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Foreign buyer rule change may have unintended consequences

A law change stopping foreign investors buying New Zealand houses could have unintended consequences.

The Overseas Investment Amendment Bill has passed its first reading and will go to select committee.

It amends the Overseas Investment Act to classify existing houses as sensitive, meaning non-residents need consent to purchase them.

Foreign investors can still buy new builds but must then sell them on.

Economist Shamubeel Eaqub said it made sense: "The idea is that foreign investors can invest in the development but not in the house."

But in an update, Bell Gully lawyers said it was a potential problem.

"This appears to be an onerous condition that will effectively close down pre-sales to overseas persons who are looking for a rental property investment," they said.

"It also does not appear to allow an overseas buyer to hold the property if there is a market downturn during the construction period. Conversely it would seem to result in any gain being taxable both under ordinary principles as well as under the two-year bright line test."

Ryan Greenaway-McGrevy, senior lecturer in economics in the University of Auckland business school, said the requirement to sell new property was necessary.

"Encouraging foreign capital to finance new construction is great in theory, since we need additional housing. But in practice, new construction is also a potential loophole for non-residents to purchase existing housing.

"The on-selling rule acts as an additional deterrent to non-residents that would otherwise use new construction as a loophole to subvert the desired effect of the ban," he said.

"Without the on-selling rule, the legislation may unintentionally encourage significant modifications to existing properties solely for the purpose of getting around the ban. That would be a waste – and would put additional pressure on the construction sector."

But he was concerned about how the rule change would affect the finance of large-scale apartment complexes, such as in downtown Auckland.

"These projects often rely on selling off-the-plans to foreigners in order to raise sufficient capital to get the project off the ground."

Treasury has warned that a rush to ban overseas buyers could have "sub-optimal" or "unintended consequences".

But the rule change is required before the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (formerly the TPPA) is signed.

Greenaway-McGrevy said the change always needed to be introduced quickly to avoid a rush to get in that would further push up prices.

"Campaigning on the ban and then waiting a year to actually implement it would have been counterproductive. If the laws need to be tweaked, they can be amended."

It is expected that only a small number of buyers will be affected by the rule changes. It is estimated that foreign investors are about 3 per cent to 5 per cent of the market.

Banks have already ruled out a lot of foreign buying by excluding foreign income from their considerations of whether borrowers can service a loan.

Associate Finance Minister David Parker said the law "recognises and reaffirms that it is not a right for an overseas buyer to purchase a house here".

"Our objective is to ensure that the New Zealand housing market is shaped by New Zealanders."

"We want to encourage foreign investment where it adds to our economy. But investment in existing homes by those who have no right to reside here, and no intention to live here, does not achieve that objective unless they add to housing supply," Parker said.

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