Home Sweet home—A dream in a bubble or not? (Part II)
New tax rules—is the government asking investors to go south? How is the new cash rate going to effect the house prices?
Even as we continue our coverage on the housing issues in Auckland, the government continues to stamp on the land speculators and investment of foreigners in Auckland’s real estate. A new draft is ready to be implemented, which imposes an additional tax (Residential Land Withholding Tax—RLWT) on people indulging themselves in the housing market in Auckland.
In our discussions with the specialist, we understood that the draft, in all probability, will be implemented from October. The draft comes down heavily on the sale of houses, which are to be sold within two years of its purchase. The new set of rules impose additional tax of 33% on the profit margins of the sale and makes it mandatory for foreign investors to hold a New Zealand bank account (in other words, a valid IRD number) in order to purchase a property in New Zealand.
Summary of new RLWT rule
1. Lower of 33% of the gain on the sale or 10% of the actual sale of property to be paid as tax if the property is sold within two years of purchase.
2. Offshore investors to compulsorily have IRD number and an NZ bank account.
3. All the property settlement of the property that occurs on or after October 1, 2015, to come under the new rule.
4. Every foreign investor to be subjected to the Bright-line test.
5. Even if the sale of property is after two years of its purchase, one has to prove that he/she has resided in the property for two years in order to escape RLWT rule.
6. Renting the property before the sale will also not exempt the person from the new tax rule unless he/she has resided in the property for two years at least.
7. Only people exempted from this rule are those who have gained property by inheritance or through legal separation of couples.
There is another addition to the whole system called a bright-line test. This test is basically a supplement to the intention test in the current rule for sale of land. It is to discourage individuals, whose sole intention for the purchase of real estate property is to gain capital by selling it again.
The rule also takes notice of the facts of whether or not a person has lived in the house or property during those two years. It is interesting that it doesn’t take into account that the place has been rented out or has been used by a close family member.
The new draft applies only to residential properties and not to commercial properties. The rule will also be likely to apply to vacant land, which has dwelling on it or is being considered to have a dwelling on it. The land intended for commercial use will not be covered under this rule for now.
So what does this mean to a normal home buyer? Although the call for reducing foreign investment into the real estate market has been longstanding, the government has always downplayed the issue. It would be interesting to see how the market reacts to the new rules.
This move by the government can be seen as clamp down on the real estate property speculators who are considered to be the reason for the rocketing prices of the property in Auckland. Here on, one needs to prove his intentions to the government before buying a residential property.
One bank official, who wishes to remain anonymous, spoke to Indian Weekender and shared an insider’s view about how the demand for buying property has cooled down in recent times in Auckland because of the new rules by the government. The official said, “Because of the new rules on lending and taxing, we have seen a tremendous growth in the real estate sales outside Auckland. Our bank has seen almost a twofold increase in real estate business in terms of lending in last two months in places such as Hamilton and Rotorua. On the other hand, the market has cooled down a lot in Auckland.”
We continue from last week, our interview of Phil Twyford, the spokesperson for housing from Labour party on the housing issue in Auckland.
IWK: So according to you this Auckland real estate market is only a short-term driving force for GDP and not a long-term solution?
Phil Twyford: Yes. As I said, real estate speculation doesn’t generate any exports. We need to be building firms and businesses to come out with products and services that can be sold overseas. .
IWK: Recently there was data that Labour party came out about the investment from China in Auckland’s real estate market. How big is the impact on the current situation in the market?
PT: Now I think there should be greater clarity on the data that we released. It was a sales data from a private real estate agency. What it showed was that 40% of the sales were made to people from Chinese descent. That is all it showed. It is not possible from that data to know if they were citizens or non-residents. We simply made the inference that because Auckland’s Chinese origin population is only nine per cent, we believe the 40% sales to Chinese descent in this case study suggested significant presence of offshore buyers in the market and we still stand by that argument.
IWK: But have you taken into account the number of people from China moving in as long-term residents in New Zealand? Don’t you think it is natural for them to buy houses the phase of life they are in?
