N.Z opens can of whoop-ass on investors

New Zealand’s new measures give Australia the playbook it needs if it wants to go hard on property investors. Will we follow suit?

Last week New Zealand announced two measures aimed at getting property investors on a leash, and cooling a supposed housing bubble in Auckland.

There’s a lot of angst in the media about a “bubble” in Sydney too. Is NZ showing their cousins across the pond the way of the future?

The first point is that in a lot of ways the NZ property market looks a lot like ours. Definitely in the sense that it’s a bit unbalanced.

Growth is heavily localised in Auckland. NZ’s biggest city is currently growing at a thumping 16.9% a year, and is now 60% above its previous peak in 2008! The rest of NZ however is muddling along on 3.2% a year.

Australia is similar in that sense. Sydney is growing at around 15% a year, Melbourne at around 8%, but everywhere else below 4%.

In a way I think there’s a momentum story here, same as in Sydney. Prices are growing because prices are growing. Investors are attracted to impressive capital growth figures. The more investors come, the more prices rise.

That makes for a hot market. But not necessarily a ‘bubble’.

And that’s the other point. The RBNS acknowledges that there are problems with land release and supply, again, much like Sydney, and you can’t point the finger solely at demand.

Oh, and there’s also a lot of angst about foreign investors driving up prices… out of reach of poor first home buyers. (Sound familiar?)

So there’s more than a few parallels, which makes what’s going on in NZ right now particularly interesting. Australian policy makers will be watching closely.

And what’s going on right now? Well, we had two significant policy pivots from the Reserve Bank of New Zealand, and the New Zealand government last week, both aimed at trying to calm the farm in Auckland.

The governments measures aren’t’ entirely clear yet, and will be fleshed out in more detail in the coming budget. But there seems to be a focus on bringing everyone under the same legislative umbrella.

The new measures will include:

• Providing Inland Revenue with extra funding for compliance and enforcement.
• Requiring non-residents and New Zealanders buying and selling any property other than their main home to provide a New Zealand IRD number.
• Introducing a new “bright line” test to tax gains from residential property sold within two years of purchase, unless it’s the seller’s main home, inherited or transferred in a relationship property settlement.

The changes will be subject to consultation and take effect on 1 October this year. The “bright line” test will apply to properties bought on or after that date…

The first two are sensible enough, and we’ve had a similar story here, with the government only recently giving FIRB and the ATO the tools it needs to monitor and enforce rules around foreign purchases of property.

The last measure is probable most interesting. As PM Key said,

“It is aimed squarely at ensuring that property buyers – including overseas speculators – who buy residential property with the intention of selling for a gain pay their fair share of tax as required by the law…”

‘Overseas speculators’?

The way I understand it, Chinese money is looking for a safe place to hang out. It’s not about flipping properties for profit. So in that sense I don’t think it will have much effect.

But it does say that the government recognises a problem and feels a need to do something about it. Regardless of what they actually do, that should give investors pause for thought.

The RBNZ’s proposals have more meat on the bone and considerably more teeth.

From the press release:

“In response to the growing housing market risk in Auckland, the Reserve Bank is today announcing proposed changes to the loan-to-value ratio (LVR) policy. The policy changes, proposed to take effect from 1 October, will:

• Require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30 percent.
• Retain the existing 10 percent speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80 percent.
• Increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15 percent, to reflect the more subdued housing market conditions outside of Auckland.

The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market.”

The rules don’t affect PPRs or new house construction.

So there’s speed limits on how quickly banks can grow their higher risk mortgage books AND there is now a requirement for investors in Auckland to have a 30% deposit.

If you had to front up 30% to invest in Sydney, would that change how you looked at it?

We already have the speed limits in place here (though not limited to specific cities). They came in December (as APRA guidelines – not quite hard and fast). But then pretty much all the major banks broke the speed limit in the March Quarter.

Banks are scrambling to shore up their capital base to avoid APRA actually slapping legislative shackles on them, but everyone’s eyes are on APRA.

And now this: NZ going hard on investors in a single geographic market.

It’s hard to avoid the conclusion that if you really thought that something needed to be done here (and I’m not convinced that that’s true), but if something needs to be done, then it would be much better to target the problem markets, rather than pulling the handbrake on every market in every city.

And for us, that means Sydney.

NZ has just re-written the playbook, and Australia will be watching closely.

Watch this space.

Is Australia’s market too unbalanced? What do we do about it?

Would a 30% deposit rule slow you down?