Should I Invest in New Builds or Existing Properties?

An honest review of how the government's tax changes have impacted the balance between new and existing properties.


Ed McKnight

Economist, property investor and host of the Property Academy Podcast

The government's recent tax changes are causing Kiwi property investors to think, "should I invest in New Builds or existing properties?"

This has traditionally been a controversial topic in property investor circles.

However, these tax proposals truly upset the economics of property investment.

One business that had until now only specialised in existing properties ... has begun pitching themselves as NZ's New Build experts!

As we'll get into, below these tax changes make New Builds more attractive.

Yet, even so, new builds are still not the right fit for everyone.

So, this article breaks down the arguments for and against new builds so you can make an informed decision about the right property for your strategy.

How The Government Tax Changes Impact Your Decision

New Builds have better cash flow under the new changes

The economics of property investment changed when Grant Robertson announced his tax proposals.

Investors who purchase existing properties will soon have to pay higher tax bills.

This is due to the removal of interest deductibility, where the government will view existing investment properties as more profitable than they really are – resulting in higher tax bills.

An investor with a $500,000 mortgage will pay approximately $6,000 extra in tax a year by the time the changes are fully implemented.

However, the government have announced that new build properties will be exempt from these changes. The exact definition of what constitutes a "New Build" is still to be determined through consultation since the legislation has not yet been written.

However, we consider these tax changes won't impact properties acquired directly from a developer after 27th March.

This gives New Builds a considerable tax advantage over existing properties. So, some investors who previously focussed on existing properties will likely switch towards new builds.

When we've modelled the impact of the changes using our Return on Investment Calculator, a $600k new build property bought with 100% lending will be $75,000 better off than a comparable existing property over 15 years.

The new build is expected to make just over $45k over this timeframe. Whereas, if the same property were existing, it would lose $30k during the same period.

Key Takeaway: New builds are now higher-yielding than existing properties, given their (soon-to-be) significant tax advantage.

Take a look at this Instagram post, where we break down the difference 👇

New Builds Are Less At Risk Of Interest Rate Rises

New builds are less at risk of interest rate rises

A simple way to think about the tax change's impact is to multiply your interest rate by 1.5.

If the interest rate you invest with is 2.3% ... then the proposals effectively make your interest rate 3.5% for an existing property. However, the effective interest rate for a new build would remain 2.3%.

In practice, this means that new builds have cheaper interest rates than existing rental properties.

This is important when managing your interest rate risk.

Many investors expect that interest rates may rise in the future. As this happens, the difference in profitability between new builds and existing properties starts to grow.

For instance, if the interest rate fell to 2%, a new build's effective rate would be 2% and 3% for an existing property. That's a palatable 1% difference – $5,000 a year on a $500k mortgage.

But if interest rates rose to 8%, then the effective interest rate for an existing property would be 12%. 8% for a new build. That's a massive 4% difference – $20,000 a year on a half-million mortgage.

This means that investors who purchase New Builds can better manage any increases in interest rates.

In practice, we don't expect that interest rates will increase as high as 8%. But, investors should be aware that the average 1-year fixed interest rate over the last 10 years has been 4.7%. Double what the current 1-year rate is.

If rates rose to this average – then once fully implemented – an existing rental property would be $12,000 worse off per year than an equivalent New Build.

Key Takeaway: Investors putting their money into New Builds are better protected from interest rate rises.

The Deposit You Need

New Builds require lower deposits

Under the Reserve Bank's LVR rules, investors need a smaller deposit to purchase new builds compared to existing homes.

Investors wanting an existing property require a 40% deposit. But there are no minimum deposit requirements set by the Reserve Bank for new builds.

In practice, most banks will approve an investor's mortgage application for a New Build with just a 20% deposit.

The Deposit That Property Investors Need for New Builds vs Existing Rental Properties

That means that if an investor wants to buy a $500,000 property, they will only need a $100,000 deposit if it is new. However, if it is an existing property they will require $200,000 as a deposit to purchase the same property.

