The buy-to-let offerings in New Zealand can seem pretty attractive: when you factor in relatively strong demand in most urban areas, healthy rental yields and plenty of tax perks you can get upwards of a consistent 8% on your investment at the moment. Which, when your savings account is probably only offering you 1% at best at the moment, can seem highly attractive.
However, the Finance Minister has been talking tough about those who’re getting rich off the back of buy-to-lets in New Zealand and threatening tax reforms, which may make it less attractive to be a property investor in New Zealand going forward.
You can then add to that the fact that apparently 44,000 homes newly constructed over the past 10 years all leak because of poor building standards and the incorrect use of what are unsuitable materials in New Zealand, and you have at least 44,000 reasons not to buy any property in haste in New Zealand at the moment.
Taking the rental market at face value you have an opportunity for a simple, profitable venture in New Zealand. But scrape a little below the surface and you see that actually, getting rich off the back of buying to let in New Zealand is not at all straightforward and is not something you should attempt without care and caution!
As stated there is strong demand. However, this strength of demand is limited to the urban areas where there is consistently strong employment – something that is getting harder to find as New Zealand is trying to stave off the worst effects of the flu that’s raging in nations such as America and the UK. What’s more, New Zealanders have had it good in terms of tax perks and financial breaks for a long time when it comes to owning investment properties, so there are plenty of vacant homes on the market for a potential tenant to choose from in most areas.
Back in February of 2008 the Reserve Bank of New Zealand decided to take a closer look at ‘the tax system and housing demand in New Zealand’ and they produced a discussion paper that concludes that those ‘worst off’ in New Zealand’s housing market are heavily geared (or mortgaged) owner occupiers – the report further concludes that there are currently a whole host of incentives in place to encourage investment in buy-to-let property. The report states: “There are a range of policies that seem to have some potential to reduce these distortions. A capital gains tax is one option, but if administrative and other difficulties make this approach unattractive, two other possibilities analysed in this paper are reducing taxes on capital income (and removing the ability to offset labour income with capital losses), or changing the tax treatment of interest to a real basis.”
Well, it seems the government has heeded the basis of this advice and is actively pursuing the consideration and analysis of all options associated with squeezing the hefty tax breaks that landlords currently enjoy. “We’ve had a major problem with the housing asset bubble which has been one of the key drivers of the Reserve Bank pushing up interest rates,” states Russel Norman, the co-leader of the Green Party. He has been particularly encouraged by the currency finance minister stating that: “We will seriously consider changes in the taxation of property. We haven’t had those put to us yet but I think the evidence that investment patterns in New Zealand could be more productive I think is pretty strong.”
The government certainly wants to try and push through the boom bust cycle, and it seems that even those in opposition are in agreement…so could time be called on the profitability of property investment in New Zealand? Well, it will take a very brave politician to meddle with the tax system, but amongst politicians there does seem to be a strong appetite for change.
This means that if you’re thinking of entering the market you need to be aware of potential changes to the tax system that could see the erosion of your profitability. Then add on the aforementioned fact that an estimated 44,000 new homes have been constructed badly using materials unsuitable for the New Zealand climate and that they are leaking, and you have a real reason to tread carefully in New Zealand at the moment. However, the headlines that are focusing very much on these new and leaky homes have failed to discuss the fact that actually, many homes in New Zealand that have been renovated and extended over the same period will have been affected just as badly too!
This basically means that if you thought New Zealand was an easy market to make money from property, you need to think again. Tread carefully and you could still reap rewards, but take an ill-advised belly flop dive into the market and you could end up in trouble!
