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The Government has announced significant changes to taxation that will affect residential property investors. Designed to slow runaway house prices, the phased removal of mortgage interest deductibility from rental income was unexpected and received a mixed response.

For those looking to buy a home, there was a flicker of hope. For property investors, varying degrees of shock. Those property investors who have been in the market a while may have recognised that moves in asset values are generally cyclical and that unexpectedly large rises were due to meet some resistance or pullback.

The more affected investors are likely to be those who have been building a more recent portfolio – doing the seemingly sensible thing and taking advantage of low interest rates to borrow against existing equity and add to a property portfolio. Some of these investors could now be in a position where the additional tax creates a cashflow problem and they may choose to sell property or at least halt their plans to purchase additional properties in the near future.

Property has long been an attractive means of saving for retirement in New Zealand. There are both advantages and disadvantages to investing in property over the alternatives such as managed funds. One of the major advantages is the relative simplicity of using borrowed money as a means of amplifying investment returns. Since returns are generally positive over time, borrowing usually works in the favour of those with a long time horizon. However, when asset prices fall, borrowing can also accelerate the losses, particularly in the short term.

The general consensus appears to be that this move may at least slow the recent rapid price rises. Longer term, the plans to increase housing supply could also provide something of a dampener.

With less benefit from debt funding, the advantages of using managed funds for retirement saving can come into the spotlight. Their greater flexibility, more diversified investment exposure and lower “hassle” factor can provide a lot of options for retirement savings.

To learn how a managed fund can benefit your investment portfolio, contact AdviceFirst on 0800 438 238 and talk with one of our advisers.

AdviceFirst is a Financial Advice Provider (FSP23242).