On 23 March 2021 the Government released a new housing package intended to improve housing affordability.^[1] This article breaks down the package and considers the potential implications of the proposed new housing and tax policies.

What’s in the package?

• New $3.8 billion Housing Acceleration Fund
• $2 billion loan to Kāinga Ora
• Extension of Apprenticeship Boost Fund
• Raised income and property price caps for First Home Grants and Loans eligibility
• Changes to the ‘bright-line’ rule that taxes profits from residential land sales, including extending the bright-line period from 5 to 10 years - except for ‘new builds’
• Removing interest deductions for debt-funded residential investment properties

A closer look

Government funding schemes

The Government has committed an initial $3.8 billion to the Housing Acceleration Fund (Fund) aimed at increasing the pace and scale of affordable housing development. 

The Fund will be used to:

• purchase land for housing development, particularly in locations close to employment opportunities, public transport and other amenities;
• help finance the provision of critical infrastructure required for new housing developments; and
• support the delivery of a wider mix of housing (both ownership and rental) that is affordable for low-to-moderate income households.

The Government has indicated that the Fund will be utilised in partnership with key stakeholders and that local government will continue to play a significant role in addressing New Zealand’s housing affordability challenges.

At this stage, the details of the Fund, including timing, are light but Cabinet will determine further details by 30 June 2021, with a view to collaborating with local government from mid-2021.

The Fund is the latest central government initiative aimed at boosting New Zealand’s housing supply. It joins a list of other central government initiatives, such as the Infrastructure Funding and Financing Act 2020, recently developed to support the development and renewal of critical infrastructure in New Zealand, which has largely fallen upon local government to manage and maintain. 

The Government will also support Kāinga Ora to borrow a further $2 billion for the purpose of scaling up strategic land purchases for future developments.

Finally, the current Apprenticeship Boost initiative will be extended by four months to continue to incentivise employment and training in the construction sector.

Tax shake-up for the residential investment property sector

The key tax changes announced by the Government are two-fold, namely: 

• changing the ‘bright line’ rule that taxes profits from the disposal of residential land (other than your main home) within a specified period after acquisition; and
• removing tax deductions for interest costs in relation to debt-funded residential investment properties. 

The stated intent of the changes is to remove ‘incentives’ and ‘loopholes’ for residential property ‘speculators’, in an attempt to rebalance the market in favour of first home buyers. 

The principal changes to the bright line rule have been enacted straight away, by way of addition to a tax bill that was passed by Parliament on 24 March 2021 (but still awaiting Royal Assent at the time of writing), and will generally apply to residential land acquired on or after 27 March 2021 (excluding acquisitions locked in on or before 23 March 2021). 

The changes will:

• extend the specified post-acquisition disposal period under the bright line rule from 5 years to 10 years for residential land other than ‘new builds’;
• maintain the existing 5 year period for ‘new builds’, including properties acquired within 1 year of receiving a code compliance certificate (but the exact details of the ‘new build’ provisions are still to be determined, following consultation); and
• modify the ‘main home’ exemption from the bright line rule, in particular by introducing ‘change-of-use’ rules that will limit the extent of the main home exemption if a property is put to other use (eg, long or short-term rental) for more than a 12 month period. 

The interest deductibility changes will be consulted on before legislation is introduced, but this will happen this year and the changes are intended to apply from 1 October 2021. 

Subject to a prospective exemption for ‘new builds’ and other details (to be confirmed following consultation), the proposed changes would: 

• progressively remove interest deductions for debt-funded residential investment property acquisitions prior to 27 March 2021 (including acquisitions locked in on or before 23 March 2021), in 25% increments, from 1 October 2021 to 31 March 2025, so that no interest deductions could be claimed from 1 April 2025 onwards; and
• for debt-funded residential investment property acquisitions on or after 27 March 2021, completely remove interest deductions from 1 October 2021. 

The proposed changes would not affect interest deductibility for property developers and builders, nor would they affect interest deductibility in relation to borrowing for a non-housing business that is secured against residential property. 

First Home Assistance

Access to the First Home Grant and Loan Scheme will increase through two means; an income cap increase on First Home Grants and Loans, and an increase on the property price cap which a buyer is entitled to use the grants and loans on both for new and existing property.

Assistance is now available to single first home buyers with an income of up to $95,000 (previously $85,000) and two or more first home buyers may have a combined income of up to $150,000 (previously $130,000).

Property price caps for both new and existing properties will also be increased across most of the country. Auckland and the lower North Island seeing the biggest increases.

These changes come into effect on 1 April 2021.

Our comments

Developers and local authorities have been imploring the Government to fix the infrastructure funding gap for some time. The Housing Acceleration Fund is welcome news and should form a key part of the package that enables a more comprehensive response to the under-investment in New Zealand’s housing and infrastructure stock. We hope the fund can get off the ground quickly in order to capitalise on existing and new development plans.

In relation to the proposed tax shake-up, while the extension of, and other changes to, the bright-line rule may have grabbed more immediate headlines, we see the removal of interest deductions as the more significant tax measure. If enacted as currently outlined, we expect it will have a real impact on the economics of residential property investment in the longer term, particularly if interest rates increase. 

First home buyers are likely to consider these changes a step in the right direction towards improving housing affordability, particularly with the increased income caps for the Grant and Loan schemes, but may query whether the changes go far enough to make finding a suitable home achievable for many.

Get in touch

If you would like to discuss any implications these changes may have for you, please get in touch with one of our contacts (pictured right).