Concerns Rental Market Will Worsen Following Tax Changes

Interest deductibility changes kick in for landlords on 1 October, the Government has announced, going against Inland Revenue’s advice and ignoring recommendations from property industry leaders.

The Government has confirmed its proposal to limit the availability of deductions for interest expenses incurred by residential property investors from 1 October, phasing them out over the four years.

There is an exemption for new purpose-built rentals with deductibility for up to 20 years. Cabinet is also set to consider an even longer period for large build-to-rent developments.

“However, for most Kiwi landlords the rules take effect on Friday,” says Tim Kearins, Owner of Century 21 New Zealand.

He warns that the new rules will put unwanted pressure on residential rents already at record high levels.

“Rising rents are not just the property sector’s prediction, but Inland Revenue’s – arguably the one organisation that’s got the most to gain. Its advice to Ministers earlier this month is as clear as daylight: they strongly advised against it.”

Kearins points to the ‘Regulatory Impact Statement: Limiting interest deductibility on residential investment property’. Authored by Inland Revenue, and dated 8 September, it advised the Ministers of Finance, Revenue, and Housing against going down the deductibility route at all.

After considering four options: ‘Inland Revenue has advised against any of these options to deny or limit interest deductions and prefers the status quo to all options. It considers that additional taxes on rental housing are unlikely to be an effective way of boosting overall housing affordability.

“While they will put downward pressure on house prices, they will put upward pressure on rents and may reduce the supply of new housing developments in the longer-term,” Inland Revenue advised.

“The benefit of increased housing affordability for first-home buyers is outweighed by negative impacts on rents and housing supply, high compliance and administration costs for an estimated 250,000 taxpayers, and the erosion of the coherence of the tax system.”

“Against the advice of their own tax department and experts, the Government soldiered on regardless,” says Kearins.

Property Council New Zealand has also spoken out against the Government’s move. Chief Executive Leonie Freeman says it shows a lack of ambition from the Government in dealing with the housing and rental crisis.

“You cannot tax your way out of the problem. For us to be innovative about solutions the Government has to work with the men and women across the industry who are fighting to increase the options for Kiwis in dire need of better housing.”

While she says the exemption for new builds is welcomed, Freeman doesn’t believe it will incentivise even one extra home to be built for a deserving Kiwi family.

“Property Council New Zealand has been a passionate advocate for Build-to-Rent in New Zealand as a solution to some of our housing woes, and today’s announcement sadly does little to advance that cause,” Freeman says.

“We are disappointed that the Government hasn’t looked to incentivise a truly game-changing asset class which would see more options for Kiwi renters.

“Build-to-Rent is flourishing in other comparable countries like Australia and the United Kingdom. Today’s announcement does nothing to seize this opportunity for better rental accommodation in New Zealand. Ultimately, this means less supply for Kiwi families.”

Freeman says Property Council New Zealand is pushing for Build-to-Rent developments to be specifically exempt from the interest deductibility proposal to encourage this dynamic new asset class.

“These changes will do nothing to unleash Build-to-Rent’s potential, side-lining what could have been a potential gamechanger for the local rental market.”

Kearins points out that this move comes hard on the heels of the Residential Tenancies Amendment Act which was the biggest overhaul of our tenancy laws in 35 years.

“Just when our property managers are screaming out for more properties to rent given the huge demand, it becomes less attractive for ‘mum and dad’ investors to provide the stock. Many are instead heading to the share market or commercial property syndications.”

Kearins does give the Government credit for trying to encourage new builds to fill the void, but says the rental availability gap will only widen in the short to medium term.

“That’s where the real pain will be for tenants.”

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