Navigating New Zealand's Property Landscape: A Guide to Recent Changes

The Reserve Bank introduced new lending rules and regulations on July 1, 2024. Let's break down what this means for buyers, sellers, and investors.

The Bright-Line Test - Reduced to two years from ten years.

The bright-line test is a way to tax the financial gains people make when they buy and sell an investment property. It's just like paying tax on any other income you might make – after you sell an investment property.

Introduced in 2015 to curb property speculation, the bright-line test has seen its fair share of adjustments. Initially, a two-year holding period, was then extended to ten years in 2021 to cool the market. However, as of July 2024, we're back to the original two-year period.

This change is good news for property investors looking to sell, who've held their property for more than two years, as they can now do so without incurring the bright-line tax. This could potentially lead to an increase in property listings – although we’re yet to see this. If it does, buyers might find more options available in the coming months, especially heading into Spring, which traditionally is where we see an uptick in listings.

Lending Rules - Adjusted for low deposit lending and investors.

Another change involves relaxing the Loan-to-Value Ratio (LVR) restrictions. This means banks can lend more money compared to the property's value. This effectively means it changes your deposit requirements when looking to take on a mortgage.

The key changes here will impact first-home buyers and property investors.

For property investors the main change is that the LVR Limits have increased – from 65% to 70% – offer more borrowing power. In other words, you previously required a 35% deposit and now you need a 30% deposit. The only exception to this rule is if you are purchasing a new build in which case you can buy with a 20% deposit.

For first-home buyers, the main change is that banks can now lend out 20% of their total loan book (the amount of total new home loan lending per month) to buyers with less than a 20% deposit. Meaning they have more capacity to assist buyers with a smaller deposit which was previously capped at 15% of their loan book. Similar to investors, newly built properties are exempt from these rules.

To give an example of how to calculate LVR it is (the loan amount or mortgage divided by the property’s value) x 100 = x%. i.e. $250,000 mortgage/ $500,000 property value x 100 = 50% LVR.

Debt-to-Income Ratios.

The Debt-to-income (DTI) ratio measures your total debt relative to your income. The new caps limit how much you can borrow based on your earnings. For owner-occupiers, total debt can't exceed six times your income, while for investors, it's seven times your income.

While these caps aim to promote financial stability, they also impact borrowing capacity – which of course is a very deliberate move by the Reserve Bank to mitigate the future risk of prices spiralling out of control again and creating more inflation price bubbles. 

We believe that DTI ratios will have an impact in due course, but only once interest rates start to fall from the levels we are currently seeing. The impact will likely mean borrowers will need to adjust their expectations with regard to what they can afford.

The Bigger Picture

The combined effect of these changes is intended to create a more balanced and stable property market. While sellers might benefit from increased buyer interest, buyers need to navigate the new lending landscape with care.

It's essential to remember that these are just the rules the banks must follow, however, history tells us that regulation doesn’t always achieve its intended purposes – the market (that’s you and me) will do what it wants to do. The financial regulators cannot ultimately control people’s emotions, motivations and sentiment (FOMO anyone?), which can influence people’s choices around property buying and selling. Seeking advice from financial professionals can be invaluable in helping make informed decisions.

Do you have any specific questions about the new lending rules and regulations? If so, get in touch we’d love to chat.