Are new builds worth the hype?

Anna
Anna
7 February 2022

Photo by Rodolfo Quirós from Pexels

There are many Government incentives available at the moment, which makes building new houses or buying new builds an increasingly attractive offer. These incentives are put in place to increase the national housing pool to support NZ growing population, and stimulate activity in the construction industry to assist economic recovery from the impacts of COVID-19. But is buying a new build a good investment for you?

Advantages

Tax Incentives

In March 2021, the Government announced new investor tax policies, ending tax deductions on interest costs for rental properties. But the Government has decided to exempt new builds for 20 years from the new tax rules. This means that property investors can continue claiming interest tax deductions, which significantly improves the returns that many landlords can earn from their investments.

Additionally, the** bright-line test is kept at 5 years** instead of 10 for new-build investment properties.

LVR exemptions

The re-introduction of loan-to-value restrictions (LVR) on November 1, 2021, means most investors need a 40% loan deposit to secure a property. But again, these LVR rules don't apply to new homes. With new builds requiring only a 10% deposit, it's much for property investors to secure a loan.

Healthy Homes Standards Compliant

Generally speaking, new homes are built to a higher standard due to improvements in the Building Code, almost guaranteeing compliance with the Healthy Homes Standards. Additionally, with many builders guaranteeing their work for ten years or so, fewer maintenance issues should be reported and less money spent on fixing them in the next decade.

Extended settlement time

Buying off the plans requires typically only a 10% deposit with settlement months away upon completion. During this time, house prices may increase, and the final price will be below market value.

Disadvantages

Compromised location

Location of new builds may affect tenants appeal. For example, established neighbourhoods near town centres, popular schools and transport are often built up with little land available for new developments. The odds are, too, that new builds will not have mature landscaping and unique appearance to cut through the noise and stand out amongst similar properties.

Construction delays

Statistics NZ showed a record number of new homes consented in 2021. However, such an increase in enthusiasm exacerbated by lockdown disruptions is hard to support. The construction industry lacks skilled workers and building materials resulting in a backlog of work and longer building timeframes. There is an added fear that small and inexperienced building companies dealing with a lack of working capital, climbing costs and supply chain delays may struggle to stay in business.

Possible budget blow-outs

Labour and material shortages caused by excessive building demand and the disrupted international supply chains amidst the Covid-19 pandemic are boosting construction costs. So those looking to build should plan forward to lock in the prices of raw materials to avoid blowing up budgets.

Increased competition

Nationwide government schemes make new builds an attractive option for owner-occupiers and investors, making this corner of the market highly competitive and driving new builds' prices up.

Not getting what you want

As with anything new, there is an element of risk buying off the plan as the finished property may not turn out exactly how it was expected.

No quick capital wins

Unlike existing properties whose price can be affected by presentation or requirement for some maintenance work, the new builds are brand spanking new. As a result, little can be done to improve the property's capital value quickly. On the other hand, some painting or a new deck in the older property can improve its rental price or capital value.

No income while building

Another negative that is often overlooked is that you don't get any income while the property is being built, where there is an almost instant and predictable income when purchasing an existing property. Therefore, it is crucial that you carefully budget and can afford outgoing payments (such as construction costs and mortgage payments) for 6-9 months while having no income coming in.

There would always be some risks with taking on a new build, but the biggest one of all is if the current Government decided to make more sudden policy changes in future.

The information contained in this article is exclusively for promotional purposes. It does not in any way constitute legal advice and should not be relied upon as the basis for any legal action or contractual dealings. The information is not and does not attempt to be, a comprehensive account of the relevant law in New Zealand. If you require legal advice, you should seek independent legal counsel. myRent.co.nz does not accept any liability that may arise from the use of this information.

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