What do bright-line changes mean for the NZ property market? 

With changes to the bright-line period already in effect and the market starting to respond, can we expect significant shifts in the housing market?

Wade Cornelius, Managing Director of NZSIR Marlborough, examines how these shifts may play out and what you need to know if you’re thinking of selling.

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What's changed with bright-line testing?

Off the back of election promises, the coalition Government lowered the bright-line test period from 10 years to two years, which came into effect on July 1, 2024. Essentially, properties sold on or after this date are now only subject to the bright-line rule if the property is sold within two years of being acquired. Properties acquired before July 2022 are now exempt from the bright-line test, as the sale of these homes will have occurred over two years ago.

The bright-line changes have come as no surprise to anyone—whether investor or first-home buyer. And while we can expect the changes will likely impact investor strategies, homeowner decisions, and overall market dynamics, will it be significant?

With so many factors influencing New Zealand's housing market dynamics, will the bright-line period make a ripple?

Property Investors

Unsurprisingly, investors stand to benefit from the changes. We can expect increased activity as investors are enticed by a reduced tax burden on short-term property investments. We will likely see investors return to the market as they enjoy stronger returns on investment and the ability to diversify property portfolios across geographical regions more efficiently. 
 
Investors will also welcome the return of interest deductibility. This allows investors to claim interest as an expense for any residential investment property they own, irrespective of when the rental property was purchased or when the loan was drawn down. The changes are happening in two phases:

• From 1 April 2024, you can claim a deduction for 80% of the interest on funds borrowed for the residential property 
• From 1 April 2025, you can claim 100% of the interest deduction instead of 80%

First-Home Buyers

With investors now motivated to capitalise on shorter holding periods, we can expect to see more properties put up for sale. While this will be welcome news for first-home buyers, they may also find themselves in a competitive market. I think we could possibly see upward pressure on pricing due to the increased competition, and first-home buyers should be very clear about their requirements, have their finance sorted and be ready to act quickly. Being open to professional advice can make a big difference in this environment. 

There are a few exclusions to the bright-line, these include:

• Properties that are your main home
• Farmland and business premises
• Inherited property, or if you're the executor or administrator of a deceased estate
• Properties impacted by Cyclones Hale and Gabrielle in early 2023 

Other factors at play in the property market

While we can expect the bright-line changes to cause a few ripples in the market, I'm not convinced they will be significant at this stage. There are so many factors are currently at play in the New Zealand property market, and we will continue to see these impact pricing behaviour and clearance rates. 
 
Here are a handful of some of these factors: 
 
Migration 
A significant factor impacting New Zealand's property market is net migration. As we currently witness record departures by NZ citizens, non-New Zealanders are filling the void, contributing to a net migration increase (over 500,000 year-to-date). This significant demographic shift directly impacts both the rental and sales markets. 
 
Rental availability 
Rental vacancy rates have seen a notable rise in the main centres—Auckland, Wellington, and Christchurch, and regionally, Northland. These areas are now experiencing vacancy rates exceeding the national average, which hovers just under 2%. This should encourage investors to investigate emerging urban locations with growing populations in order to diversify the geographic concentration of their investments.  
 
Market pressures and investor dynamics 
In the coming months, the lower end of the property market, where first-home buyers and investors typically engage, is expected to feel the most pressure. This segment historically sees higher turnover, and with the new bright-line rules, we could see increased activity as investors look to capitalise. Urgency among buyers may also be heightened by the forecasted drop in the OCR and cost of lending. 
 
Geographic diversification 
New Zealand's recent run of natural disasters has highlighted the need for robust risk mitigation among investors. Consequently, one emerging trend is the geographical diversification of property portfolios. Investors are increasingly favouring regions with lower rental vacancy rates and strong yield potential.  

The final word

As always, research and local knowledge are pivotal in making a property decision, particularly when new dynamics are at play. I strongly recommend seeking professional advice from your accountant or taxation specialist before making any major property decisions in light of these changes. Navigating a changing real estate landscape can be complex, however, you are well supported when working with New Zealand Sotheby's International Realty. With our expert knowledge and extensive referral system spanning national and global networks, you have access to invaluable insights and opportunities. 

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Wade Cornelius is the Managing Director of NZSIR Marlborough.