June Market Report

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New build tax exemption means new opportunities for investors.

The housing market is set to get a shake up with the announcement that new residential builds will not be hit by the phasing out of loan interest offsetting against rental income.

The government has confirmed investors can still claim back the home loan interest on new builds – and property professionals are predicting a renewed interest from investors in the creation of new homes as a result.

What’s more, the definition of ‘new build’ also includes the conversion of existing commercial buildings into apartments and back yard infill units. Conversion apartment sales have lifted on the back of the announcement and some landlords have been talking about building small units on the back of existing rental property.

Previously property investors have been able to claim back the interest of a home loan against the rent from the property, which reduces tax bills significantly for those with large mortgages. From March 27 the percentage of interest which can be claimed back was reduced, and that will continue to reduce over the coming years, meaning tax bills will increase for landlords with mortgages on existing buildings.

But with new build home loan interest costs being announced as exempt from this financial shock for some landlords, that unused land or subdividable property investors are sitting on will start to look a lot more appealing when considering expanding their rental property portfolio.

New builds will include a house added to an existing property, either standalone or attached; a house replacing an existing house’ one house renovated to create two; and commercial properties converted into apartments. As long as it is “self-contained” with its own kitchen and bathroom facilities, it appears it will get the green light.

Additionally, if a house was added to vacant land it would not have to be new or constructed on-site to qualify as a new build, which means modular, kitset, and relocated houses would qualify too.

Owner-occupiers have not been able to claim the cost of interest on their mortgage as a tax-deductible expense and are therefore not directly affected by the latest changes. They will however be affected if there is a cooling off in the market, but we are not yet seeing this.

Housing supply continues to be a struggle as everyone in the process express frustration with staff shortages, red tape, and now there are material shortages and delays. Despite this there has never been so many people wanting to be a developer. We are seeing people with no industry knowledge buying properties to develop to sell, or hold to rent, it’s like every lunchroom and chat site is talking about property projects. Investors will definitely be debating the merits of switching their portfolio from existing dwellings to new or keeping what they have, but buying ‘new builds’ when expanding.

Lower Hutt hit a new record median house price in May this year at $873,500, up from $656,000 in the same period last year. This 33% increase is seen right across the market as buyers strive to get into their first home, up-size, downsize, develop and invest. There are mixed reports and predictions on what the rate of growth will be over the next year.

As always, it will be important to read the fine print and figure out what percentage of interest deductibility is specific to each new build, and what the final policy wording is after the consultation period is over.

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