What a month of March we had. It was full of radical changes in the housing market with tons of controversial reactions and opinions.
In this letter, I will not discuss 10-year bright-line extension policy as, in my view, property investment is a long-term venture with a mindset of holding properties for years. That means 5 or 10 years does not play much difference.
Let’s look into the second part of the changes the Government introduced – Interest deductibility or rather none interest deductibility on residential investment. Basically, the Government drew a line as of 27th of March 2021, and 4 days prior announced the following:
- If property is acquired on or after 27/12/21, interest deductions will not be allowed from 01/10/21.
- If property is acquired prior to 27/12/21, interest deductions will be progressively reduced over the next 4 years until it is completely phased out.
- Exemptions will apply to new builds (off the plans) sales and property developers who pay tax on the sale of the property.
There has been and is a lot of negative talk about the changes. I would not like to whine about how outrageous the legislation is, and that the Government clearly does not know nor understand the difference between speculation and investment. Let’s rather look at it with a positive outlook.
Without a doubt, the abolishment of tax deductibility of interest payments will impact our profitability, however, in the big picture we are still in the same boat sailing steadily towards our goal:
- Property is still one the best vehicles to wealth creation and wealth retention in New Zealand.
- Property is a relatively safe store of wealth against inflation.
- Property is the easiest asset to leverage against from financial institutions.
- Historical property price data indicates that real estate continues climbing steadily.
- Auckland CBD rents have been rising until the Covid pandemic, with the outlook on the rents to sharply go back up once the borders are open.
- In the long term, the rental demand in Auckland hub of the business district will remain strong, period.
And finally, the Government intervention does not change the fundamental core of the residential investment – a good investment with a solid long-term plan is still a good investment. Amend your profit and loss spreadsheet and keep building your property portfolio.