The biggest change we we have seen since 2010 - when depreciation on buildings was revoked - has just hit the residential investment market.

The Reserve Bank of New Zealand (RBNZ) have put their largest set of brakes on investors in an attempt to curb an over-heated property market.

If you want to buy an existing property or one that is more than 30% of the way through construction, you will need to put in 40% of the purchase price versus 20% under the old rules. That’s twice the capital, regardless of price or location. If you are buying an apartment, townhouse or house off-the-plans, your deposit remains at 20% as this category of property is exempt from the new rules.

So what does this mean for investors? If you are a large investor with a decent sized balance sheet, it will probably mean nothing. If you are a first, second or third time investor it has huge implications for what you can and can’t buy.

The RBNZ desperately wants this change – they’re very concerned about the housing bubble bursting. They can’t stop demand but focusing buyers toward new stock in an under-supplied market is a smart move. Investors create new housing for a growing rental pool and typically with new builds and off-the-plan purchasing, pricing is less volatile because developers release set price lists versus tendering or auctioning. The laws of supply and demand still rule but typically price increases are more palatable than the annual increases of 25-30% that we have been seeing in locations such as Auckland, Tauranga and Hamilton.

This sort of growth isn’t sustainable over the long-term and the Government has said ‘enough’. Affordability and house prices are growing further apart. Banks have stress-tested the amount of loan defaults that would occur if interest rates jumped to 7% and it’s not a pretty picture!

They are looking at debt-to-income ratios and when first time investors are paying $600,000- 800,000 for a property that is only rented for $500 to $600 per week, they just don’t have enough income to afford it. Tenants can’t pay more rent because a landlord’s interest bill increases, so the borrower is left to fund the short-fall and the banks' forecasts show they can’t.

So What Impact Will This Have?

Second-hand property being purchased for investment purposes will have far less competition than it did prior to these rules. It’s a huge market so I see this having an impact overnight across New Zealand.

New or existing investors with limited equity will only be able to afford off-the-plan or new builds meaning these two product categories are about to get an influx of buyers.

So what does all this mean for smart investors? You do sensibility tests on debt-to-income ratios. You analyze a purchase with 6% or 7% interest levels. You stand back and ask yourself if $500,000 in Christchurch makes more sense than $800,000 in Auckland for the same rent per week. You get prudent with your purchasing and don’t get carried away with greed in locations that are growing at exponential rates.

It doesn’t mean stop investing – there are still great deals to be had. You have to get ‘smarter’ with your investing and be sure the numbers make sense.

Campbell Venning has been investing in property for over 20 years and is the Head of Property at The Property Factory. He can be contacted at campbell@ thepropertyfactory.co.nz or on 021 515 085