Mortgage interest deductibility 'a surprise to the upside', says non-bank
The mortgage and finance industry is pleased to have a way forward for New Zealand, saying that the three-way coalition government, including its policies, will support confidence and property investor activity.
Almost six weeks’ on from the 2023 General Election, Prime Minister Christopher Luxon and his coalition partners, ACT leader David Seymour and New Zealand First leader Winston Peters, released details of their coalition agreement on Friday. Christopher Luxon was sworn in as Prime Minister on Monday morning, now officially the country's 42nd Prime Minister.
The role of Deputy Prime Minister is to be shared by New Zealand First leader Winston Peters and ACT leader David Seymour, with Peters assuming the role until May 31, 2025.
Coalition Agreement documents released on Friday show that National/ACT intend to fulfill the National Party’s pre-election promises to reinstate tax deductibility on rental properties and “rewrite” the Credit Contracts and Consumer Finance Act (CCCFA), among other changes.
Finance industry reacts to new coalition goverment
Basecorp Finance chief financial officer John Moody (pictured above left) said that in aggregate, the overall policy settings that were announced should provide a positive framework for the property market and industry.
“Announcements in relation to mortgage interest deductibility provide a faster timeline than originally put forward, while intentions in relation to the bright-line test and tenancies also represent good news for investors,” he said.
Independent economist Tony Alexander (pictured above right) said that the reinstatement of mortgage interest deductibility is likely to encourage more investors back into the market.
Following “massive disorganisation” of the previous six years, it was good for New Zealand to have what looks like a “steady policy platform and a plan” in place, Alexander said.
Kiwi Adviser Network general manager Sarah Johnston (pictured above centre) said that knowing the structure of the incoming government was important for the mortgage industry and for the country, supporting investor activity and financial decision-making.
“Any positive news we get for our investors is obviously a benefit, making them feel happier about the market, and that this is a place they can play and do business in,” she said.
Interest deductibility rules a “surprise to the upside”
According to the National/ACT Coalition Agreement, full (100%) deductibility is to be restored in 2025/26 (April 1, 2026) as originally promised, with a 60% deduction in 2023/2024 and 80% in 2024/2025.
Landlords will have the ability to issue a 90-day notice to a tenant to end a periodic tenancy without providing a reason or applying to the Tenancy Tribunal and notice periods for landlords wishing to sell a property will be returned to 42 days (21 days for a tenant wishing to move), the document shows.
Moody acknowledged that the changes in interest deductibility represent a “surprise to the upside”. The National Party had previously proposed that it would keep interest deductibility at 50% in April 2024, rather than have it reduce to 25% as planned by Labour.
Ultimately, the restoration of investors’ ability to deduct interest “significantly improves the cashflow equation”, particularly given the current level of interest rates, he said.
“It’s a positive signal that should bring real confidence not just in relation to this particular change, but also in what it says about the governments approach to investors will be in this 3-year term,” Moody said.
Referring to real estate reports showing investor activity had been subdued over the last 18-24 months, Moody said that while there had been some improvement in recent months, election uncertainty had “further weighed” on the market.
“The investor category, across both short and long-term products, has been a key one for Basecorp and we expect to see this continue to trend upwards in 2024 - particularly if interest rate expectations further moderate and we begin to see rate decreases on the horizon,” he said.
Alexander also acknowledged that the changes to mortgage interest deductibility would arrive sooner than expected. He noted that ability for property investors to offset 80% of interest paid on the mortgage against rental income from April 1, 2024 was the next best thing to having it fully restored.
Property investors would likely be motivated by the idea that other investors were moving back into the market, and the desire to purchase first, he said.
“It clearly is going to encourage investors to think of making a purchase sooner rather than later,” Alexander said.
CCCFA rewrite unlikely to change credit appetite
According to the National/ACT Coalition Agreement, the government will “rewrite” the Credit Contracts and Consumer Finance Act (CCCFA), to “protect vulnerable consumers without unnecessarily limiting access to credit”.
Former Financial Advice New Zealand CEO Katrina Shanks said in October that areas of the legislation still need to be addressed, noting that the legislation did not cater for payday lenders, suggesting the design of separate legislation for this lender group.
Moody said that in Basecorp’s view, the limited roll-back of the CCCFA by the Labour government had reduced some of the most problematic provisions of the Act. Any further changes to the CCCFA legislation are not likely to materially change bank credit appetite, including that of Basecorp Finance, he said.
“We base this view off the bank credit conditions survey, which shows credit availability from banks at very healthy levels and well off the 2022 lows,” Moody said.
“Anecdotal views from advisers also support the view that banks, in looking for market share, are as competitive on underwriting as they have historically been, and there has been recent innovation in this space with a low-doc refinance product from Westpac reflective of some of the CCCFA amendments.”
Moody said that Basecorp Finance agrees with the aim of the original CCCFA legislation, to ensure that loans are suitable and affordable and to protect vulnerable consumers as part of the underwriting process.
Basecorp Finance would therefore like to see the CCCFA “continue unchanged”.
“We also think any review of the CCCFA, plus any accompanying changes, introduces a level of regulatory uncertainty to the industry and yet more change to systems and processes as implementation occurs,” Moody said.
Alexander said that in his view, a rewrite of the CCCFA would largely be positive and that further tweaks would support credit access.
He noted that banks remained cautious about their liability under the legislation and said that they would likely wait for clarification around the timing of the CCCFA rewrite before easing the rules.
“At the moment, the banks don’t seem all that interested in gaining market share…there’s been no Spring mortgage campaigns and I don’t think anticipation of the CCCFA changing is going to much change their behaviour in the near future,” Alexander said.
“I think they’re still largely in their shells when it comes to lending, especially to investors.”
Interest rates and inflation remain a challenge
Alexander also noted that ANZ monthly Business Outlook Survey for October had already showed a jump in business expectations for the economy in a year’s time, and improvements in investment and employment intentions.
Moody said that while confidence is trending upwards, 2024 will be a year of “real challenges” for the economy. While confidence is likely to continue to trend upwards, high interest rates and inflation is likely to continue to weigh on sentiment, he said.
In a media statement released on Friday, Luxon said that changes that the new Government would make mean that despite the “challenging economic environment”, New Zealanders could look forward to “a better future”.
The three-party coalition government marks the first in New Zealand’s MMP history, with all parties represented in Cabinet.
From a business and finance perspective, Nicola Willis is listed as the Minister of Finance, Chris Bishop the Associate Minister of Finance and Andrew Bayly the Minister of Commerce and Consumer Affairs and Minister for Small Business and Manufacturing.
What do you think of the three-way coalition government and how might the incoming policies affect the property market and access to credit? Share your thoughts in the comments section below.