, trustworthy relationship with a property manager so that we can advise them as to what makes a good rental before they buy.”

In fact, David has already seen a sharp increase in owners seeking out professional property managers and a rise in referrals from lawyers, accountants, financial advisers and real estate agents. Describing the feeling in the market, he says,

“Most feel that they are losing control over their investment decision, which makes property seem to be a little bit riskier.”

It’s possible that some owners will look to recover the additional tax costs by increasing rents. For property owners, it can feel like a minefield of legislative rules and regulations and extra costs.

“It’s a business now, so owners need to get the right advice from professionals they trust and make sure their team understands their investment goals.”

3. Clarify Your Investment Goals

In Simon’s experience,

“most clients are long-term investors and have a view to hold for more than ten years,”

a sentiment echoed by Tessa and David. As a result, the extension of the brightline test has not been a huge cause for concern amongst their clients. However, the new tax rules will make it more difficult for first-time investors with lower equity, investors with larger portfolios who have borrowed heavily, and people who are looking to invest and retire within ten years.

It’s essential that anyone who has invested or is looking to invest in residential property is very clear on
their goals and what is realistic. This is yet another reason why it’s important to build a team of trusted advisers who can help you consider your options and advise you on the best path for your
specific situation. Property investment is not a game of “set and forget”, and these changes makethat more apparent than ever before.

Quinovic’s outstanding people and systems provide the most professional, effective and reliable residential property management service in the NZ market for over 30 years. www.quinovic.co.nz