As part of a broad package of measures aimed to curb house price growth – which is just shy of 25 per cent over a 12-month period – the Ardern government is removing the advantage investors have over first home buyers, including their ability to claim mortgage interest as a tax deduction against rental income.

“Cabinet has agreed to remove the ability for property investors to offset their interest expenses against their rental income when they are calculating their tax,” said Revenue Minister David Parker.

This system is similar to Australia’s negative gearing policy, the abolishment of which was central to Labor’s federal election campaign in 2019. And although critics do see an integral link between negative gearing and a spike in house prices, the Morrison government is not expected to follow New Zealand’s lead.

Speaking to nestegg, Diana Mousina, senior economist at AMP Capital, explained that although the situation in New Zealand has striking similarities to Australia, it does in its essence differ.

“Obviously, both have had very strong price growth since COVID peaked in both countries last year, or that period between March and May when we both had the worst economic performance, but New Zealand already had some LVR restrictions prior to COVID to try and deal with some of these pressures and issues in the housing market. In the pandemic, they removed these to try and support activity,” Ms Mousina said.

“In Australia, macroprudential tools were used in 2017 and later removed, to slow down property price risks, especially around investor lending. So, the New Zealand situation is a bit more frothy, because they’ve had stronger house price growth,” she explained.

In fact, according to the Real Estate Institute of NZ, Auckland’s median house price has soared 24.3 per cent to NZ$1.1 million, while across the rest of the nation, the median house price is up 19.1 per cent.

But unlike in Australia, New Zealand’s house price spike has largely been driven by investors. As such, Prime Minister Ardern’s firm move to curb investor activity is in fact seen to be justified.

“It’s obviously being done because investor lending is becoming a very large share of the property market in New Zealand, they’re the ones that seem to be picking up the largest proportion of new property sales,” Ms Mousina said.

“In Australia, we have had a property price boom over the past six to 12 months, but it has really been driven by owner-occupiers and the risks around owner-occupier lending aren’t as severe as investor lending,” Ms Mousina explained.

But although the situation in Australia remains largely under control compared with New Zealand’s predicament, Ms Mousina does expect the local government to take some initiative in the coming months as house prices continue to rise.

“We could see some restrictions in Australia announced over the next 12 months, I think it’s likely some macro-prudential tools announced, but they will probably be more around restricting LVR lending, so maybe restricting the number of loans the banks can make with LVRs greater than 80 or 90 per cent, maybe some measures around the debt-to-income ratios, but until you see a big increase in investor loans, which we’re not seeing, or a big increase in interest-only lending, I don’t think it’ll be targeted towards the investor like it has been in New Zealand,” Ms Mousina said.

What else is NZ doing?

Among New Zealand’s other key measures, aimed to increase the supply of homes and remove incentives for speculators, are:

• NZ$3.8 billion fund to accelerate housing supply in the short to medium term
• More Kiwis able to access First Home Grants and Loans with increased income caps and higher house price caps in targeted areas
• Bright-line test doubled to 10 years with an exemption to incentivise new builds
• Apprenticeship Boost initiative extended to further support trades and trades training

“This is a package of both urgent and long-term measures that will increase housing supply, relieve pressure on the market and make it easier for first home buyers,” Jacinda Ardern said.

“The housing crisis is a problem decades in the making that will take time to turn around, but these measures will make a difference.  

“There is no silver bullet, but combined all of these measures will start to make a difference,” the New Zealand Prime Minister concluded.

And although Ms Ardern’s announcement has been applauded by local economists, REINZ has its doubts. 

“We understand what the government is trying to achieve by extending the bright-line test to 10 years; however, we don’t believe this will be a magic bullet in terms of solving New Zealand’s housing affordability issues and nor will it do anything to increase the supply of houses,” said Wendy Alexander, acting chief executive at REINZ.

“In actual fact, what it’s likely to lead to is residential property investors holding on to their properties for even longer in order to avoid paying tax, thereby further reducing the total pool of properties available in the market,” Ms Alexander opined. 

Moreover, REINZ is concerned changes to interest deductions will completely change the financial dynamics of investing in residential property. The institute is also forecasting a spike in rent in the coming years as investors look to offset the costs.