CoreLogic says a spike in investor sales or sharply rising rents don’t seem particularly likely.

Higher mortgage rates might be the key concern for property. Especially now that the loss of interest deductibility will be felt more keenly when rates do rise.

On top of that, loans are larger than ever before. And from such a low base, even a small rise in mortgage rates is proportionately large – especially for the many borrowers who have only ever seen rates fall, says Kelvin Davidson, senior economist.

It’s been two weeks since the Government’s announcement to extend the bright-line test and to taper/remove mortgage interest deductibility for investors.

Amid all of the expert commentary, news headlines, and social media debate, CoreLogic has taken an evidence-based perspective.

It suspects the impact for owners of rental properties may be limited in the short term and relatively few will push ahead with sales.

Calculations for the 21,000 or so investor purchases with a mortgage in the past 12 months (average price paid of $820,000 and assumed 30% deposit), the extra cost is only about $700 this tax year.

On top of that, the figures will be less for those who have owned for longer or have lower debt anyway.

Tax bills will rise as the interest deductibility change phases in and, of course, these are cash costs that need to be paid – as opposed to the offsetting benefit of capital gains “on paper”.

But even so, says Davidson, those capital gains have been substantial, at an average of $98,000 for recent buyers (let alone what might continue to accrue in the coming months), far outweighing any extra tax.

For further context, the chart shows the dollar rise in average property values over various periods – eg in the past two years alone, almost $159,000 (23%).

CHART 1

This highlights another incentive for owners not to sell (if they can avoid it). It could trigger a significant bright-line liability.

Davidson says at a 33% tax rate, the $98,000 gain for recent buyers is more than $32,000 tax, far costlier than the loss of interest deductibility.

In addition, the low returns from other assets, such as term deposits, raises the question of what would sellers do with their released equity?

The lack of a big sell-off by existing landlords suggests no major change in the stock of rented properties. This undermines the arguments that rents will spike as a direct result of this policy change.

“Historical rental growth across existing tenancies has been steady at about 3% per year for a fair while, and even when rents on new tenancies have risen more quickly, peak growth hasn’t gone much above 5%.

For context, the Infometrics measure of average household income has risen about 4% over the past 10-15 years, or in other words, rental growth tends to track incomes closely.”

In the same vein, there’s no clear evidence previous changes to the regulations – Healthy Homes – or cost of ownership – removal of depreciation, ring-fencing of tax losses – have directly caused rents to rise in aggregate.

However, there are likely to be greater effects on the mix of investor purchases from now on, says Davidson.

“The incentive to buy existing properties has been reduced, and there are now stronger reasons to look at new-builds, which are exempt from the LVR limits, bright-line extension, and the interest deductibility changes.

“This, however, might have the perverse effect of ‘crowding out’ first home buyers, a group who have a higher market share for new-builds than all properties.”

He says there are already clear signs the reinstated loan-to-value (LVR) limits have dampened investors’ buying activity, an effect which could well be amplified by the Government’s policy changes.

The chances of further regulation in the form of caps on interest-only lending have significantly reduced, not least because equity is now king from a borrower’s perspective. So there may not be as much demand for interest-only loans.

CHART 4

Meanwhile ASB senior economist Mike Jones says a slowing in house sales is expected to come through over April and May.

ASB economists had been expecting a slowdown over the second half of the year.

“The Government’s actions to quell investor demand mean the slowdown will now be more rapid,” says Jones. “Rather than market heat reducing to “simmer”, it’s more akin to a dousing in ice cold water.”

He says fewer sales will allow housing inventory to finally lift, easing market tightness and reducing the upward pressure on prices.

General uncertainty also leads to lower levels of activity, and this is likely to continue as we wait to see if the RBNZ will gain additional housing tools. It’s also possible the May Budget will contain additional housing.

However, the four-year phase-in period for the changes to interest rate deductibility on already-held properties will blunt the immediate impacts and afford investors plenty of time to assess, says Jones.

“Some parts of the proposals are also still out for consultation and may end up being watered-down.”