New Zealand's booming house prices could finally be reigned in by a new rule removing property investment tax breaks that was likely to chase some investors out of the market, pundits say.
The Government today announced it would stop allowing property investors to claim interest paid on home loans as a business expense - a benefit that typically helped them lower their taxable income.
That was likely to make it harder for investors to afford to pay for short term costs - such as mortgage repayments - while they waited for their properties to go up in value so they could profit from capital gains at resale, analysts CoreLogic said.
It meant more investors would now "think twice" before buying a rental property, Nick Goodall head of research at analysts CoreLogic said.
And - when combined with new tougher measures expected to be announced by the Reserve Bank in May - Goodall suspected skyrocketing house prices might finally be slowed.
"When you add it all up, we actually might see these measures affect prices in the market this time around," he said.
It comes as house prices defied predictions of a fall due to the economic impact of the Covid-19 impact to leap through one of the biggest booms in the Past two decades.
Auckland's median sales price soared to $1.1m in February, jumping almost 25 per cent higher than a year earlier, Real Estate Institute figures showed.
National prices climbed 23 per cent to $780,000.
That prompted the Government to announce a suite of measures today aimed at curbing the price growth and tilting the market in favour of first home buyers.
Among other measures was an announcement the bright-line test would be extended to 10 years, up from five years.
That meant anyone reselling a home - that wasn't their family home - would pay tax on any rise in value of the house if the home was bought and resold within a period of 10 years.
Yet while significant, Westpac acting chief economist Michael Gordon agreed with CoreLogic's Goodall that the real game-changer was the Government's move to scrap interest deductibility - or the ability of investors to claim interest as a business expense.
"This is the big thing, not the bright-line test," he said.
"This goes beyond levelling the playing field and tips it quite firmly in favour of owner-occupiers and first home buyers."
He said the new rule effectively differentiated residential property investment from other types of businesses.
"All businesses are allowed to deduct their expenses, so to now go all the way to remove all interest deductibility will have a major impact on investors."
He said the bright-line test - based on past experiences of it earlier being extended from two years to five years - would basically require investors to be a bit more patient before selling and wouldn't likely have impacted house prices on its own.
With booming house prices having defied earlier predictions of a fall, Gordon was cautious about what would happen as a result of the new rules.
"It is a difficult question to say about where we see the market settling once we see rental property owners exiting," he said.
CoreLogic's Goodall said that while the Government was typically limited in its ability to impact house prices, the new removal of interest deductibility was likely a stronger step than many had expected.
"There is an overarching rhetoric that you can't get away from where the Government is saying we do not want speculators in the market and we need to ensure the capital growth reduces."