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What the foreign buyer ban means for ordinary kiwis - 17th Aug 2018

What the foreign buyer ban means for ordinary kiwis

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The passing of the foreign buyers ban this week - but what effect will the legislation have on the different segments of the property market?

The Overseas Investment Amendment Bill stops overseas buyers from purchasing most types of homes, except for new apartments in larger scale developments.

Existing homes will no longer be available non-residents other than those from Australia and Singapore due to existing free-trade deals.

The Bill will officially become law once it receives the Royal Assent in a few weeks’ time, and the new screening requirements will start within two months of that date.

Associate Finance Minister David Parker says the bill's aim is to stop New Zealanders being outbid by wealthier foreign buyers and demonstrates the Government's commitment to making the dream of home ownership a reality for more Kiwis.

But will the law achieve Labour’s aims? We talk to the experts.

What the ban means for BUYERS

Liz Kendall, senior economist at ANZ, expects the foreign buyer ban will have a dampening effect on the housing market – the question is how much.

"Our central expectation is that the direct impact of restricting purchases will be small and temporary, since the proportion of sales going to foreign buyers is estimated to be quite low," she says.

"However, there are a number of headwinds acting on the market at present and the ban may create uncertainty and weigh on the market more than we anticipate.

"It’s also possible that we see some volatility as a result of the ban, with some foreign buyers potentially bringing forward purchases ahead of it coming into effect, with sales dropping thereafter."

Kelvin Davison, senior researcher at CoreLogic NZ, point out that foreign buyers are a relatively small share of the market for existing homes – representing 2.8 percent of buying nationally in the second quarter of this year and 1.2 percent of selling.

"Over the past seven quarters, the total net transfer of properties into foreign ownership is about 2,800, which is tiny compared to stock of 1.6 million dwellings," he says.

"There are pockets where the figures are higher (e.g. Central Auckland, Queenstown), but in some cases the foreigners buying in those markets are looking at super-luxury stock, that locals would never be interested in anyway."

He added that there were already other factors in play that have held down foreign activity. "Chinese capital outflows have had a dampening effect, and that local banks won’t accept foreign income on a mortgage application."

Bindi Norwell, REINZ chief executive, doesn’t believe the law will achieve Labour’s aims. “We have been very vocal over the past year that we don’t believe that banning foreign buyers from purchasing property in New Zealand is going to have any impact on house prices nor will it help young people into their first homes,” she says.

Property Institute CEO Ashley Church agrees, arguing that the Government's rationale is flawed due to a skewed focus on people with Asian-sounding names in the Auckland area and that the impact on buyers will be “pretty minimal”.

“This piece of legislation is a complete waste of time and has been done for political purposes, essentially to deal with some ideological issues that are important to Labour,” he says.

QV General Manager David Nagel, though, thinks the move may open up some new opportunities for those who may have been struggling to enter the market.

“It’s likely to be a further boost for first home buyers with easing competition from investors and migrants already influencing the market, the reduced activity from overseas buyers may add to the opportunity for first home buyers to gain a larger slice of the pie,” he says.

Mr Davidson says on paper the "ban" should be favourable to Kiwi buyers, because it takes out one source of competition, but as overseas buyers are a relatively small part of the market, it's unlikely this effect will be all that noticeable.

"In terms of the competition that a local person may face to actually secure a property, the removal of foreigners will tend to make that a bit easier. But it’s far from clear that prices would be affected – the foreigners who have previously been able to secure the properties may have paid only $1 more than the losing buyer," he says.

What the ban means for SELLERS

Westpac chief economist Dominick Stephens believes the ban will have an impact on those looking to sell in the Auckland and Queenstown markets, but will have less effect on a national level.

A 15 percent stamp duty on foreign buyers introduced a couple of years ago in Toronto shut many foreign buyers out causing house prices to fall about 6 percent, and similar effects may be seen here, he says.

“For Auckland and Queenstown, that is a reasonable starting point for thinking about the type of impact the foreign buyer ban might have,” he says.

“For other regions of New Zealand he says the foreign buyer ban will be less noticeable, since foreign purchases are such a small proportion of the total.”

Church agrees: “There's never been any particular incidence of substantial foreign residential investment in the regions so the effect of the ban there will be even less.”

Kendall says the ban will bite the central Auckland market, which is dominated by apartments. “Indeed, house prices could fall in central Auckland if domestic buyers do not fill the gap. Hamilton and Queenstown may also be affected to some degree. But in other regions, house prices may not be affected at all.”

Mr Davidson says it’s worth remembering that not everybody wants a foreign buyer ban. "For example, for super luxury homes, foreigners may be the only ones that can buy them." 

What the ban means for INVESTORS

QV's Nagel thinks the effect will likely add further to the residential slowdown being seen around the country, with a combination of tightening credit conditions, gradual easing migration data as well as the changing rules for investors.

"With the bright line test being extended, ring fencing losses and Healthy Homes legislation, these will all contribute to ease back the rate of growth.”

Church says the amendment to allow foreign buyers into the new build market is one of the few positive aspects in an "otherwise fairly murky piece of legislation”.

“Auckland has a massive shortage of dwellings and needs more houses built as quickly as possible,” he says.

Mr Davidson says: "Many developers have welcomed the tweak to the legislation to allow foreigners to invest in new apartments, in order to allow these to actually get built. This has to be a good thing for NZ housing supply, both from a total point of view and also that it might shift us more towards higher density living.

"The laws also still allows for foreigners to buy residential land and develop it to add to the housing stock."

However, Stephens warns: “Allowing foreigners to purchase new apartments off the plan will really water down the price impact relative to what it could have been.

”This allowance will create a bifurcated apartment market. Foreign buyers will pile into the new apartment segment of the market, and New Zealanders will squeezed out of that segment. Instead, Kiwis will go into the second-hand apartment market, which foreigners have been forced to exit. To the extent that the availability of new apartments satisfies foreign demand for property in New Zealand, the overall price impact of the ban will be ameliorated.”

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