Property market shakeup: incoming changes and what they mean for you
With surging property prices, the government and the Reserve Bank of New Zealand (RBNZ) are looking to cool the market in 2021 with a number of new regulations (previously mentioned in an earlier blog).
Luke Jackson, Head of Resimac NZ, believes these changes will create rapid shifts in the property landscape for owner occupiers, property investors and first-time buyers alike. However, buyers still have plenty of opportunities in this market if they know where to look. Here's what you need to know.
Changes to loan-to-value ratio (LVR) rules
In March, the RBNZ re-introduced loan-to-value-ratio restrictions requiring most owner-occupier borrowers to have a minimum 20 per cent deposit in order to qualify for a home loan. Under the same rules, only 20 per cent of all owner-occupied loans provided by a financial institution can be worth more than 80 per cent of the value of the property they cover.
Further, it announced that investors would require a deposit of at least 40 per cent from May.
Luke says the changes are a return to normality post-pandemic, reflecting existing regulation that was in place prior to 2020.
"The removal of LVR restrictions during COVID-19 really helped push the housing market along and kept the economy going last year," says Luke.
"The Reserve Bank is now looking to reinstate those rules to combat the housing affordability issue by dampening demand to make sure it doesn't outstrip supply. However, those looking to buy property shouldn't be discouraged; there are still plenty of options available to Kiwis."
Significant tax changes for investors
Another initiative the government has introduced to slow the market is removing the ability to claim interest as a tax deduction on investment properties. The bright-line test (the rule that determines whether a vendor must pay capital gains tax on the sale of property) has also been extended from five to ten years.
"For investors with a rental property, removing interest as a tax-deductible expense will have a huge impact on the cost of keeping an investment property each year," says Luke.
"Even though the rule will be phased in over four years, this initiative will have a material impact on investors from the outset, and some may need to reassess their position."
If you're considering buying an investment property for the first time, this will need to be factored into your budget when calculating costs and your expected returns.
"This might not be a problem for seasoned investors with larger portfolios, but it could change how others approach buying their first investment, for example."
Alternative avenues for first time buyers
With tighter LVRs and fewer tax breaks for investors, the flow on effect is likely to impact first time buyers who are currently renting on two fronts.
As investors pass the additional costs on, those who are renting and saving for a first home may have less money to put away for their deposit. With the minimum deposit now increased to 20%, they may also need to save more than they originally budgeted for.
"With higher deposits required, buying a house may be out of reach for many people's budgets," says Luke.
But Luke says that all is not lost for those looking to break into the market, with new pathways like shared ownership programs or specialist mortgage products offering more tailored solutions than larger institutions.
"If you're a first home buyer, my advice is to explore new schemes and structures that offer real solutions, and don't discount them just because they're not the traditional way of doing things," says Luke.
Exemptions to the new regulations
With the government looking to grow new suburban areas, newly built homes will be exempt from the LVR requirements and tax initiatives introduced this year.
As a result, these areas have potential for first home buyers as well as new investors. However, Luke says these exemptions may not be available with every lender.
"Other lenders may decide to apply the LVR rules across all mortgage applications, regardless of whether it's a new build or not," Luke says.
"Resimac, which evaluates loan applications on a case-by-case basis, has the ability to apply LVR exemptions where appropriate, giving you more opportunity and flexibility when buying," says Luke.
"Although increased competition may lead to an increase in prices for newly built homes, this is a good place to start if you're looking to buy this year."
Financial advisers will be more important than ever before
Gaining the right advice will become increasingly important in this ever-changing environment.
"Speaking to a financial advisor can be a worthy investment. A good advisor can offer you tailored advice that is in your best interests and is based on your financial situation. And can help you keep abreast of the changing regulations and what they mean for you.
"Moreover, a financial adviser can help you set realistic financial goals and recommend the right strategies for you so that you feel more confident and on track with achieving your financial targets."
"And you can always talk to the Resimac team about what products will help you accomplish your property goals," says Luke.
If you have any queries or want to chat more about the features of your loan, our Customer Care experts are on hand to help. Please contact Customer Care via firstname.lastname@example.org.
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Resimac. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from a finance professional before implementing changes relating to your finances.