New Zealand’s government will ban foreigners from buying residential property, making good on its promise to crack down on offshore speculators who it says are partly to blame for spiraling house prices.

The Overseas Investment Amendment Bill, which places limitations on foreign purchasers, passed its final reading in parliament Wednesday in Wellington. The restrictions will take effect within two months of the law receiving formal assent from the Governor General, the symbolic head of state, Associate Finance Minister David Parker said in a statement.

“This government believes that New Zealanders should not be outbid by wealthier foreign buyers,” said Parker, who shepherded the legislation through parliament. “Whether it’s a beautiful lakeside or oceanfront estate, or a modest suburban house, this law ensures that the market for our homes is set in New Zealand not on the international market.”

Prime Minister Jacinda Ardern campaigned on a foreign buyer ban in last year’s election, saying overseas speculators had driven up house prices and made property unattainable for many young Kiwis. Prices have surged more than 60 percent in the past decade amid record immigration and a construction shortfall, driving home ownership to its lowest since 1951.

While data suggest foreign buyers play only a small role in New Zealand’s housing market, wealthy Americans such as tech billionaire Peter Thiel and former U.S. broadcaster Matt Lauer have made headlines for snapping up some of the most pristine property in the country. Those cases and others have fueled the perception that New Zealand is being used as a bolthole for the world’s elite.

Foreign Buying

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The new law, which the government says brings New Zealand into line with neighboring Australia, classifies residential land as “sensitive,” meaning non-residents or non-citizens can’t purchase existing dwellings without the consent of the Overseas Investment Office.

Foreign buyers will need to show they are either increasing the number of residences and then selling them, for example by building an apartment block where a house once stood, or converting the land to another use, the government has said. They will need to convince regulators that whatever they do will have wider benefits to the country.

The government has faced down objections from wealthy investors who have warned that the ban may curb broader investment in the economy and hurt New Zealand’s reputation in offshore markets.

Former Prime Minister John Key, who opposes the ban, said wealthy investors added value to New Zealand through their international connections and the nation needed to be open for business in the global marketplace.

“New Zealand is a little country at the bottom of the world,” Key said in a phone interview from his Auckland home. “Will we get rich selling things to five million New Zealanders or selling things to three billion middle-income consumers? Personally, I think it’s the latter.”

The ban comes as house-price inflation abates and a slump in business confidence threatens to further curb economic growth. House prices rose 5.1 percent in July from a year earlier, the slowest pace since October. The Reserve Bank said last week it can’t rule out cutting the official cash rate to a new record low.

Rate-Cut Risk

“To our mind, the main risk that could bring about an OCR cut is the housing market,” Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland, said in a note this week. “The foreign buyer ban is about to come into force, and we simply do not know how it will affect the market.”

Westpac’s expectation is that nationwide annual house-price inflation will slow to around zero by the end of 2018, Stephens said. “But if the foreign buyer ban creates a greater downdraft in prices, then the game could change. The RBNZ would likely react with OCR cuts in such a scenario.”

The government says the foreign buyer ban, tax adjustments and its program to build 100,000 new homes over 10 years will rebalance the property market and make houses more affordable for first-time buyers.

“We are determined to make it easier for Kiwis to buy their first home, so we are stopping foreign speculators buying houses and driving up prices,” Ardern said when she announced the policy last year. “Kiwis should not be outbid like this.”

New Housing

Overseas investors will still be able to buy new housing, particularly apartments, rentals and homes available to purchase under rent-to-own or shared-equity arrangements. They will also be able to invest in retirement villages, student accommodation and aged-care facilities.

Developers of large apartment complexes will be able to sell as much as 60 percent of units to overseas persons off-the-plans without the purchaser needing to obtain consent or on-sell once construction is complete.

Resident visa holders who spend at least 183 days a year in New Zealand will be able to purchase homes under the regime without obtaining consent. Australian and Singapore citizens are exempt from the rules to comply with existing trade agreements.

— With assistance by Olivia Carville