PT: If you take Indian population, for example, the number of people coming from India is similar to the number of people coming from China and yet the number of properties purchased by people from India is about the same as the proportion of Indians living in Auckland. And I don’t believe there is a more credible alternative explanation that explains the very large gap between nine and 40%.
It would be impossible to know if those purchases were made by the residents or not unless the government provides transparent data on this. We have been calling out for a publicly searchable register for foreign property ownership. This has been the policy of the governments of Australia, UK, etc. The government here doesn’t want to collect the data and doesn’t want people to know about it. So in the absence of that data, we felt it was necessary for us to have a debate on the issue and that is why raised this issue.
IWK: But isn't this a global phenomenon? Chinese have been investing heavily in many countries such as USA and Canada. How different is the Chinese investment in NZ compared to other countries?
PT: As the Chinese government reforms the economy, it has started to free up the restriction on the movement of capital. There is a big literature on this issue about a very large volume of the private investments from people from China, moving offshore and being invested in assets especially in the Pacific Rim area. Real estate is considered to be a highly desirable category. It is predicted that several trillions of dollars are leaving China for offshore investment for the next five years or so. It is expected that 15 billion dollars are invested in New Zealand’s real estate market. So this is certainly something that is happening around the world which is why Singapore, Malaysia, Australia, etc. are all limiting offshore investment in real estate.
That is actually the same reason why in China, non-residents are not allowed to invest in residential properties in cities such as Hong Kong and Beijing. This is a global phenomenon, which will not go away,s so we have to be able to talk about this publicly. China is a very important part of the new reality of New Zealand as a source of market, investment and migrants and these things are not going to change. We have to manage them right to get best results for New Zealand. Allowing unrestricted money from China or any other place in the world to our tiny little real estate market will have disastrous consequences for people wanting to buy affordable houses.
IWK: Now there seems to be some lending restrictions for housing loans from October. Do you think it is right move or do you think it will be a burden on the common man because this might also increase the rent for people living in Auckland?
PT: Yes. No doubt that loan to value (LTV) restrictions implemented by the reserve bank will make more difficult for first-time buyers and it will make it even difficult for the multiple property owners, as they will have to pay higher deposits. The thing is that the reserve bank is forced into this position. This is because the national government has done nothing meaningful to address the problem.
Reserve bank is worried about the housing bubble and the risk that it poses to the banking sector if the bubble bursts. You saw recently that the standard and poor international credit rating agency downgraded the credit ratings of the banks in New Zealand because of its concern about the risk of being exposed to the bubble. That is why reserve bank is making it more difficult by increasing the deposit required for the loan but to be honest, they are cornered. Reserve bank’s policy is the only move, which is having some impact on the market.
The Governor of the Reserve Bank has this week reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 per cent.
~~~~~~~
Mr Graeme Wheeler, Governor of the Reserve Bank in his statement, said, “Global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices. The US economy continues to expand. Financial markets remain uncertain as to the timing and impact of an expected tightening in US monetary policy.
“Domestically, the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate. Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence. The economy is now growing at an annual rate of around two per cent.
“Several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, the lower interest rates and the depreciation of the New Zealand dollar.
"While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.
“House prices in Auckland continue to increase rapidly and are becoming more unsustainable. Residential construction is increasing in Auckland, but it will take some time to correct the imbalances in the housing market.” “A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2 percent target midpoint. At this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data.”
(Ref: Reserve Bank of New Zealand Monetary Policy Statement )
So is this an indication from the government asking investors to head out and away from Auckland? Are these new taxing and lending rules enough to stop the real estate prices from going up in Auckland? These are the questions that only time can answer. For the time being, though, the government perhaps hopes these measures will bring down foreign investment.
This is an ongoing discussion for the moment and it is going to be rather interesting to watch this space. Indian Weekender will keep its ears close to the pulse of the market. We are also keen to hear from first home buyers and buyers of investment property about their experience in this changing and exciting environment. Write to us on editor@indianweekender.co.nz
New tax rules—is the government asking investors to go south? How is the new cash rate going to effect the house prices?
Even as we continue our coverage on the housing issues in Auckland, the government continues to stamp on the land speculators and investment of foreigners in Auckland’s real...
