From a market perspective, timing and assumptions are important considerations for a CGT.
Values are still 17% below their early 2022 peak, only 1% higher than the cyclical low in June 2023, and about 10% higher than five years ago.
In the past two years, the national median price only rose from $802,112 to $811,662.
Under these conditions, little CGT would have been payable, Cotality’s latest monthly housing chart pack shows.
The timing of Labour’s proposal is interesting, Kelvin Davidson, Cotality chief property economist says.
“The market is getting busier but remains a touch below normal, affordability has improved, and investor participation is on the rise.”
Against that backdrop, he says the CGT debate naturally raises questions about behaviour, whether investors would hold properties longer to try and avoid the tax for a while, and how much revenue a tax might realistically generate.
Davidson says lower interest rates and the reinstatement of interest deductibility has helped support mortgaged multiple property owners lift their share of property purchases to just over 25% of transactions in the past month.
He says while a CGT might encourage investors to hold on to their property for longer it wouldn’t be forever.
While it might reduce the expected returns from investing which could have implications for the rental market, at the same time it might create opportunities for renters to buy a home.
First home buyers are taking a bigger share of the market than investors and were at a record level of 29% of purchases last month.
“The predictability of existing conditions is reassuring for buyers, who are continuing to adjust to the recent experience of stable prices and slightly lower mortgage rates,” Davidson says.
“Affordability is at its best level in several years, listings are set to ease lower, and a large share of fixed loans are shifting onto cheaper rates. Provided employment holds up, those factors point to a gradual lift in both sales activity and values next year,” he said.
He says it won’t be a sharp but gradual recovery of the market.
LVR loosening won’t have much effect
Debt-to-income ratio caps will be a key factor to watch.
They go hand-in-hand with loan-to-value ratios (LVR), which will be loosened from 1 December.
Banks will be able to lend a total of 25% of new lending to borrowers with less than a 20 percent deposit, compared to 20% at present. For investors, the share of new lending that can be made to people with equity or deposit of less than 30% will lift to 10% from 5%.
This is not expected to have much effect on the housing market.
The RBNZ estimates the combined investor and owner occupier share of new lending with an LVR over 80% will increase to about 16% from 13% (about half of the peak seen prior to the introduction of LVR restrictions in 2013).
Davidson says banks and borrowers, at least on the owner-occupier side, are already operating well below the existing LVR limits, and this illustrates the caution that pervades the market, and the restraint of the weak jobs environment.
The change may make it slightly easier for well-prepared buyers on the margin to get pre-approval, but the need for a meaningful deposit and sufficient income for serviceability tests still applies.
So far, LVR restrictions have not been binding. However, as the housing cycle turns and values rise these restrictions will become more binding.
He says the investor speed limit as it stands is quite tight, so there may be a bit more of an effect for them.
Low-deposit finance has been hard to get for investors and it won’t unleash a flood of new investors because strict DTI limits and bank serviceability assessments will continue to be a major constraint. A lower deposit just means more debt for investors as well.
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