From 1 July, 2024, the real estate landscape in New Zealand is undergoing a significant transformation, bringing about key changes that will impact property sellers, buyers, and investors. Staying informed about these regulatory updates is crucial for effectively navigating the market. In this comprehensive guide, we explore the intricacies of these new regulations to provide you with a clear understanding of their implications.
Changes to the bright-line rules
A brief history of the bright-line test
The bright-line test was introduced in 2015 to curb property speculation and ensure that profits from quick property sales were taxed appropriately. Initially, the rule required property owners to pay tax on any gains made from selling residential property within two years of purchase. This measure aimed to discourage rapid property flipping and stabilise the housing market by reducing speculative demand.
In 2021, the government extended the bright-line period to ten years as part of a broader strategy to further dampen speculative investment and cool the overheated property market. By extending the period, the government intended to reduce the attractiveness of short-term investments, encouraging buyers to hold onto properties longer to stabilise prices.
Effective 1 July, 2024, the bright-line period has been reduced back to two years. This change reflects a new governmental approach to balance the property market, making it easier for people to sell properties without facing significant tax liabilities, provided they hold the property for at least two years.
These changes mean that if you sell a residential property that is not your family home within two years of purchasing it and make a profit, you will be taxed on any profit made. These profits will be taxed at your highest marginal tax rate for your annual income.
What this means
For Sellers: You can now sell properties held for more than two years without incurring bright-line test taxes, which could lead to an increase in properties listed for sale.
For buyers: This change might result in more available properties, potentially easing the competitive pressure in the market.
For investors: Short-term property investments become less risky, with a significantly reduced tax period.
Changes to loan-to-value ratio (LVR)
Understanding LVR
The Loan-to-Value Ratio (LVR) measures the amount of a loan compared to the value of the property. For example, if you want to buy a $500,000 home and you have $100,000 for a down payment, you would need a $400,000 loan, giving you an LVR of 80 percent.
Recent changes
As of 1 July, 2024, the LVR restrictions have been eased. Previously, stricter LVR limits were imposed to ensure financial stability and prevent excessive borrowing, especially among investors. The eased LVR restrictions are intended to make it easier for first home buyers to enter the market and for existing homeowners to refinance their properties.
Under previous LVR rules, Investors faced a 70 percent LVR limit, meaning they could only borrow 70 percent of the property's value and needed 30 percent as a deposit. Now this has been relax, allowing investors to borrow up to 80 percent of the property's value.
These changes may help first home buyers to borrow more than 80 percent of the property’s value to help them get on the property ladder. It will also allow property owners who want to buy an additional property to be able to borrow up to 80 percent of the property’s value.
Introduction of debt-to-income (DTI) ratio caps
What is DTI?
The Debt-to-Income (DTI) ratio measures a borrower’s total debt compared to their income. The DTI ratio caps introduced on 1 July, 2024 are a new regulatory measure aimed at ensuring borrowers do not take on excessive debt relative to their income, promoting long-term financial stability.
The new DTI caps mean lenders must now adhere to these caps when approving loans. This means that your total debt cannot exceed six times your income. For example, if you earn $100,000 a year, the maximum debt you can take on would be $600,000.
What this means
For sellers: While the caps could limit some buyers' borrowing capacity, they also promote a more stable market, potentially reducing the risk of a housing bubble.
For buyers: It’s essential to assess your income and debt levels carefully to ensure you can meet the new DTI requirements. This might mean adjusting your property expectations to align with your borrowing capacity.
For investors: DTI caps require more careful financial planning. Investors need to ensure their income streams and existing debt levels are balanced to secure new loans under these regulations.
The intention behind these changes to New Zealand's real estate regulations aim to create a more balanced and stable property market. By staying informed and adapting to these new rules, sellers can confidently list their properties without the fear of excessive tax liabilities, potentially leading to an increase in available properties on the market.
Ensure you talk about your options with your bank or financial advisor to fully understand how these regulation updates could impact your property journey.