Header Ad Module

Collapse

Announcement

Collapse
No announcement yet.

Leaked from government

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Leaked from government

    "Purpose
    1. We understand that the Minister of Finance is considering a range of options to moderate house price growth while enabling higher levels of home ownership and improving rental outcomes. Speculative investor activity has been identified as a concern, and some of these options include changing tax settings to disincentivise property investment.
    2. You have asked for advice on the possible impacts on existing housing stock and tenants of potential changes to the treatment of rental properties for investors, namely: a. Extending the bright line period: disincentivise short-term property speculation b. Limiting interest-only mortgages: increase the level of repayments for investors (i.e. require principal repayments) c. Removing deductibility of mortgage interest: increase investors’ tax liability (or reduce losses) d. Temporary rent control: reduce flow on impact to renters of any increased costs or decreased returns to property investors (measures which could be implemented “if needed” to mitigate impacts on rents from a.- c. above).
    3. At this point we understand that Ministers have not made decisions about whether all of the above measures would be implemented as a package (with a cumulative impact), or whether individual measures would be selected. Decisions on detailed design (for example the extent of grandparenting) have also not yet been taken but will be significant even if only a limited number of individual measures are implemented. Executive Summary
    4. On 4 December we provided you with a potential package of options to increase housing supply and improve affordability over the short-term. The options focused on:
    a. Increasing supply (across all types of housing tenures and price points)
    b. Reducing the rate of property and rental price increases
    c. Improving outcomes for households who rent
    d. Enabling first home buyers to better compete in the market
    e. Having an initial impact in the next 12 – 18 months, particularly in terms of reducing expectations of significant future house price gains.
    f. Appropriately targeting the specific constraints and impediments in different priority places (e.g. there are differences between main urban centres and regional centres, and
    between different places)
    5. We note that while the measures being considered by the Minister of Finance will potentially
    reduce the rate of property price increases (including by avoiding further speculation on
    existing properties), and could benefit first home buyers, they would not increase supply. In
    addition, if these measures apply to existing housing stock, they could have a negative impact
    on the households who rent these properties, particularly those on lower incomes.
    6. Te Tūāpapa Kura Kāinga – Ministry of Housing and Urban Development (HUD) supports
    measures that:
    a. act as a deterrent to investors buying current housing stock, and
    b. that channel housing investment towards new rental supply.
    7. This paper focuses on the potential impacts of the proposed changes if they were to apply to
    existing landlords, and by extension, tenants. We are particularly focused on the impacts on
    lower-income tenants who are not in a position to purchase a property. At least 75% of current
    tenants cannot afford to buy a home and this is unlikely to change even with a 10-20% price
    drop given the increase in the last 12 months.
    8. The potential changes to the treatment of rental properties could impose additional costs on
    existing property investors. This may result in some of these property investors choosing to
    sell. Investors may also make other choices to offset the costs, such as raising rents (but this
    would be moderated by the ability of renters to pay and any potential rent controls), lowering
    maintenance costs, or moving the property to the short-term rental market (e.g. AirBnB).
    9. If investors choose to sell, sales to first home buyers could increase. We note, however, that
    only some current renters are in a position to become first home buyers. Based on the Housing
    Affordability Measure, a generous estimate is that up to 25% of renters could afford mortgage
    repayments, however many of this cohort may not be able to save a deposit. There are also
    regional variations in affordability.
    10. Evidence shows that first home buyers are more likely to buy homes in the bottom half of the
    market, which may further reduce rental stock at the lower end of the market.
    11. Where an existing landlord chooses to sell, the existing tenants are likely to be displaced,
    either immediately if the landlord gives notice prior to the sale, or subsequently if the sale is to
    an owner occupier. This risk could be partly mitigated if the Residential Tenancies Act 1986 was
    amended to prohibit termination of a tenancy if a landlord intends to sell, but would only be a
    temporary reprieve if the sale is to an owner-occupier.
    12. Rental “churn” imposes substantial costs on renters (e.g. moving costs, new bond, rent in
    advance), particularly those who are not currently capable of becoming homeowners. At the
    lower end of the market, the churn increases the risk that households may need to rely on
    transitional housing or emergency housing special needs grants, or increase the numbers of
    the public housing register. Moving costs also negatively impact the finances of those that are
    saving for a deposit.
    13. If Ministers choose to proceed with one or more of these options, HUD recommends that
    extending the bright line test will have the fewest consequences on tenants, as it focuses on
    disincentivising future short term speculation, rather than causing potential churn in the existing
    rental market.
    14. HUD would also recommend that any other changes (e.g. limiting interest-only loans, removing
    deductibility of mortgage interest) do not apply to investment in new builds, or to currently
    owned rental properties. We would recommend, however that they apply to short-term holiday
    accommodation, to disincentivise shifting property from long-term to short-term rental e.g.
    AirBnB.
    15. The Treasury have also recommended further advice be provided to Ministers on other
    measures to reduce demand in the housing market, including a deemed rate of return method
    for taxing investment properties and a stamp duty. We note that the impact of these measures
    on current and future property investment should be assessed, given the potential downstream
    impacts on existing renters and new supply.
    16. We will be reporting to you on HUD’s recommended package of measures in more detail in
    January 2021, including further advice that you have requested on rent control.
    Property investors vary in their portfolio size, length of investment and levels
    of equity or debt
    17. Property investors vary in the number of properties they own, the length of time properties have
    been held and the levels of equity or debt. Depending on their circumstances, proposed
    changes will affect property investors differently.
    18. Purchasers owning multiple properties have made up between 35%-40% of property
    purchases over the last decade (by comparison first home buyers have bought 24% of
    properties in 2020). Multiple property owners with between 2-4 properties (which normally
    includes their main home) make up more than half of these purchases, with fewer than 15% of
    purchasers owning 10 properties or more.1

