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Government Policy Effects

There could be ‘speed bumps ahead’ for the highly- leveraged investor, writes John Bolton.

By: John Bolton

1 May 2021

The big news for the housing market that’s been hard to ignore is the removal of interest deductibility. Whatever your point of view, the bigger problem is that a government can impose such a big policy change without analysing the downstream impact on the economy. For any government, or any business for that matter, this is simply reckless.

The Ultra-Rich Own Commercial Property And Land Banks

They don’t buy residential houses and they definitely don’t buy residential properties given the added burden of Healthy Homes or tenant-friendly law. And whilst it set out to burn effigies of cardigan-wearing property investors, the Government’s housing policy still didn’t address the fundamental issue of affordability. Roughly half of our population cannot afford to buy a house, and nothing from the announcement changes that.

For a number of small investors, the cash flow impact will be too high for them to manage and they will eventually be forced to sell properties. In the short term, they will stop buying and that will reduce competition with first home buyers. In the medium term they will start selling and there will be even less buyers. This will unquestionably impact on the rental part of the market. Less buyers and less competition for houses will reduce prices, or at the very least reduce price pressure. First home buyers (that can afford to buy) simply won’t exist in many locations in big enough numbers.

There Is Also The Impact Of Bank Credit Policy To Consider

Banks assess affordability on pre-tax rental income whereas going forward they will need to assess on post-tax income (effectively 33% less rental income). This is likely to tip the majority of investors into “negative-servicing” which has a multitude of impacts.

Less investors will be able to buy based on changing servicing calculators. When selling properties with negative servicing, the banks are likely to take full proceeds of sale to reduce debt. That’s fine as long as the funds were not required elsewhere.

A large number of New Zealand small business owners are property investors, so a cash flow crunch on property investors is actually a cash flow crunch on small business. The unintended consequences of a rushed policy.

The Saving Grace For Investors Right Now, Is Very Low Interest Rates

Most long-term investment property is already cash flow positive due to increasing rents, higher prices and extraordinarily low mortgage rates. And that is a strong mitigant againstany larger negative impact on the property market.

What it does mean is that the Reserve Bank is now likely to keep interest rates low for longer. Long-term wholesale rates fell recently as the market started digesting the policy implications. Don’t feel compelled to rush out and fix for too long.

The new housing policy will also take the pressure off LVR (loan-to-value) restrictions, so I’m expecting to see these ease up again as heat dissipates from the market. The Government applying a fiscal “tax” tool will take the pressure off our Reserve Bank having to carry the burden through macro- prudential tools.

However, there will still be a shortage of property in good locations. A lot of the price pressure in these locations has come from developers looking to build infill terraced housing who have been incorrectly labelled as property investors. We are likely to see a continuation of this trend especially with the tax distortion towards building new terraced houses.

I have an inkling that the new policy is going to create as many problems as it solves. If you’re wanting to buy in a desirable part of any city, I wouldn’t hold my breath that prices will fall.

If you are a highly-leveraged property investor, tread carefully and don’t put your head in the sand. There are undoubtedly speed bumps ahead.

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