In a shock move, the Ardern led NZ government last week announced the repeal of negative gearing. Taking effect from today, the 29th of March for all future purchases, plus a phase out plan of 5 years for existing investment properties. A devastating blow to all existing investment property owners with debt.
The swift decision was made following extensive political pressure after NZ property prices growing more than 20% during the last year. Leading up to this decision, the NZ government took another step in the fight against the record gains in property values by imposing a world first policy determination that the NZ Reserve Bank must include stabilisation of the property market in its decision-making remit.
These two reformist policies followed macro prudential regulation limiting LVR’s for investment property to 70%, to be further lowered to 60% from 1st May.
These massive policy adjustments follow the failure of the Ardern government to maintain housing affordability. An election promise made leading into the first term of government, which now in their second term, remains elusive. At home, the ALP recently confirmed that negative gearing reform is still on its agenda.
These revolutionary type NZ decisions have forced the Australian and NZ dollars and 10-year bond yields lower, which both governments and local reserve banks will not be unhappy about as this is positive for our international trade. International markets can group the Antipodean nations together, thus a NZ government decision has impacted the Aussie dollar and bond yields.
NZ and Australia have a history of setting legal and policy precedents that the rest of the world follows. For example, NZ were the first to mandate the Reserve Bank have a target for inflation. Subsequently, all western democracies followed. Time will tell whether Australia (and the rest of the world) will follow suit with New Zealand’s ground breaking changes to the Reserve Bank mandate to consider property price stabilisation, as they did with the mandate to set a target for inflation.
With regards to negative gearing policy, the Australian Labor party is unlikely to take the risk of a full wind back of negative gearing when they regain power at some point in the future as they will not have forgotten the reckoning that the Bill Shorten led party faced in the ‘un-losable’ May 2019 election when the abolition of negative gearing was one of a number of unpopular policies that cost them key votes.
The more likely approach that a potential future Labor government may implement is a watered-down version. Sources from the party suggest a limit to the number of properties that can be negatively geared to one or two, as opposed to a total revocation. This solution seems a bit more palatable to the Australian public given the vast majority of investment property owners own two or less investments, or none, but have aspirations to own an investment property or two.
Whether the sacred cow of negative gearing property ever gets rolled back in Australia remains to be seen. But what is almost certain is that APRA will add restrictions to lending at some point in 2021 or 2022 to slow down this ever-increasing bull run for the property market. The federal government will be grateful that it has this lever to pull, which proved successful in the largest reversal of property prices on record from November 2017 to July 2019.
The big question is what levers will they pull and when?!
For more information on these changes, check out these articles and podcast episodes:
- NZ kills tax loophole on property to slow soaring house prices
- By targeting house prices, New Zealand shows the way
- Labor’s negative gearing, CGT plans aren’t dead yet
- Our Market Update in Ep#74 “Property Investment – The seven secret steps to buying a house”
- Macro prudential measures in Ep#72 “Property prices – what causes values to fall & how to tackle a rising market”
- Market update #18 “The early trajectory for 2021”
If you’d like to discuss your property plans or mortgage strategy, please get in touch with us here.