That means that investors who have a limited amount of equity can make their money go further when investing in New Builds.

Is New More Expensive?

Are new builds more expensive than existing properties?

One comment sometimes raised in property investment circles is that new properties are more expensive than existing ones.

Accounting Perspective

From an accounting perspective, this should be the case, but it doesn't always work out that way in practice.

What do we mean by that? As a property gets older, the chattels within the property gradually diminish in value.

Ovens and dishwashers wear out. Lights become dated and used. Carpets deteriorate.

So, if you put a new and existing property side by side – the same in all other respects – the new house would usually be more expensive than the existing one.

Properties That Are Already Standing Tend to Be Valued More

However, it is essential to note that price difference is often mitigated by the fact that new properties are usually bought off the plans.

You might question: "What difference does that make", which is a great query. Usually, home buyers, particularly owner-occupiers who make up most of the property market, place a premium on something that is already built.

Said another way, home buyers are willing to pay more for something that's already built, rather than a home that is sold off the plans.

This means that developers often need to competitively price their properties when selling off the plans to entice buyers.

This often cancels out the impact we just discussed above, but only when the properties are bought off the plans. If the new house is already built, we would expect it to be a higher price than an existing identical property.

Properties Have to Be In Line Because of Valuers

It's also important to note that developers have a powerful incentive to keep the prices they put on new homes in line with the rest of the market.

That's not just because consumers will balk at high development prices but, more importantly, because home buyers require a valuation before they can get a mortgage approved.

Before most home buyers go unconditional on a property bought off the plans, they will need to get their mortgage approved. Since the property doesn't exist yet, the bank will require the purchaser to get a registered valuation.

This is where a professional valuer will conduct an analysis of similar properties that have recently sold in the same area.

A value will then be placed on the property, and the bank will not lend more than this valuation.

For instance, let's say that a first home buyer wants to purchase a property that a developer has priced at $500,000. The first home buyer has a deposit worth $100,000 and wants to secure a mortgage for the remaining $400,000.

But what happens if the developer has overvalued the property compared to the market?

Let's say a valuer goes to inspect the plans and the registered valuation comes back at $480,000.

The bank will then only lend up to $384,000 on the property (80% of $480k), which means that combined with the $100,000 deposit, the home buyer has a total of $484k, which is $16k short of the $500k purchase price.

In this case, two things can happen:

  • The first home buyer negotiates with the developer to drop the price to $480k, in line with the valuation, or
  • The first home buyer walks away because they are scared off by the lower valuation.

You might think, "What does this all really mean?" It means that developers have a powerful incentive to keep the prices of new properties in line with the cost of comparable existing properties. That's because when valuers make their assessment of the brand new property's value, they're looking at the entire market to make that judgement call, including existing properties.

Case Study

Case Study: Addington, Christchurch

To give you an example of this in practice:

Early in 2020, we at Opes were involved with a new development located on Ruskin Street in Addington, Christchurch. These 3 bedroom, 2 bathroom townhouses were priced at $499,000.

As part of our due diligence, we wanted to understand how this purchase price stacked up compared with the broader market.

We used QV to find out what properties had recently sold in the area and then used that information to locate similar properties. The idea here is that similar properties should have the same value.

We then cross-referenced this against (which tends to have more photos of individual properties) to make sure the houses were comparable.

We found a property located around the corner from the investment we were analysing that had sold 9 months prior on Burke Street.

The Burke Street property was a townhouse with 3 bedrooms, 1 bathroom and a floor area of 99 square metres. It sold for $475,000.

New vs Existing 3

That compared with the Ruskin Street property which was also a townhouse with 3 bedrooms, but had 2 bathrooms and a floor area of 117sqm, with an additional parking space. As mentioned, this was being promoted at $499,000.

New vs Existing 4

So, there was a $24k price difference in this case, which is primarily because the Ruskin Street property was larger and had the extra bathroom and car space.

