Officials warned rents could rise if the law change reduced the number of investors buying and renting out property.

Government is extending the amount of time for which investment properties must be held before their owners can avoid capital gains tax - despite a warning that it could be bad news for renters.



Revenue Minister Stuart Nash confirmed the "bright-line" test would be extended from two years to five in legislation working through Parliament.



"The extension of the previous government's bright-line test will help dampen property speculation and make homes more affordable," Nash said.



He said reducing speculative demand would help to improve affordability for owner-occupiers. (New Zealand does not have a comprehensive capital gains tax in place.)

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But in an impact assessment, Inland Revenue and Treasury officials warned there was a risk of "lock-in" as a result of the change, which could reduce the number of dwellings for sale.

ROSS GILBIN/STUFF Stuart Nash: "The extension of the previous government's bright-line test will help dampen property speculation and make homes more affordable."

"If the fall in the number of dwellings for sale exceeds the reduced demand from speculators and investors then this could lead to increased competition for the housing stock available for purchase for a period of time."

They said there was a risk that rents could rise if the law change reduced the number of investors buying and renting out property.

"A higher level of home-ownership among former renters is unlikely to completely offset the pressure on rental prices. This is because owner-occupied homes typically have a lower occupancy rate than rental homes, so the reduction in the supply of rental housing (caused by some investors exiting the market) will probably outweigh the reduction in demand for rentals (as some renters purchase homes)."

SUPPLIED Andrew Bruce says few of the members of the Auckland Property Investors Association will be affected.

Gareth Kiernan, chief forecaster at Infometrics, said the rule change would make a difference. A two-year limit would stop people who were flicking properties on in a speculative boom, but two years was not a long time to have to plan to hold a property.

"With five years, that's quite a long-term decision you're making there."

Andrew Bruce, president of the Auckland Property Investors Association, said most of his members were buy-and-hold investors who planned to hold a property for many years.

People who were buying and selling within a short time period were already being caught by the intention test - which enabled Inland Revenue to apply capital gains tax, even before the bright-line test was introduced, if it could be shown that an investor bought a property planning to sell it.

Cameron Bagrie, of Bagrie Economics, said it should be seen in the context of wider structural changes to the market as the Government changed migration settings, reassessed the tax system, and pushed ahead with its building project KiwiBuild, as the banks' attitude to lending changed.

"There's a lot of uncertainty in regard to how that's going to impact the market."

The extension from two to five years would make a difference, he said, but it had to be seen in context.

NB: This story has been edited for context to include a sentence reminding that New Zealand does not have a comprehensive capital gains tax.