    19. Approximately 20% of current private rentals have been purchased in the last two years.
    20. We do not have detailed information on investor portfolios and levels of equity or debt but do
    know that:
    a. Longer term investors are unlikely to have high debt and may have significant cashflow
    from their properties:
    i. Our analysis of rental bonds and residential sales suggests the median holding time
    for investors is around 7 years, which is comparable to owner occupiers. Long-term
    investors will also have earned significant capital gains.
    ii. Loan to value restrictions will have limited debt in recent years.
    iii. The 63% of property investors (182,219 taxpayers) reporting rental profits to IRD
    have an average profit of $14,000.
    b. Some investors will have substantial debt and will be in a negative cashflow position:
    i. The 37% of property investors (107,530 taxpayers) reporting rental losses to IRD
    have an average loss of almost $9,000. Most allowable deductions reflect real cash
    costs to investors e.g. insurance, body corporate fees, maintenance.
    ii. New borrowing by investors has trended up over the last 5 years.
    c. The greatest change in behaviour is likely to come from investors who are less able to
    absorb additional costs, although we expect most landlords may consider increasing
    rents (discussed further in paragraph 24). These investors are likely to have entered the
    market recently, and/or be in a tax loss position, and/or have a smaller number of
    properties.
    21. For illustrative purposes removing the deductibility of mortgage interest and/or limiting interest-
    only mortgages could affect a recent investor in the following ways:
    a. Denial of interest deduction: assuming a mortgage of $500,000, which is around 70%
    of the national median sale price2
    , at an interest rate of 2.5% would have interest costs of
    $12,500 per annum. Denying all interest deductions would add a cost of $4,125 at a
    marginal tax rate of 33%3
    .
    b. Limiting interest only mortgage: assuming the same mortgage, moving from an
    interest only mortgage would add principal repayments of $11,200 per annum. By
    comparison the median rent for new bonds lodged over the last 12 months was $470 per
    week, or $24,440 per annum.4

