By Greg Ninness
The Government’s plan to ban overseas investors from buying residential property is already drawing howls of anguish from property developers, real estate agents and lawyers, who claim it will hinder new property developments and worsen the housing shortage in places like Auckland.
And that, they say, would push up both prices and rents, making life even more difficult for ordinary, hard-working New Zealanders, exactly the opposite of what the Government is trying to achieve.
Of course all of those groups are well known for setting aside narrow self interest in favour of the broader public good. But while their protests may be well intentioned, they are probably wide of the mark.
The changes the Government is planning are contained in the Overseas Investment Amendment Bill, which in a nutshell, would ban overseas investors from buying existing dwellings or residential land. It would, however, still allow them to be residential property developers and add to the housing stock, provided they sold down the new dwellings they created within 12 months of them being completed.
There are separate rules for migrants coming to New Zealand who want to buy a home.
One of the main objections being raised by developers is that it would hinder their ability to pre-sell units in apartment or other multi-unit developments, to overseas investors.
Under the new rules overseas investors would still be able to buy residential properties off the plans, but they would be treated like developers and have to on-sell them within 12 months.
That would likely see them caught by the Bright Line test which would see them taxed on any capital gains.
It has been common for developers of large scale housing projects such as apartment blocks to promote them to overseas buyers. And in many such projects, overseas investors have made up a significant proportion of the buyers. However, this is something developers are usually coy about discussing, typically preferring to stress the “high number of owner-occupiers” who have bought into a development in their marketing material.
For many developers, overseas investors have been a relatively easy sell.
There are well oiled sales machines promoting overseas property investment operating throughout the world, although this trade has been dominated by investors from China.
But this flood of money into our residential property market has had unintended consequences.
It came at around the same time as immigration surged to a point where construction of new dwellings couldn’t keep up with demand, while at the same time interest rates were plunging.
Those two factors combined to push up prices.
And the Chinese weren’t like most other investors.
For many, their main motivation to buy overseas property was to get their money out of China and away from the scrutiny and control of Chinese government officials.
And they were less worried about the price they paid than local buyers.
New Zealand property prices seemed cheap to them and they could see that property prices here were already rising strongly, so they could park their money in this country and enjoy handsome capital gains.
As the river of Chinese money started flooding in, property prices that were already in overdrive became turbocharged.
And that skewed the market.
Developers responded to this rush of cash with bigger and better dwellings and the cost of new homes inevitably skyrocketed.
That left them with two main customer groups.
Overseas investors, and local buyers on high incomes and/or with a decent chunk of equity, most likely from an existing home that had also appreciated in value.
People on average wages who didn’t already own a home started to be locked out of the market, especially in Auckland.
However that model has served developers well over the last few years and they and their partners such as real estate agents and lawyers have all had a good feed from the profits.
But the market has now turned.
The Chinese Government has clamped down hard on the ability of its citizens to send money abroad, and that has dramatically curtailed the number of overseas investors buying residential property here.
And prices have started heading sideways.
With the prospect of capital gains starting to dry up and rental yields often at minuscule levels, the idea of stashing some cash in this rocky outcrop at the bottom of the Pacific suddenly doesn’t look so attractive.
Which leaves developers to duke it out with each other for the limited pool of local buyers who can afford to buy their product.
There is no shortage of people in this country who want to buy the houses and apartments developers are producing.
But there is a limited supply of local people who can afford to buy the type of dwellings they are providing.
That is something that is unlikely to be lost on the banks, and it’s probably one of the reasons they are being so cautious with their lending on new developments.
The explanatory notes to the Overseas Investment Amendment Bill state very clearly the outcome the Government expects it to achieve: “The Bill will ensure that overseas persons who are not resident in New Zealand will generally not be able to buy existing houses or other pieces of residential land. This will lead to a housing market with prices shaped by New Zealand-based buyers.”
If property developers want to secure their futures they need to stop whingeing and wishing for a return to the halcyon days of a year or two ago and accept that there is a limited market for the upmarket type of properties they have been turning out, and it’s probably getting close to saturation point.
The growth opportunities now are in providing more modest dwellings that more people will be able to afford.
In a video interview with interest.co.nz in November, Housing Minister Phil Twyford said this:
“We are going to be building so much, there are going to be opportunities for New Zealand companies, but we are not averse to the idea of overseas companies that are used to working at scale, coming in and acting as a disrupter and I think possibly shaking up and improving some of the supply efficiencies and doing some of these big projects,” he said.
“And by tendering construction work at scale, at say thousands of homes with multi-year contracts, companies will be able to scale up and invest in offsite manufacturing – build factories that can build quality homes at a more affordable cost.”
Developers should take note.
If they don’t adapt to the changing market and find ways to take advantages of the opportunities it is going to provide, then someone else probably will.
And, perhaps ironically, that someone else just might be Chinese.
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