That gives us confidence that if the properties had precisely the same features, they would have been priced very similarly.

This process is not scientific by any means, and if you look hard enough you are sure to find exceptions. But still, new and existing properties are usually priced reasonably in line with each other if the new property is bought off the plans.

Who New Is Not Right For

So who are new properties not the right fit for?

New properties certainly aren't the right fit for all property investors, and the difference comes down to the strategy each property investor uses and their personal situation.

New Builds vs Existing – Property Investors Who New Builds Are Not The Right Fit For

When new properties are completed, they typically won't have any renovation potential. This means that active property investors who focus on significant renovations should not invest in new properties.

If an investor were to try a renovation strategy on a new property, they would over-capitalise. It is likely they would not get their money back.

Similarly, new properties bought off the plans may not be the right fit for people concerned about significant changes in their personal life over the next 6-12 months.

To use an example to illustrate this, let's say you want to have a child in the next 6 months. The bank might approve your investment mortgage now based on both partners working.

However, the bank may not approve the mortgage if only one partner is working.

The risk here is that you go unconditional on a property under construction, which you then can't get the finance on when it comes to settlement (if your household income has dropped).

In this case, you would be better served investing in a property that is already built rather than purchasing a property off-the-plans.

This is also the case for people who are worried about the prospect of being made redundant shortly. If they suffer an income hit while a property is being constructed, they may face issues at settlement.

Finally, if you are on a very tight budget, then newer properties may not be the right fit for you.

Former BNZ chief economist Tony Alexander recently referenced a study that showed fewer new properties are being built for the low-end of the market.

Instead, developers will tend to build properties in the middle of the market, where they have the most appeal. If your budget dictates that you must buy an investment property at the lower end of the market, then new properties may not be the right fit for you.

Who New Is Right For

Who are new builds the right fit for?

On the other hand, if you are looking for a low-maintenance long-term buy and hold investment, then newer properties may be the right fit for you.

New Builds vs Existing – Property Investors Who New Builds Are The Right Fit For

Newer properties work really well for a long-term buy and hold investor because they are straightforward to hold over that term.

As a comparison, one of the biggest unbudgeted costs investors face with existing properties is long-term capital maintenance. This is when things like the roof or a hot water cylinder need replacing or electrical work needs to be redone.

Depending on the job, these could cost $10,000 – $30,000. This can be crippling for investors who don't have the capital to fund that expense.

Because everything within a recently built property is brand new, investors avoid these one-off and unexpected costs. That comparatively decreases investors’ risk and medium-term maintenance costs.

Similarly, because these properties are more attractive for tenants, investors in new properties can gain higher quality renters. This can mean that investors secure longer-term tenants, decreasing vacancy and the potential for lost rent in the downtime between one tenant moving out and another moving in.

From experience, we also see that tenants are more likely to take care of a newer property, which can decrease day-to-day maintenance costs over time.

Next, not all property investors are handy on the tools or have the experience, knowledge or inclination to renovate properties themselves. Newer properties tend to work for these investors. That's because they can secure a high-quality property with solid bones, without the need to rip down, replace and repaint gib, or recarpet a room themselves.

This is also beneficial for investors who have fulltime jobs or families that take up a significant amount of time. In this case, these types of people can still become property investors without having to sacrifice their current work, social or family lives.

Finally, it's important to note that people who invest in new builds may renovate their properties.

However, they're more likely to renovate the property at the point where they are selling it, rather than when they've first purchased. The benefit to this is that investors can achieve a premium for the property after it has been cosmetically enhanced.


Key things to take away

Investing in brand new properties is not for everyone or all investors. Investors who heavily renovate properties or who engage in flips can't run their strategies effectively on New Builds.

But, some long-term buy-and-hold investors who previously invested in existing properties will now find their previous strategy is unprofitable.

These investors may find that New Builds – with their significant tax advantages – will better suit their property portfolios from now on.


Would you like help looking for New Build investment properties?

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Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.