Bernard Hickey from Hive News New Zealand has a waning for Australian investors looking to cash in on the hot market there. He gives us detail about a new tax on foreign investment that has been mooted by the NZ Prime Minister.
Kevin: Just like in Australia, when there is a Reserve Bank decision in New Zealand, there is a lot of interest about it. It happened this week, and joining us to bring us up to date on that and the New Zealand market generally, Bernard Hickey, publisher for HiveNews.co.nz.
What did they decide to do, Bernard?
Bernard: The Reserve Bank kept the Official Cash Rate at 2.25%, which was widely expected. There were about three economists out of about 17 who thought there might be a cut this week, although financial markets were expecting a higher chance of a rate cut.
There was no rate cut, but the Reserve Bank did indicate it would likely cut the Official Cash Rate one more time later this year 2%. That would see mortgage rates drop below 4% in New Zealand. Most people in New Zealand take out fixed-rate mortgages, and they are currently around the 4.2% mark.
Kevin: So when the Reserve Bank in New Zealand adjusts the rates like that, is that an automatic follow-on from the bank, or do the banks make those decisions independently?
Bernard: That is a really interesting point, because with the last rate cut which was a surprise on March 10th, the banks didn’t pass it all along to floating-rate mortgages. New Zealand is a bit different from Australia in the way that the mortgage market operates. In New Zealand, most people now with mortgages have fixed-rate mortgages, so they will take out a one-year or an 18-month or a two-year mortgage, which typically at the moment have rates at around about 4.2% to 4.6%. About 25% or so of mortgages are floating-rate mortgages.
On March 10th, the banks – which are the same big four banks that you have – decided only to pass on about 15 to 20 basis points of the 25 basis points of cuts to floating-rate mortgages. They argued that their foreign funding costs were higher early in 2016 than they had been in 2015.
Kevin: It would appear to me that the market is still very, very hot, particularly around that Auckland and even Northland area. I was surprised to see that Gisborne actually had a bit of a movement, too, in its asking price. What is happening in that area?
Bernard: Gisborne and Hawke’s Bay are unusual in New Zealand in that they are relatively small provincial areas with relatively weak local economies, and particularly in Gisborne’s case, falling population. So its house prices have been underperforming over the last decade or so, particularly relative to Auckland.
But what we have seen in the last six months or so is that Auckland property investors in particular have looked to leverage up some of their equity gains in Auckland by buying property elsewhere. There have also been some people who have decided to move out of Auckland to crystalize their capital gains, which are tax-free in New Zealand, and buy a bigger house on a bigger section or maybe a lifestyle block in a regional area. Gisborne is a pretty attractive part of the country. It has some great vineyards, it has the most sun, and it is a pretty attractive place for a lot of people.
We are seeing a bit of heat now starting to build up in some of these previously unloved provincial areas, like Gisborne, like Napier, like Dunedin, and to an extent Wellington. It’s also being driven by a change in Reserve Bank policy in November.
In New Zealand, the Reserve Bank is the regulator of the banks, not APRA, and the Reserve Bank specified that from November 1st, if you were a rental property investor in Auckland, you couldn’t borrow more than 70% of the value of the property. However, outside of Auckland you could borrow up to 80% of the value of the property.
So a lot of property investors now look ahead in New Zealand to a future of no capital gains tax, no stamp duty, and falling interest rates along with an economy that is growing solidly at 3% with jobs growth of 2.5% – so plenty of demand for property.
Kevin: There’s a big debate over here, too, in Australia is about negative gearing. That’s something that you don’t have in New Zealand.
Bernard: That’s right. Losses are ring-fenced in New Zealand, so it’s much harder to make a big loss on a rental property and then offset it against your income tax. One thing to watch for, though – some news that has broken the last few days – is that the Prime Minister, John Key, has suggested that New Zealand might introduce a land tax for non-resident owners of property in New Zealand.
We have some of the same stresses on our property market here where first-home buyers are struggling to get in. There is plenty of foreign investment, particularly from China, and there is a lot of political pressure on the government to do something about that because we don’t have any restrictions on foreign buying of property here.
When we say a land tax, that’s a tax of let’s say 1% per year on the value of the land every year ongoing, not a stamp duty. The government hasn’t said they are going to go ahead with it yet, but the Prime Minister has talked about it. That means if you are an Australian investor buying a property in New Zealand, you could be subject to this land tax on non-residents – if it is brought in.
There is still a lot of news to come yet. We still haven’t heard the detail, but the Prime Minister did suggest that this week.
Kevin: It’s very interesting. We will follow what happens on both sides of the Tasman. Of course, one of the major banks here, Westpac Bank, cutting off its book entirely for foreign investors, so we’ll see what happens there.
Bernard Hickey is the publisher of HiveNews.co.nz.
Bernard, thanks for your time.