    22. The number of investors who might be impacted by these potential changes includes:
    a. Approximately 20% of current private rentals have been purchased in the last two years.
    Half have been bought by small investors (less than 4 properties).
    b. Just over one third of investors are in a tax loss position and may need to meet increased
    costs from other income sources.
    There are a number of actions investors might take in response to these
    changes
    23. Depending on their circumstances, proposed changes will affect property investors differently.
    Possible responses include:
    a. Increasing rent to cover additional costs
    b. Taking their property out of the rental market
    c. Reducing costs by lowering maintenance
    d. Selling one or more properties.
    Increasing the rent to cover additional costs
    24. Property investors will weigh up their willingness and ability to pay for any increased up-front
    costs against the returns to the investment, including rents and untaxed capital gains. It is
    unlikely that investors will be able to fully pass on additional costs through increased rents.
    Stressed renters are already at the limit of what they pay and may respond through sharing
    housing costs and crowding. Rising rents can also lead to more well-off renters opting to buy,
    subject to being able to raise a deposit, or paying higher rent to secure properties. Both factors
    would limit the extent rents can be increased.
    Investors may take their properties out of the rental market
    25. Prior to COVID-19 in many holiday location investors had strong incentives to shift properties to
    the short-term holiday accommodation market. The extent of the impact is unclear, but certainly
    contributed to an underlying shortage of rental accommodation in some locations (for example
    Rotorua, Queenstown and Hastings).
    26. Listings on short term holiday accommodation platforms have declined this year and revenues
    remain low compared to the same time last year. While the risk of leakage to the holiday rental
    market is low at this point, this risk will increase once borders reopen and tourism levels
    recover. For this reason, proposed changes should also apply to short-term holiday
    accommodation, if they apply to rentals, to ensure landlords are not incentivised to take
    properties out of the rental market. In practice, however, it may be difficult to amend the law to
    clearly distinguish between AirBnB-type properties and some other more traditional holiday
    accommodation (e.g. traditional B&Bs or motels).
    27. We do not believe there is a high risk that properties will be left vacant. Forgone rent would
    exceed costs of the proposed changes.
    Investors could look to save costs by lowering maintenance costs
    28. A further potential unintended consequence of increasing the costs to property investors is that
    they reduce expenditure on maintaining their properties. It is difficult to quantify this risk, and
    we note that this is more likely on the margins, and with landlords who are unaware, or
    unconcerned about compliance.
    29. A baseline survey that will track compliance with the healthy homes standards found that 93%
    of landlords had heard of the standards, and 77% had done some things to prepare their
    properties to meet the standards. Around 40% displayed strong commitment to meet the
    standards. Eight percent were described as “difficult” or in “denial”.
    30. Compliance activity by Tenancy Services could address this, but remains a small function
    relative to the size of the rental market.
    Investors could sell one or more properties
    31. Lower expected returns and higher costs will reduce investor demand for housing. This will
    reduce what investors are willing to pay for properties and lead to some divestment. Investors
    who are unable to cover increased costs from other income sources are more likely to sell.
    Some landlords are currently considering selling one or more properties
    32. Two recent surveys of landlords have found around 20% are seriously considering selling one
    or more rental properties in the next 12 months. Key reasons for wanting to sell include recent
    house price rises, freeing up money for their own financial situation, compliance costs or
    Government policy changes, changes to rental laws or new requirements for landlords.
    Would sales of investment properties increase first home buyers into the market?
    33. Only some current renters are in a position to become first home buyers. Based on the
    Housing Affordability Measure, we estimate that up to 25% of renters could buy, subject to the
    ability to save a deposit, and with variations depending on location.
    34. We expect that those investors most likely to exit the market are those with high debt related to
    their investment properties, whether they are investors with one or multiple properties.
    35. However, we won’t see a significant fall in prices if demand from investors with higher levels of
    equity and first home buyers (with deposits) remains strong. The underlying demand drivers for
    these purchasers – low interest rates and high rents are likely to remain unchanged.
    36. Analysis of property sales and current rental bonds suggests that most homes bought by
    investors would be considered by first home buyers. Apartments are the exception, with only
    3% of first home buyers purchasing apartments since January 2019, while they make up
    around 10% of rentals. First home buyers are also more likely to buy homes in the bottom half
    of the market compared to multiple property owners who tend to purchase across all price
    points. First home buyers are also more likely to purchase stand-alone homes (80%) compared
    to investors (67% of rental properties).
    How are tenants impacted when their landlords sells?
    Renters in the private market have variable ability to pay rent and/or move into home
    ownership5
    37. The proportion of New Zealand households that rent has increased from 22.9% in 1991 to
    31.9% in 2018, and just over 1.4 million people make up these households. Most of these
    households (83.5%) rent privately.
    38. Renters are more likely than homeowners to be on lower incomes, and non-partnered. People
    of Pacific, Māori or Asian ethnicity are more likely to be renters than homeowners.
    39. The proportion of households that rent varies across the country, with the highest proportions in
    Gisborne and Auckland (around 40%), and the lowest in Tasman and Marlborough (around 24-
    28%).
    40. Housing costs are a greater burden for renters than for homeowners, when looking at
    proportion of income spent on housing costs.
