Private property issue #90 - What will National do to the bright-line test?

Almost 5,000 people signed up for our webinar on Tuesday. One of the big topics people asked about was the government’s changes to the bright-line test.

This is big. Not only will it increase demand, it will also increase supply. Here’s what you need to know.

What will National do to the bright-line test?

National plans to roll the bright-line test back to 2 years. They want to do this by July 2024.

To confirm, the shorter bright-line test applies to all properties.

It’s not just new properties you buy. If you currently have a 5 or 10-year bright-line test, it will go down to 2 years.

Let’s say you bought a property in June 2022.

Under today’s rules, if you sell before June 2032, you could get a hefty tax bill.

When the test changes, your bright-line expires in June 2024. 8 years earlier. You can sell and not pay tax.

National confirmed this in their Back Pocket Boost Policy:

How much tax could this save me?

This change could save you a lot in tax.

What if you bought the average property in Christchurch back in March 2020?

You would have paid $514k. If the property followed the market perfectly, it’d be worth $741k today.

Pop the champagne. You made $227,000.

Today, the high interest might be hurting you. So you think: “I just want to sell it”.

But if you sell, you’ll trigger the bright-line test. That means paying up to $74,100 in tax.

So the bright-line change could save you a lot of money.

But it will also increase the number of properties listed on the market. Here’s why.

Some investors are holding on for dear life.

They’ll do anything to wait until they’re outside of the bright-line test before they sell. That way, they don’t have to pay the tax.

Once the bright-line test changes, they can breathe a sigh of relief. They can sell without paying a heap of tax.

That’s why changing the bright-line test will increase supply. Some investors will put their properties on the market.

How many investors could list their properties?

250,000 properties will instantly be outside the bright-line when the rules change.

A good chunk of these properties are people’s own homes. So the owners wouldn’t get caught under the bright-line anyway.

But 30 – 40% of those properties might be investments or holiday homes. 

So, between 75,000 and 100,000 extra properties could suddenly be outside the bright-line.

Not everyone will want to sell. But 16% of the people who came to our webinar on Tuesday night said they would.

Interestingly, the number of new listings has gone down 30% since the bright-line test was first introduced.

The bright-line test didn't cause that change on its own. Interest rates have gone up, and it’s a colder market. Some people will think "it's the wrong time to sell".

But the bright-line was part of it.

Rolling back the rules should cause the number of new listings to go up.

Does that mean house prices will go down?

If nothing else changes, an increase in the supply of listings means house prices will go down.

But there’s an important assumption there – that nothing else changes.

And there are a lot of changes going on.

Net immigration just crept over 128,000 in the last year. The highest it has ever been. Lots more people are calling New Zealand home. They all need somewhere to live

National will also change the tax rules for property investors (interest deductibility). That will cause some investors to re-enter the market.

And as house prices rise, people think, “I better buy now before the prices go up.”

So, while supply will go up, demand will probably go up more. That will likely cause house prices to rise.

Looking at the latest forecasts, the big banks say house prices will go up faster than 5% next year.

P.S. N.Z. Property Investor magazine turned 20 this year. To celebrate, you can get a digital subscription (valued at $95) for free.

Head to the Property Investor mag website. Click on 'Yearly Digital' and use the promo code: 20YEARSGIFT at checkout.