50,000 homes open for purchase by foreign home buyers under National's plan

Thursday, 31 August 2023

National's newly-proposed tax plans will open up about 50,000​ homes to purchase by foreign home buyers if enacted, according to CoreLogic data.

Under the proposed plans, which may become reality if National triumph at the October election, foreign home buyers will be allowed to buy any home that costs $2 million or more, but they would be hit with a 15% tax.

Those 50,000 homes made up only about 3%​ of the New Zealand’s 1.7 million properties, but in more expensive locations the proportion of homes where Kiwis will be competing with foreign buyers is much higher.

In Auckland, about 15% of homes (or 39,000 properties​) would be open to purchase by foreign buyers, under National’s plan, based on current price estimates.

In Queenstown, it was about 11% of homes (or 2200 properties​).

There are also questions around the amount of tax revenue the plan will generate, with the opposition and CoreLogic casting doubt over National’s claim the plan will bring in $740m a year,​ which it said would come from the sale of less than 2000​ homes per year to foreign buyers.

Under National’s plan, foreign purchases would incur a 15% foreign buyers tax, meaning a foreign person buying a $2 million home would pay $300,000 in tax​.

The foreign buyer ban would remain on properties less than $2m under the plan.

In other main centres the proportions of homes that would be up for grabs to foreign buyers was lower – in Wellington just over 1% of properties (or 800 properties​), in Christchurch it was 0.8% (or 1250 properties) and in Hamilton it was 0.3% (or 200 properties)​.

CoreLogic head of research Nick Goodall said the removal of the ban and introduction of a tax could result in a lift in foreign investment of residential properties.

“Especially with the reduction of the bright line test too, as once they’ve bought the property, if they hold longer than two years they won’t be required to pay any tax on capital gains made,” he said.

“So for foreigners looking to ‘park wealth’ somewhere, New Zealand could be very attractive, even with the 15% tax on the purchase.”

Goodall said while technically the policy only related to properties worth more than $2m, it could affect the broader market if foreigners chose to hold the property, but not live in it, or put in a tenant. That would reduce the overall supply of housing for locals and could flow through to higher prices for all properties.

“I think this could particularly be the case in places like Queenstown, which already has a shortage of properties, particularly affordable ones for workers to live in.”

Questions over revenue from new plan

CoreLogic stats showed in the year to the end of June, 2600 properties sold for $2m or more. In the same period the year before, it was 5700. The year before that, it was 5500​.

Based on these numbers, Goodall had questions over whether the new plan would generate anything like the sums National had projected.

“I also did a quick calculation to see where the $740m tax take came from, and I’m struggling to figure it out,” Goodall said.

“If you assume 5% of the 2600 properties sold above $2m went to foreigners at an average price of $2.5m, that would only raise $50m at 15% tax rate – a long way short of the $740m.”

Labour finance spokesperson Grant Roberts was also quick to find issue with National’s projections.

“National is banking more than $700 million a year – nearly half of its revenue initiatives – from a 15 per cent tax on foreign home buyers. But their numbers are based on incredible assumptions about how much this will raise,” he said.

Labour’s housing spokesperson Megan Woods said that before the foreign buyer ban in 2018, an average of 4120 homes a year were sold to foreign buyers.

“National’s plan assumes 48.5% of those homes would be sold for over $2m , despite homes of that value being only five% of the market,” Woods said.

National has been approached about its policy’s tax-take projections.

The ban on foreign home-buyers was brought in by the Government in 2018 as a way to take some of the heat out of the property market and keep foreign speculators away.

The ban appeared to achieve its desired effect.

Statistics NZ data shows the number of homes bought by people without New Zealand citizenship or resident visas reduced from 3801 in 2018, to 492 in 2022.

According to CoreLogic, on average 90,000 to 100,000 properties were transacted a year, suggesting foreign buyers were not a huge contributor to demand, but were a contributor.

However, National pointed to research published last year that compared the effect of New Zealand’s foreign buyer ban to foreign buyer taxes imposed in Australia and Canada.

The research, conducted by researchers at Stanford University and Baruch College in the United States concluded taxes passed in Canadian cities Toronto and Vancouver, and Sydney and Melbourne in Australia had significantly negative and persistent effects on house prices. New Zealand’s ban on foreign buyers, for existing housing, had no statistically significant effect on house price growth.

National’s tax plan stated a similar tax-based approach to foreign home buyers had been used in the likes of British Columbia (Canad), and New South Wales (Australia).

“National’s foreign buyer tax means it will be very difficult for speculators to make a profit selling houses in New Zealand. This will help deter investors who are not interested in making a genuine contribution to New Zealand,” National finance spokesperson Nicola Willis said.

National had sought legal advice, which had advised its plan did not contravene existing trade deals.

”National has received legal advice finding that a foreign buyer ban could be reinstated in the future, although National believes its proposal for a foreign buyer tax – which supports our plan for tax relief – is a better policy,” Willis said.

Auckland Property Investors Association general manager Sarina Gibbon said her first reaction to the policy was that it would lead to more buyers in the market, and even if isolated to higher-end properties, that would still create demand.

She did not think the policy would be one that the association’s members would pay much attention to, because they were mainly interested in rental properties, and few $2m properties would make good rentals.

In its tax plan documents, National argued overseas investment could benefit Kiwis, but current rules could stop some people choosing to.

“In particular, for many investors and potential migrants, the ability to own a home is a major factor in deciding whether to bring their companies, expertise and talent to New Zealand,” the tax plan said.

Willis did not respond to questions on whether foreign buyers would be assessed to see if they intended to invest in any other way in New Zealand, other than buying the home, prior to being approved for the purchase.

Sensitive land tests would still apply to foreign buyers.

KPMG tax partner Darshana Elwela said National’s plan may impact those in certain locations like Auckland more than other places.

He also said it was not clear whether the threshold of $2m would be adjusted over time if house prices increased, but he expected this could happen.

He said the policy appeared to be similar to a stamp duty.

“There are a range of design considerations that will need to be worked through,” he said.

“The suggestion that it would apply at point of purchase would suggest there will be a withholding mechanism to ensure the foreign buyer tax is paid. If so, it’s not clear who would be responsible for this.”

Elwela said it could be the seller, or purchaser’s lawyer.

It was also unclear who would administer the regime, and whether it would fall to the Inland Revenue (IR) or Land Information New Zealand (Linz), or how the process for withholding the tax would work.

“We assume there will be some withholding mechanism as National’s policy is for purchasers to pay the tax at point of purchase.”

He also said the foreign buyer definition appeared to be based on whether they hold a resident class visa.

“This is different to the test that is currently used for other withholding on certain land transactions, so solicitors may need to change processes to ensure the foreign buyer tax is separately recorded and collected.

”It is expected to deter speculators as speculation should not be profitable when this tax is factored in.”

The Overseas Investment Amendment Act, which introduced the ban, includes exceptions designed to allow overseas investors to make investments that would increase housing supply.

These included allowing 60% of the apartments in a new development to be sold to foreigners, and the increased housing pathway, which allowed overseas persons to purchase land for development under certain circumstances.

Australians and Singaporeans were also excluded from the restrictions.