    41. Renters in the private rental market can be categorised into the following groups6
    :
    a. Potential first home buyers: This group of renters can afford their rent, and have been
    able to save a deposit. Housing in Aotearoa: 2020 reported that in 2018, one fifth of
    renters who had moved in the past five years had become homeowners.
    b. Intermediate housing market: This group of renters can comfortably afford their rent,
    but do not have sufficient disposable income to be able to save a deposit. A report by the
    Building Research Association of New Zealand (BRANZ) in 2015 identified that there
    were 181,500 intermediate households nationally, with 85,400 of these located in
    Auckland.7
    c. “Price takers” and stressed renters: This group of renters (a sub-set of the
    intermediate market) are those who do not qualify for public housing (or qualify but would
    be relatively low priority), but have high rental costs relative to their income. As a general
    indicator, based on the housing cost to income ratio, between 25% and 30% of renters
    paid 40% or more of their income on housing costs over the past ten years, and around
    45% paid 30% or more. At the lower end of this group are “price takers”, who rent at the
    lower end of the market and “take” the lowest price offered, which may or may not be
    affordable. Rental unaffordability is generally greater in places in New Zealand where
    rents are high (eg, Tauranga, Thames-Coromandel, Rotorua, parts of Auckland).
    If a number of landlords choose to sell, the associated “churn” in the rental market can
    impose significant costs on renters
    42. Frequent moves and insecure tenure can affect a household’s wellbeing. Renters in New
    Zealand move more frequently than non-renters and evidence shows that frequent moves can
    be detrimental to health and wellbeing. Research from the Growing Up in New Zealand study
    found that between birth and nine months, “children born into families residing in private rental
    accommodation were the most likely to have experienced early [residential] mobility, with nearly
    1 in 2 (49 percent) having moved at least once, compared to fewer than 1 in 5 experiencing
    mobility if their families were home owners”.8
    Direct costs to renters
    43. From 11 February 2021, landlords who are terminating a tenancy due to the sale of the rental
    property will be required to give 90 days’ notice (for a periodic tenancy).
    44. In the 2018 General Social Survey, just under 30% of tenants were on a fixed term tenancy,
    which cannot be terminated early due to a property sale – although the tenant may have to
    move after the fixed term ends. Other landlords choose to sell a property with their tenants in
    place, even if they are on a periodic tenancy. In those cases, the new owner can either
    continue the tenancy, or give notice if they intend to the move into the property.
    45. The risks to tenants of having to move when a landlord sells could be partly managed by
    amending the Residential Tenancies Act 1986 to remove the ability of a landlord to terminate a
    tenancy when selling. However, this would only give the tenant security of tenure if the property
    sold to another investor, which is not the intention of these proposed tax changes.
    46. For the affected tenants, the search for a new property incurs a number of upfront costs.
    Significant one-off payments include:
    a. payment of advance rent and bond: this can be several thousand dollars comprising up to
    four weeks of rent in advance, plus four weeks rent for a bond payment
    b. moving costs: these will depend on the ability to call on family or friends to help, and size
    and composition of the household.
    47. A tenant’s existing bond can be transferred to a new tenancy, if the new landlord agrees.
    Tenancy Bond services data indicates that around 700 out of 11,000 bonds are transferred
    between tenancies each month. However where this is not possible, renters can wait up to
    three weeks for their bond to be returned after their tenancy ends.
    48. In addition, for an average rental there is likely to be an ongoing increased rent of
    approximately $50 per week. A comparison of weekly rents in Census and Household
    Economic Survey data with Tenancy Bond data indicated an approximate difference of $50 per
    week, indicating the price of new tenancies is set higher than the price for those in existing
    rentals.
    A number of tenancies ending at once causes prices to spike
    49. While the number of houses in the market doesn’t change, evidence shows that a number of
    tenancies changing over at the same time causes spikes in prices. Tenancy Services bond data
    shows that in markets where there are significant numbers of tenancies ending at the same
    time, prices spike over that period (for example in Wellington, where many tenancies change
    over during the summer months).
    50. Consequently, if a significant number of property investors choose to sell, and give notice to
    their tenants, this could increase costs to displaced tenants.
    Some stressed renters may have difficulty finding a property
    51. There is a risk that for some renters in the lower-priced parts of the rental market, that they will
    not be able to find a new rental property at a price they can afford. This could lead to either
    further pressure on emergency special needs grants, transitional and public housing, or to
    overcrowding to enable rent to be affordable.
    52. This risk is greater in the current supply-constrained market, and has much more significant
    long-term costs, both for the individual and for the Government. For example, in the September
    2020 quarter 9,823 households received one or more Emergency Housing Special Needs
    Grants (EHSNG). These households were temporarily unable to access private rentals or one
    of the 3533 Transitional Housing places across the country. In locations such as Gisborne,
    Rotorua and Napier-Hastings EHSNG are high reflecting the underlying tightness in the rental
    market and difficulty in accessing secure affordable rentals when existing tenancies are ended.
    Rent control to counter the risk that investors increase rents to recoup their costs
    53. The Treasury advice noted that rent control measures could be drafted to offset or limit
    negative impacts of adjustments to tax policy changes on rent prices. If the government
    introduces a temporary rent control then this could incentivise more investors to sell, but
    international evidence shows that those that retain rental properties will try to find other ways to
    increase rental income and/or increase rents up as soon as the period of rent control ends."
    Moderator note: Crashy to add in the source.

