NZ foreign buyers: going, going, gone

Proposed amendments to New Zealand’s Overseas Investment Act will restrict foreign buyers from purchasing residential property in New Zealand - but may have some unintentional consequences.

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The bill prohibits all non-New Zealand residents or citizens (apart from Australians and Singaporeans) purchasing residential property, with exceptions for new housing and pre-sales of large projects.

"The policy is likely to have a negligible impact on housing affordability.”

The full extent of the impact foreign buyers have had on the property market in recent years is uncertain.

Foreign purchases account for about 3 per cent of national purchases, although roughly a quarter of these are likely to be Australians. However, it is possible non-residents could be funding transactions through (or with) NZ residents, meaning the proportion of foreign buyers may be understated.

The proportion of property transfers to foreigners appears small both in absolute terms and also when compared with Australia where it is estimated to comprise 7 per cent to 13 per cent of transactions.

Highest bidder wins

ANZ Research expects the new policy to reduce house price inflation – although probably not by much.

The effect is very uncertain, for a range of reasons. But making reasonable assumptions about the impact on house sales, they might reduce house prices by less than half a percentage point - not a large amount, especially considering house prices have risen an average of 9 per cent every year since 2012. 

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While the nationwide impact is likely to be small, effects of the restrictions will be felt more in regions with more foreign buyers, like Auckland CBD.

Prices could fall in central Auckland if domestic buyers do not fill the gap. In other regions, house prices may not be affected at all. However, there has so far been no discernible impact on house prices in central Auckland as a result of the proposed restrictions.

ANZ Research expects a one-off adjustment in the price level until a new 'equilibrium' is reached, implying a temporary moderating effect on house price inflation.

Cause and effect

With the estimated impact on house prices small, the policy is likely to have a negligible impact on housing affordability. However, as with any new policy, it’s important to be wary of unintended negative consequences.

It will be important for the restrictions to be implemented smoothly, so restrictions do not impinge on business operations or reduce the desirability of NZ as an investment destination.

Another unintended consequence could be an increase in rents.

The foreign-buyer restriction, combined with other proposed policies, may make capital gains look less assured or investment look more risky. Investors may seek to offset this by charging higher rents.

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Amongst the debate about foreign ownership it is important not to lose focus of other important issues pertaining to housing affordability, particularly on the supply side.

It is also important to view the issue of foreign ownership in a broader economic context. The fact is NZ has a poor saving record and is reliant on foreign investment to do business.

In a global economy where trade and free-flow of capital have large benefits, NZ needs to be careful not to send a signal it is 'closed for business'; that foreigners – and foreign capital – are not welcome here.

Elizabeth Kendall is a Senior Economist at ANZ New Zealand

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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