Real Estate Practices in New Zealand
Overview of The New Zealand Real Estate Market
Until the 1980s the most common form of housing was single story, stand-alone dwellings surrounded by relatively large gardens. Predominantly the framing and cladding of these homes was timber. While some homes were built on leasehold land the majority stood on freehold land.
In the past three decades as city populations have risen and land has become more scarce, a far greater variety of housing and land ownership situations have developed, including in-fill housing on larger sections, apartments, flats and terrace housing. With these developments has come a greater variation to land ownership on which properties sit, including cross lease and common ownership.
Along with new housing becoming larger, finished to extremely high standards and to modern, international designs, the sections on which they sit have become smaller. Older homes, particularly those in the inner city suburbs or with desirable features such as commanding views, have been extensively remodeled.
In the past two decades Auckland has rapidly developed as a large, multi-cultural, international city and residential house prices have increased rapidly, and are significantly higher than in any other New Zealand centre.
Buying and Selling Real Estate in New Zealand
While individuals can sell their own residential property as private individuals, all but a few properties are sold through licensed real estate agencies and agents.
Real estate agencies and agents are controlled through the independent Government agency, the Real Estate Agents Authority (REAA). This body sits under the Justice Department, and its aim is to set high standards of service and professionalism for buyers and sellers. It deals with complaints about agency and agents’ behavior.
The Real Estate Institute of New Zealand (REINZ) is a voluntary association representing the interests of licensed real estate agents, and operates a Code of Practice to which agencies and individuals members are required to practice.
To operate as a real estate agent, practioners must be qualified and licensed.
The Buying of Residential Property By Non-New Zealand Residents
To protect the interest of future generations, the Overseas Investment Office (OIO) assesses applications from non-residents seeking to invest in assets valued at NZ$100m or more, or what is termed sensitive land.
This means that in reality there are no restrictions on non-New Zealand residents purchasing residential property.
However, from October 1 2015, all non-resident purchasers will be required to obtain an Inland Revenue Number, and to achieve this they will need to open a local bank account. This move is designed to provide the Government with details as to the extent to which non-residents are buying residential property.
The main providers of residential mortgage lending are trading banks. Each has its own lending criteria, but trading bank operations fall under the overall financial management of the country’s Reserve Bank. Most of the larger banks have specialist divisions which assist non New Zealand residents to understand and comply with the country’s house buying rules as they apply to residents.
Currently, the Reserve Bank requires mortgage lenders to only lend to buyers who can make a down payment of 20% of the purchase price. In Auckland, the 20% rule applies to those who will reside in the house. However, investors must make a down payment of 30%.
Property Taxes in New Zealand
There are no property taxes or stamp duty associated with buying or selling a house. In extremely rare instances GST of 15% can apply to property that is classified as business related.
New Zealand has no capital gains tax associated with selling a house. However, if a house is purchased with the intention of making a profit on sale, then normal tax rules apply. The Government has recently instructed the Inland Revenue Department to review all property sales made within two years of purchase with a view to assessing whether normal tax rules should be applied to any capital gain.
It is normal to seek legal and accounting advice when buying and selling property to ensure those involved with the transaction understand their legal and financial commitments and responsibilities.
Owners of all residential property pay a yearly ‘rate’ to their territorial local authority to fund the activities of the authority. These rates are struck by each territorial authority based on its yearly operating budget, and the level of payment is normally based on the value of the property. The rate level between territorial areas can differ significantly.
To assist local authorities strike rates every property is valued every three years by a State agency. The valuations are based on a combination of recent sales prices, formal valuations and mass appraisal systems. These valuations are a reasonable indicator of what the market value of the property might be.
The Buyer’s Costs in New Zealand
The buyer’s only additional cost to the purchase price is their lawyer’s fee, which will cover the legal transfer of the property, a search of legal title and mortgage agreements. Some banks charge a set-up fee associated with the establishment of a mortgage.
There is no standard scale of fees for what lawyers might charge for their services. Some online providers offer ‘fixed’ fees of under NZ$1000, but lawyers are free to set their own fees, and normal practice is to ask about fee levels before engaging a lawyer.
It is good practice for the buyer to obtain various reports. The most common are:
a) builder’s report, which reviews the structural integrity of the property
b) water tightness report, which covers potential water or leaking issues
c) valuation, which estimates the value of the house, normally obtained for mortgage purposes
d) LIM report, which gives a substantial amount of statutory information about the property.
(Sellers sometimes pay for these reports to assist in the sales process.)
On reaching agreement on the sale of a property, a deposit of 10% of the purchase price is normally paid by the buyer to the seller’s agent, and this money is placed in the agent’s trust account until the transaction is completed.
The Seller’s Costs in New Zealand
The seller pays the agent’s fee, and often an agreed additional fee covering promotional costs.
Agent fees vary between real estate companies, and are competitive. Fees are normally based on the selling price achieved, with the fee being paid only on the successful sale of the property.
Barfoot & Thompson commission fees are as follows:
On the first $300,000 of the purchase price 3.95%
On the balance of the purchase price 2.0%
Minimum commission rate of $8000 + GST
Our commission rates are among the most competitive in the market, and full details are available at www.barfoot.co.nz/sell/our-commission-rates.
Selling price ($NZ) Commission ($NZ)
$1 million $29,728
$1.5 million $41,228
$2 million $52,728
$5 million $121,728
These figures are inclusive of GST of 15%.
The seller also pays their own lawyers legal fees for handling the transaction.
The Role of the Agent and Sales Process
The two main forms of sale are negotiated sale and sale by auction.
In a negotiated sale the seller, in consultation with the agent, will set a selling price. The agent will conduct negotiations around price. When a price is agreed the agent will process the signing of primary sale and purchase agreements.
From that point on, lawyers for each party will liaise to complete the agreement and the transfer of title/money.
Auctions (which is the main sales method in Auckland but not the rest of the country) operates differently to a negotiated sale. The seller nominates a ‘reserve price’ which is unknown to potential buyers. If the reserve price is met the sale is completed at the fall of the hammer. If the reserve is not met the highest bidder has first right to conduct a negotiated sale.
When a property is sold at auction a 10% deposit is made to the selling agent immediately, with the final settlement taking place as outlined in the auction documentation.
Auctions are conducted under strict, transparent rules. At Barfoot & Thompson auctions vendor bids are not permitted, and telephone bidding is accepted only if the telephone bidder is pre-registered. An agent is permitted to bid on behalf of a buyer. Our auctioneers only accept what they believe are genuine bids.
The real estate agent acts as the liaison point between the buyer (and buyer’s lawyer) and seller (and seller’s lawyer), conducts the final pre-sale inspection with the buyer, and delivers the keys to the buyer after the lawyers have transferred money and title.