    Plus some information is also revealed on NZH here
    Last edited by donna; 30-04-2021, 01:00 PM. Reason: crashy to always add in source and put information copied in a quote.

  • #2
    Released, not leaked. Looking forward to seeing HUD advice on rent controls (and more) delivered to Ministers in January 2021.

    Comment


    • #3
      Interesting, despite the acknowledgement that 37% of property investors (107,530 taxpayers) are reporting rental losses to IRD (an average loss of almost $9000), the Government has moved to increase those losses by progressively removing loan interest deductibility.

      You have to wonder how the denial of interest deduction which assuming a mortgage of $500,000 at 2.5% interest adds a further $4000 to the loss - will help rental supply?


      HUD also appear to be advocating an amendment to the Residential Tenancies Act 1986 to prohibit termination of a tenancy if a landlord intends to sell the rental property to another landlord.

      HUD have correctly identified that rents will increase as a result of housing policy changes and that “there is a risk that for some renters in the lower-priced parts of the rental market, that they will not be able to find a new rental property at a price they can afford. This could lead to either further pressure on emergency special needs grants, transitional and public housing, or to overcrowding to enable rent to be affordable.”

      Comment


      • #4
        Originally posted by Sanya View Post
        Interesting, despite the acknowledgement that 37% of property investors (107,530 taxpayers) are reporting rental losses to IRD...
        But isn't that the trick?

        Arrange your finances so that it appears you are making a loss?

        It's just a technical loss.

        Ask yourself, why would anyone really bother running at a loss.



        Last edited by McDuck; 30-04-2021, 01:17 PM.

        Comment


        • #5
          Multi income property I were is at for me, to continue to purchase cashflow is so import moving forward.
          "DEBT BECOMES IRRELEVANT WITH INFLATION".

          Comment


          • #6
            Originally posted by McDuck View Post
            Arrange your finances so that it appears you are making a loss? It's just a technical loss.
            Not really. Most of the “loopholes” are gone. Even HUD believes deductions made by investors represent real cash costs as evidenced in their comment

            “Some investors will have substantial debt and will be in a negative cashflow position. The 37% of property investors (107,530 taxpayers) reporting rental losses to IRD have an average loss of almost $9,000. Most allowable deductions reflect real cash costs to investors e.g. insurance, body corporate fees, maintenance.”