New tax rules—is the government asking investors to go south? How is the new cash rate going to effect the house prices?
Even as we continue our coverage on the housing issues in Auckland, the government continues to stamp on the land speculators and investment of foreigners in Auckland’s real estate. A new draft is ready to be implemented, which imposes an additional tax (Residential Land Withholding Tax—RLWT) on people indulging themselves in the housing market in Auckland.
In our discussions with the specialist, we understood that the draft, in all probability, will be implemented from October. The draft comes down heavily on the sale of houses, which are to be sold within two years of its purchase. The new set of rules impose additional tax of 33% on the profit margins of the sale and makes it mandatory for foreign investors to hold a New Zealand bank account (in other words, a valid IRD number) in order to purchase a property in New Zealand.
Summary of new RLWT rule
1. Lower of 33% of the gain on the sale or 10% of the actual sale of property to be paid as tax if the property is sold within two years of purchase.
2. Offshore investors to compulsorily have IRD number and an NZ bank account.
3. All the property settlement of the property that occurs on or after October 1, 2015, to come under the new rule.
4. Every foreign investor to be subjected to the Bright-line test.
5. Even if the sale of property is after two years of its purchase, one has to prove that he/she has resided in the property for two years in order to escape RLWT rule.
6. Renting the property before the sale will also not exempt the person from the new tax rule unless he/she has resided in the property for two years at least.
7. Only people exempted from this rule are those who have gained property by inheritance or through legal separation of couples.
There is another addition to the whole system called a bright-line test. This test is basically a supplement to the intention test in the current rule for sale of land. It is to discourage individuals, whose sole intention for the purchase of real estate property is to gain capital by selling it again.
The rule also takes notice of the facts of whether or not a person has lived in the house or property during those two years. It is interesting that it doesn’t take into account that the place has been rented out or has been used by a close family member.
The new draft applies only to residential properties and not to commercial properties. The rule will also be likely to apply to vacant land, which has dwelling on it or is being considered to have a dwelling on it. The land intended for commercial use will not be covered under this rule for now.
So what does this mean to a normal home buyer? Although the call for reducing foreign investment into the real estate market has been longstanding, the government has always downplayed the issue. It would be interesting to see how the market reacts to the new rules.
This move by the government can be seen as clamp down on the real estate property speculators who are considered to be the reason for the rocketing prices of the property in Auckland. Here on, one needs to prove his intentions to the government before buying a residential property.
One bank official, who wishes to remain anonymous, spoke to Indian Weekender and shared an insider’s view about how the demand for buying property has cooled down in recent times in Auckland because of the new rules by the government. The official said, “Because of the new rules on lending and taxing, we have seen a tremendous growth in the real estate sales outside Auckland. Our bank has seen almost a twofold increase in real estate business in terms of lending in last two months in places such as Hamilton and Rotorua. On the other hand, the market has cooled down a lot in Auckland.”
We continue from last week, our interview of Phil Twyford, the spokesperson for housing from Labour party on the housing issue in Auckland.
IWK: So according to you this Auckland real estate market is only a short-term driving force for GDP and not a long-term solution?
Phil Twyford: Yes. As I said, real estate speculation doesn’t generate any exports. We need to be building firms and businesses to come out with products and services that can be sold overseas. .
IWK: Recently there was data that Labour party came out about the investment from China in Auckland’s real estate market. How big is the impact on the current situation in the market?
PT: Now I think there should be greater clarity on the data that we released. It was a sales data from a private real estate agency. What it showed was that 40% of the sales were made to people from Chinese descent. That is all it showed. It is not possible from that data to know if they were citizens or non-residents. We simply made the inference that because Auckland’s Chinese origin population is only nine per cent, we believe the 40% sales to Chinese descent in this case study suggested significant presence of offshore buyers in the market and we still stand by that argument.
IWK: But have you taken into account the number of people from China moving in as long-term residents in New Zealand? Don’t you think it is natural for them to buy houses the phase of life they are in?
