Signs of 'Tentative cooling' in property market

“If you’re a residential property investor, or thinking about becoming one, the game has changed a lot in a short space of time - and there’s an additional layer of potentially quite off-putting uncertainty about what might yet be in store.”

The report suggested that the interest deductibility policy is likely the most significant factor taking the wind out of the housing market’s sails, and made some predictions around its potential effects.

“Broadly speaking, we see this playing out as follows – existing investors realise they’re in for a higher tax bill, so will look for ways to recoup the loss where possible (via higher rents).

“Some will likely push pause on their plans to buy or develop for a while as they work through the implications and assess the housing pulse, and some would-be investors could be deterred permanently.

“Highly leveraged property investors may decide it’s time to downsize the portfolio, and accountants are likely to benefit as investors try to find ways of restructuring their portfolios to avoid or limit the tax increase.”

However, ANZ’s economists are not expecting a “fire-sale” of investment properties any time soon.

“The phase-in of the change is important in this regard, as is the very valid question of what else they would do with their money currently,” the report reads.

“The impacts of the removal of interest deductibility on investors will vary enormously, depending on a number of factors such as loan size and the path of mortgage rates.”

So what does that mean for New Zealand’s already-high house prices?

“We aren’t forecasting house prices to fall, but from these lofty heights we certainly would not rule it out.

“There are a lot of highly indebted households out there who would be very vulnerable if interest rates were to increase, or incomes were to deteriorate.

“In terms of investors, it’s worth noting that interest rate increases no longer bring a larger tax offset – there’s now a greater chance that interest rate increases could cause investors to sell up, meaning a faster braking impact on the housing market than previously.

“We’re expecting this policy change to have a relatively muted impact in the near term, but it makes mortgage rate increases even scarier for the housing market.”

The full ‘Policy Plethora’ report is available here.