            Real cash costs are actual not technical losses. Further, loses where they do occur are ring-fenced.


            Originally posted by McDuck View Post
            Ask yourself, why would anyone really bother running at a loss.
            Long term reward of course. The reality is that in the short term there may be little or no profit from rent after expenses like mortgage interest, insurance, rates and maintenance are taken into account.

            Experiences and circumstances differ but I routinely hear of investors taking 6-7 years to get to a break even cash flow position. This eventually happens as debt is reduced and rents increase.

            What I feel is quite interesting is that whilst the Government has expressed concern about rental housing shortages and rent affordability – its policy action will make both worse.

            Realising the negative impact on tenants HUD noted “HUD would also recommend that any other changes (e.g. limiting interest-only loans, removing deductibility of mortgage interest) do not apply to investment in new builds, or to currently owned rental properties.”

            Cabinet did not listen.

            Comment


            • #7
              Originally posted by crashy View Post

              Moderator note: Crashy to add in the source.

              Plus some information is also revealed on NZH here

              Here is the source: https://www.hud.govt.nz/assets/News-...s-REDACTED.pdf

              Comment


              • #8
                Originally posted by Sanya View Post
                Not really. Most of the “loopholes” are gone. --
                Long term reward of course..
                The hole is still there.
                Even if you have to throw in a few dollars to make it work.
                That being, " get someone else, (a renter), to pay your mortgage for you"
                While only a few people are playing it, it's OK, but as a national pastime, it needs moderation.
                Last edited by McDuck; 01-05-2021, 06:54 AM.

                Comment


                • #9
                  Originally posted by McDuck View Post

                  The hole is still there.
                  Even if you have to throw in a few dollars to make it work.
                  That being, " get someone else, (a renter), to pay your mortgage for you"
                  While only a few people are playing it, it's OK, but as a national pastime, it needs moderation.

                  If you are just starting out with not much to your name then a 40% deposit on a $700k property is more than a few dollars to make it work.

                  Further, with record low rental yields, expenses typically outweigh income, so more dollars need to be thrown in each month to make it work.

                  I do agree that moderation was required . The clampdown on LVR should have happened late last year. Unfortunately Robertson was sceptical of the link between the Reserve Bank’s money printing and house price inflation.

                  Comment


                  • #10
                    Originally posted by Sanya View Post


                    If you are just starting out with not much to your name then a 40% deposit on a $700k property is more than a few dollars to make it work.
                    True, but don't forget, if the prices keep escalating due to speculator activity, that 700 K becomes 800K ...900K etc etc.


                    Comment


                    • #11
                      Originally posted by McDuck View Post

                      True, but don't forget, if the prices keep escalating due to speculator activity, that 700 K becomes 800K ...900K etc etc.

                      Yes it does, and my opinion will continue to do so.
                      "DEBT BECOMES IRRELEVANT WITH INFLATION".

                      Comment


                      • #12
                        Originally posted by Frezzinghot View Post

                        Yes it does, and my opinion will continue to do so.
                        What do you see as the drivers for on-going house price increases?

                        Comment


                        • #13
                          Originally posted by Sanya View Post

                          What do you see as the drivers for on-going house price increases?
                          greed and the lack of a real alternative.
                          "DEBT BECOMES IRRELEVANT WITH INFLATION".

                          Comment


                          • #14
                            Originally posted by Sanya View Post

                            What do you see as the drivers for on-going house price increases?
                            IMHO.

                            Amount of credit available to be sucked into the housing sector mostly.
                            In other words, how loose monetary policy is.

                            Comment


                            • #15
                              Originally posted by Frezzinghot View Post
                              greed and the lack of a real alternative.
                              Originally posted by McDuck View Post
                              IMHO.

                              Amount of credit available to be sucked into the housing sector mostly.
                              In other words, how loose monetary policy is.
                              I agree with both of you.

                              Data from April could indicate some market cooling, but is that causally linked to policy, seasonality, affordability, supply? Hard to say.
                              Last edited by Sanya; 03-05-2021, 12:34 PM.

                              Comment

                              Working...
                              X