Effect of one-two punch will be stark, says Bagrie

'Sentiment will be negatively affected and sentiment is a crucial element of any asset market', says ANZ chief economist Cameron Bagrie. Photo / Mark Mitchell

Economists are divided over the likely impact on the Auckland property market of new tax moves to target speculators.

ANZ chief economist Cameron Bagrie suspects the effect of the one-two punch of Sunday's tax announcement after the Reserve Bank's tightening of loan-to-value ratio (LVR) restrictions for property investors in Auckland will be "stark", given how far prices have moved of late. "The Auckland market is primed to soften," he said.

"Prices have risen by a third in two years. That's a pretty stretched base to keep accelerating off, especially with major sources of buyer demand now being targeted.

"At the very least, sentiment will be negatively affected and sentiment is a crucial element of any asset market," Bagrie said.

But ASB senior economist Jane Turner does not expect the new tax policy to have a significant impact on the Auckland market.

"It's not a large change from the existing policy, though it should ensure it is better enforced."

The policy targets investors who buy in order to make a quick profit.

"While we don't have hard data, our feeling is they are not the majority of property investors," Turner said.

Likewise there is a lack of good data on foreign investment in the market, making it hard to gauge how much the prospect of a finer mesh to the tax net they are already legally subject to will affect the market.

"In our view, the most significant implication of the announcement is requiring foreign investors to register with the Inland Revenue and open a New Zealand bank account. This will make it easier to collect tax owing from foreign investors who made capital gains investing in the New Zealand property market. It also levels the playing field with New Zealand investors," Turner said.

The new tax rules overlay a bright-line test that deems property sales (with exemptions including the family home) to be on revenue account and taxable, if they occur within two years of purchase, on top of the existing intention-based test. They apply from October 1. Bagrie said listings of properties for sale could rise sharply in coming months as sellers looking to take their profit tried to beat that deadline, boosting the supply side of the market.

But Turner argues it could boost demand from investors looking for a quick profit who have not bought their fill yet. "It's possible that property investors, particularly the speculators, could rush in ahead of October 1 to avoid being subjected to the new rules."

Both ANZ and ASB expect the Reserve Bank to lower the official cash rate this year which, all else being equal, would boost demand.

Bagrie sees the "feeding frenzy" evident in the Auckland market recently as symptomatic of a market that is getting toppy, where gravity is about to overtake momentum.

"In six months' time we may be looking at a very different Auckland market, though with the underlying shortage of housing it is difficult to get too bearish about it."