PT: If you take Indian population, for example, the number of people coming from India is similar to the number of people coming from China and yet the number of properties purchased by people from India is about the same as the proportion of Indians living in Auckland. And I don’t believe there is a more credible alternative explanation that explains the very large gap between nine and 40%.
It would be impossible to know if those purchases were made by the residents or not unless the government provides transparent data on this. We have been calling out for a publicly searchable register for foreign property ownership. This has been the policy of the governments of Australia, UK, etc. The government here doesn’t want to collect the data and doesn’t want people to know about it. So in the absence of that data, we felt it was necessary for us to have a debate on the issue and that is why raised this issue.
IWK: But isn't this a global phenomenon? Chinese have been investing heavily in many countries such as USA and Canada. How different is the Chinese investment in NZ compared to other countries?
PT: As the Chinese government reforms the economy, it has started to free up the restriction on the movement of capital. There is a big literature on this issue about a very large volume of the private investments from people from China, moving offshore and being invested in assets especially in the Pacific Rim area. Real estate is considered to be a highly desirable category. It is predicted that several trillions of dollars are leaving China for offshore investment for the next five years or so. It is expected that 15 billion dollars are invested in New Zealand’s real estate market. So this is certainly something that is happening around the world which is why Singapore, Malaysia, Australia, etc. are all limiting offshore investment in real estate.
That is actually the same reason why in China, non-residents are not allowed to invest in residential properties in cities such as Hong Kong and Beijing. This is a global phenomenon, which will not go away,s so we have to be able to talk about this publicly. China is a very important part of the new reality of New Zealand as a source of market, investment and migrants and these things are not going to change. We have to manage them right to get best results for New Zealand. Allowing unrestricted money from China or any other place in the world to our tiny little real estate market will have disastrous consequences for people wanting to buy affordable houses.
IWK: Now there seems to be some lending restrictions for housing loans from October. Do you think it is right move or do you think it will be a burden on the common man because this might also increase the rent for people living in Auckland?
PT: Yes. No doubt that loan to value (LTV) restrictions implemented by the reserve bank will make more difficult for first-time buyers and it will make it even difficult for the multiple property owners, as they will have to pay higher deposits. The thing is that the reserve bank is forced into this position. This is because the national government has done nothing meaningful to address the problem.
Reserve bank is worried about the housing bubble and the risk that it poses to the banking sector if the bubble bursts. You saw recently that the standard and poor international credit rating agency downgraded the credit ratings of the banks in New Zealand because of its concern about the risk of being exposed to the bubble. That is why reserve bank is making it more difficult by increasing the deposit required for the loan but to be honest, they are cornered. Reserve bank’s policy is the only move, which is having some impact on the market.
The Governor of the Reserve Bank has this week reduced the Official Cash Rate (OCR) by 25 basis points to 2.75 per cent.
~~~~~~~
Mr Graeme Wheeler, Governor of the Reserve Bank in his statement, said, “Global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices. The US economy continues to expand. Financial markets remain uncertain as to the timing and impact of an expected tightening in US monetary policy.
“Domestically, the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate. Activity has also slowed due to the plateauing of construction activity in Canterbury, and a weakening in business and consumer confidence. The economy is now growing at an annual rate of around two per cent.
“Several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, the lower interest rates and the depreciation of the New Zealand dollar.
"While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.
“House prices in Auckland continue to increase rapidly and are becoming more unsustainable. Residential construction is increasing in Auckland, but it will take some time to correct the imbalances in the housing market.” “A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2 percent target midpoint. At this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data.”
(Ref: Reserve Bank of New Zealand Monetary Policy Statement )
So is this an indication from the government asking investors to head out and away from Auckland? Are these new taxing and lending rules enough to stop the real estate prices from going up in Auckland? These are the questions that only time can answer. For the time being, though, the government perhaps hopes these measures will bring down foreign investment.
This is an ongoing discussion for the moment and it is going to be rather interesting to watch this space. Indian Weekender will keep its ears close to the pulse of the market. We are also keen to hear from first home buyers and buyers of investment property about their experience in this changing and exciting environment. Write to us on editor@indianweekender.co.nz
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