Some of the coalition Government’s property tax policy changes could have marginally negative impacts on financial stability, the Reserve Bank says.
The central bank highlighted three tax adjustments, which could have an impact on property prices, in its Financial Stability Report published on Wednesday morning.
First, it said restoring interest deductibility for investors in residential property would boost their valuation of existing homes and boost their debt servicing capacity.
This would increase demand for existing properties and presumably push up prices.
Secondly, reducing the brightline period to two years would increase the after-tax profits earned by investors selling properties within the period.
“This could increase speculative housing activity at the margin,” the Reserve Bank said.
It could also prompt investors struggling with debt-servicing costs to sell their properties now, instead of waiting out the 10 year taxable period.
While house prices were within the sustainable range, increased investor activity from these tax policy changes posed a risk that prices could rise above sustainable levels.
Chlöe Swarbrick, co-leader of the Green Party, said the report made it clear the Government’s tax decisions were increasing house prices and “lining the pockets of speculators”.
Strong population growth and potentially lower mortgage rates were also cited as potential drivers of higher house prices, with fewer new homes likely to be built going forward.
The Reserve Bank said the supply of new housing would slow once developers completed their existing projects, despite growing demand for rental properties.
Amid economic uncertainty and reduced borrowing capacity, buyers were preferring to purchase existing properties rather than buy new builds off the plans.
“As a result, many developers are finding it difficult to achieve the levels of pre-sales required by banks to finance new projects,” the central bank said.
Watching commercial property
The Reserve Bank singled out the commercial property sector as being particularly troubled in the high interest rate economy.
While this sector is a key source of risk overseas, it only makes up about 8% of bank lending in New Zealand. The vast majority of lending is related to residential housing.
That said, commercial property has been struggling with weaker demand for office and retail space after the pandemic and now because of the broader economic slowdown.
Rising unemployment and soft consumer spending means businesses are less likely to need additional office space or want to open a new retail store.
The RBNZ said the economic slowdown was the key risk to the sector, but the Coalition’s plan to remove the depreciation tax reduction could add to existing cash flow pressures.
Finance Minister Nicola Willis said removing the “one-off changes” made to depreciation during the pandemic was a key part of the tax package.
“That provides us a significant source of funding for personal income tax reduction, that’s the policy we campaigned on and reflects our priority of giving working people a better deal”.
Both National and Labour campaigned on removing the depreciation tax benefit from commercial property owners as a way to raise about $525 million a year in revenue.
There has been a long-running debate about whether commercial property depreciates in the same way as other physical assets do. While buildings depreciate, land values often increase.
Depreciation claims were removed by National in 2010 but were brought back by Labour in 2020 as a form of fiscal support for commercial property owners during the pandemic.
It was originally intended to be a permanent measure but it was picked up by politicians as an easy source of revenue to fund more popular policies — such as tax cuts.
Helen Johnson, a legal partner at PWC, said getting rid of depreciation contradicted the recommendations of the 2018 Tax Working group and created uncertainty for investors.
“Many decisions made since 2020 to strengthen, upgrade, develop or acquire commercial property, will have factored in depreciation deductions and, should the changes be made, marginal investments may now be at risk,” she wrote late last year.
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