Housing Policy Changes: What It Means For You
This week the Government announced a suite of new policies with the intent to assist first home buyers into the market. This included tax changes for investors, bright-line extensions and increases to the cap on First Home Loans and First Home Grants.
So how will all this affect the property market? We never know for sure, but here are our 12 insights on the recent news:
1. Supply & Demand
Prices are generally set by supply and demand - not tax policy. Just because tax policy has changed, it does not automatically follow that markets will fall.
2. Safe As Houses?
That said, property doesn’t always go up in value. In many other economies we have seen long term negative returns in property, and it is possible in New Zealand.
3. Cost Of Doing Business
Property investors can pass on extra costs, for example a tax burden, to their customers (tenants). It can be expected that they will, and should, increase rents to whatever level is acceptable to the market.
4. Fear & Greed
Markets are heavily impacted by the participant’s expectations and emotions. It is easy to talk a market down or up; for years Kiwi’s faith in the property market has gone unquestioned. It is important that people don’t spiral into panic and prediction addiction at this relatively small question.
5. Know Your Timeframe
Lifetime believes in matching an investor's timeframe to the characteristics of the investment. Property, and geared property especially, have always been a higher risk investment and one which should demand at least a 10 year timeframe. By applying this timeframe to the property asset class, the new changes make no impact to your tax liability.
Many of the policy changes are aimed at helping first home buyers – so now is the time to get that deposit sorted, secure that pre-approval and find your home.
6. Know When To Fold
Timeframe is also important in considering your returns. It is dangerous to hold on for a few extra dollars when you have already made thousands. Now could be the best time to sell if you can’t face a market fall, need the money for something else, or have done well and are happy to exit with your gains to date.
7. Double Whammy
One of the significant changes is that interest costs can no longer be a tax deductibility on residential property investments. This will have a meaningful impact on many property investors who will now be under pressure to cashflow their property investments, and this would get even worse with interest increases. At Lifetime, we are here to talk to anyone who may be concerned about this change, to review your situation and assist in mitigating any unexpected burdens where possible.
8. It Pays To Be In Business
Business owners have now got a serious advantage over residential rental property owners as their interest on debt is still deductible. Further, commercial property investments still retain the ability to deduct interest costs and offset losses against the personal income tax of the directors, through look through companies (LTCs).
9. Stress Test
Interest rates could go up in the future, making the impact of this new policy even greater. Investors need to test their cashflow in a higher interest rate environment and be confident they can meet higher costs, should such a scenario eventuate.
10. Best Practice Principles
Lifetime has always championed diversification and liquidity as the best means of managing unexpected events in investment markets. This is a timely reminder of the importance of these two investment fundamentals, and all investors should have this as a key plank of their investment strategy.
11. Prepare For The What Ifs
With the possible cost and risk of property investment increasing, the importance of income and asset insurance becomes even more important. Should your situation change, a well-structured, affordable protection plan is your best line of defence.
12. Go Time
At Lifetime, we proudly support people buying their first home and getting into the property market. We support our clients to achieve their home ownership goals as soon as possible where manageable, and with acceptable risk. Many of the policy changes are aimed at helping first home buyers – so now is the time to get that deposit sorted, secure that pre-approval and find your home. We are here to help you through the process.
About the Author
Sam Walter is an Auckland based Financial Adviser who has been supporting clients with their insurances and investments for nearly 20 years. Sam has over $90 million worth of private funds under his management and is great at motivating people to improve their financial behaviours.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
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