1 Labour Policy Taking Action in our first 100 days 2018 Demographia International Housing Affordability Survey places New Zealand as the third most unaffordable in the world. 2 1. Unintended consequences In its current form the Bill may have a detrimental effect on both New Zealand and overseas developers, and prevent property development. This in turn may negatively impact housing supply at a time of housing shortage, leading to an increase in property prices and rents. Additionally, the proposed changes to the definition of ?ordinarily resident? may increase pressure on the rental market, as students who would otherwise purchase an apartment or property to live in while they study in New Zealand will instead be required to rent. a. The amendments may hinder property development, in turn decreasing housing supply and increasing house prices For New Zealand developers, New Zealand banks often require a large number of pre-sales in order to agree to fund construction costs. There have already been problems with developers unable to obtain enough pre-sales to satisfy banks, while construction costs rise, leading to developments being abandoned3. It is a common practice for developers to market ?off the plans? developments off-shore to obtain enough pre-sales to be able to proceed with satisfying bank pre-sale requirements, after first trying to sell in the New Zealand market. Under the Bill, overseas pre-sales may no longer be an option for developers as many purchasers of off-the-plan units may be excluded outright, as they will not meet any of the benefit tests if they are buying a single unit in a development. This will reduce the pool of potential purchasers which a development can cater to, and potentially puts the ability of developers to obtain proper finance to complete a build at risk. It also appears to contradict the intention of the Bill, which is to ban speculators from buying ?existing? houses only. The proposed amendments to section 16(1)(e) include the new ?benefit to New Zealand? test. This test will likely catch overseas developers seeking to enter the market; it allows overseas investments in sensitive land so long as they meet that test. While overseas developers already have a higher cost expectation when it comes to doing business in New Zealand, the Bill will impose additional costs in application fees and lawyers? fees for applications on developers. Conveyancing costs will likely increase as lawyers will have to be involved much earlier on in the purchase process in order to advise on the relevant OIA tests and to provide compliance certification. The likely flow-on effect of the above is that the number of new properties being completed and offered for sale in New Zealand is likely to be reduced, which may have the opposite effect of the Bill?s aim. There is already an existing shortfall of built houses over several years and new construction needs to keep up with the increasing population of the country year-to- year, otherwise house prices are unlikely to decrease as demand will go up while supply stays relatively stagnant. b. The amendments may add further pressure to rental property markets, particularly in the main centres For the reasons set out above, there is a concern that increased compliance costs for offshore developers and the inability to get sufficient pre-sales will lead to a reduction in the 3 St James Apartments, Auckland Flo Apartments, Avondale, Auckland; construction of apartments and other properties, for owner-occupiers and investors. This would have the unintended consequence of reducing the stock of rental housing therebg improving the alignment between propertg prices and gields (in other words, further increasing the cost of renting). The proposed change to the definition of ?ordinarilg resident? is also likelg to increase pressure on the rental propertg market in main centres. The Bill proposes narrowing the definition of ?ordinarilg resident? in New Zealand from persons who hold a ?residence class visa? to onlg those persons who hold a ?permanent resident visa?. This in turn affects the definition of ?overseas person? in section 7. Those who do not fall under the new ?ordinarilg resident? definition will have to meet one of 3 tests in order to purchase sensitive land in New Zealand, at a potentiallg significant cost (lawger?s fees, application fees etc). Australian legislation allows temporarg residents such as students and those working in Australia to bug existing residential properties. The New Zealand Bill does not allow this. Currentlg mang overseas students (or their parents) purchase an apartment for them to occupg while theg are completing their tertiarg studg. If these purchases are unable to proceed, these students will need to rent if theg wish to studg in New Zealand, which will add further demand to an alreadg tight rental accommodation market. 2. Concerns with definition of ?residential land? in new 56(1) and new 516 tests Currentlg, Part 1 of Schedule 1 of the Overseas Investment Act 2005 (OIA) clearlg defines the categories of ?sensitive land? that are captured bg the Act. Real estate agents who sell farmland, waterfront land or island properties understand whether the land mag be captured bg the Act, and when legal advice mag be needed determine whether the land is ?sensitive? or not. Onlg if land is sensitive is it then necessarg to analgse whether a purchaser is an overseas purchaser. However, the Bill, via new 56(1), proposes to expand the definition of ?sensitive land? to include land that is categorised in the ?relevant District Valuation Roll? (DVR) as ?residential? or ?lifestgle?. This means that the definition of residential land will be based on planning criteria, determined bg each Territorial Authoritg using the Rating Valuations Rules 2008. As land is categorised in the DVR bg the land?s highest and best use, not the actual use of the land, not all land which mag be used as residential land mag be caught. For example, central business district land mag be zoned as ?commercial land? on the DVR, even when there mag be a building consent to build residential apartments or a mixed-use development on that land. These pieces of land will not be caught bg the Bill as theg are not residential land as defined bg new 56(1) and, therefore, are not ?sensitive land?. So, this land will still be able to be purchased bg overseas persons without needing to seek OIO consent. The inconsistencg between the DVR categorisation and the intended use of the land creates uncertaintg, which will make it difficult for real estate agents and lawgers/ convegancers to identifg at an earlg stage whether land being purchased bg an overseas person might be captured bg the Act. This could result in propertg transactions that ought to have OIO approval, proceeding without it and falling over. Similarlg, the new tests an overseas person is required to satisfg before purchasing sensitive land, including the ?commitment to New Zealand? and ?benefit to New Zealand? tests, are highlg nuanced. As much guidance as possible around the application of these tests in the form of regulations is desirable. In the absence of such direction, it will be difficult for real estate agents and non-specialist lawgers/ convegancers to provide guidance to vendors and purchasers. Recommendations 1. That further consideration is given to the potential negative impact of the Bill on property development in New Zealand and housing supply, and the Bill be amended accordinglg. 2. That clear guidance on the application of the Bill is provided as in its current form, it will be potentiallg difficult for real estate agents and non-specialist lawgers/convegancers to give direction to vendors and purchasers in relation to the new tests imposed bg the legislation. Once again, thank you for the opportunitg to submit on the Bill. Real Estate Institute of New Zealand