Bright line changes won’t lead to ‘flood’ of new rentals

Tuesday, 2 July 2024

Changes to the bright line test will help increase the supply of residential property for rent, the Government says.

There is unlikely to be a sharp increase in the supply of rental properties due to the reduction of the bright line test to two years, industry figures say.

Under the bright line test, sellers have to pay taxes on the profits from the resale of properties that are not classified as their main home, and are sold within a certain time frame.

That time frame used to be 10 years for existing properties, and five years for new builds.

But from July 1, the bright line test has been scaled back to two years, as part of the Government’s commitment to encourage more people to invest in residential rental property.

Revenue Minister Simon Watts said the change would help increase the supply of residential property and put downward pressure on rent.

The government will now no longer backdate tax write-offs for landlords to 2023, citing the current fiscal situation.

A big problem that was causing rents to skyrocket was the lack of availability of residential properties for renters to choose from, he said.

“By making investment in residential property more attractive, we will see a greater supply of properties in the market which will support rent becoming more affordable.”

The application of the main home exclusion from the bright-line test had also been simplified by introducing a clean test for what was exempt, he said.

“This will make it easier for homeowners to get their property onto the market and sold. This will mean more properties for renters to choose from, taking some of the upward pressure off rents.”

Property Brokers general manager of property management David Faulkner said there would not be a “flood” of new properties on to the rental market due to the bright line test changes.

Some prudent investors who had the ability to buy might be in a position to do some good buying, he said.

“But it is around 5 to 6 o’clock in the property market cycle, so most people are not looking to buy or sell rental properties, and that will be the status quo until interest rates start to come down.”

There was a reasonably good supply of rental properties at the moment, and rents were coming back a bit, but it was to do with a shift in the supply and demand equation, he said.

The bright line test changes will not lead to a “flood” of new properties on to the rental market, Property Brokers’ David Faulkner says.

“If you look at Wellington rentals on Trade Me, for example. There has been a 23% increase in stock, but an equivalent decrease in traffic on the website, so demand is down.

“People who might have considered selling know there is a lull in the market, so they are looking at different options, and that includes listing their property for rent.”

Changes to the Airbnb rules also meant some property owners were looking at different options, and the long-term rental market was one of them, he said.

“So rental stock is increasing anyway. We might see rental stock increase in future but it is interest rates, rather than the bright line test change, that will be the key driver of that.”

Auckland Property Investors Association general manager Sarina Gibbon welcomed the bright line test changes, but said they were unlikely to cause lots of investors to rush out and buy.

Investors bought on the numbers, and if the numbers stacked up, bright line test or not, they would buy, she said.

“The bright line test is not a deal breaker. It is the realities of the headwinds investors are facing that are holding buyers back.

The bright line test change will support landlords, the Auckland Property Investors Association’s Sarina Gibbon says.

“Interest rates are still super high, there is tougher lending criteria at play, and debt-to-income ratios also came into force on July 1.”

For that reason, it was a bridge too far to suggest the bright line test changes alone would lead to a big increase in supply, and downward pressure on rents, she said.

“But we do support the resetting of the bright line test, and believe that along with other policies it will give landlords greater ability to absorb the financial strain.

“It will give them more confidence that if the worst comes to the worst they will be able to sell without being hit by bright line, and they can reinvest in another property or asset class.”

CoreLogic chief property economist Kelvin Davidson said the shorter bright line test was arguably going to drive more selling activity than buying.

“Due to the substantial top-ups required for some investors, but also an early ‘escape’ from capital gains tax, some existing landlords will start to list.”

Economist Tony Alexander’s latest property investor survey showed the proportion of existing investors thinking about buying another property increased slightly to 19% in June from 17% in May.

But that was still the equal lowest such reading in the three years the survey had been running, he said.