Property

Policy ‘not rooted in reality’

NZPIF president Andrew King says he is astounded the Government has not done any work on the fiscal reality of its policy scrapping tax deductibility on landlord mortgages.

Tuesday, March 23rd 2021

Andrew King

The Government will now stop landlords claiming interest on loans for rental properties as an expense against their income from those properties – and other forms of income such as wage and salary earnings.

In a meeting with the IRD about the processes for the change that will be phased in over four years, King says it's clear the Government has not done any work at all on the effect the policy will have.

“It seems an ideological position to take against property investors. It is not rooted in the real world of day-to-day living for investors.

“They are not speculators as the Government likes to think.

“Speculators are people who flip houses. Generally, federation members are long-term holders of property offering rentals as a service.”

He says the policy will hit the people the Government professes to care about the hardest.

“Tenants are going to be hit with yet more rent rises when landlords can no longer claim interest on mortgages as an expense against their income from rental properties.

“Any more rent rises will end up with more overcrowding in houses and push up the number of people on the Kāinga Ora waiting list for state houses.” About 22,500 people are already waiting.

He says the move to close the tax loophole is going to make it more expensive for residential property investors to provide rental housing. For example, on a $600,000 property it is going to add $6,000 a year to the costs of running the property.

“Anybody who has bought a rental investment in the past year to 18 months probably won’t be able to afford to keep it,” says King.

“It will force many to sell, particularly if they can’t put the rent up.”

While there is a proportion of landlords debt free the majority have mortgages to pay on their investment properties.

“This policy will stop people from buying properties as rentals and there will be fewer in the pool.”

Fortunately, the lower interest rates and plentiful cash from banks meant many people bought investment properties over the past few years. And the number of rental houses is in a better position than it would have been otherwise, says King.

“The underlying message from the Government is for investors to sell their existing houses and buy newly built property or off-the-plan to get more housing stock into the market.

“This is not the answer. Property goes in cycles and what will happen when interest rates rise as [they] inevitably will – investors will be forced to sell and the number of rentals plummets.”

King says the Government should be focusing on building more houses faster and cheaper, which will only be achieved when land use regulations change and development contributions fall.

On most new houses, King says developers are paying $65,000 in council and water contributions before a sod is turned.

“On a smaller and cheaper house this is a massive cost. It is easy to see why developers are building bigger houses.”

The federation is going to undertake a survey of its members to quantify how the tax policy will affect them.

Comments

On Wednesday, March 24th 2021 10:01 pm Alan Willoughby said:

It seems particularly interesting that the government is removing the ability of only one specific business type to claim interest expenses against taxable income, making the business of renting properties to tenants unique in this respect. This is especially interesting as the government has been active at auctions, outbidding both investors and first home buyers by using their seemingly endless supply of taxpayers' money to compete for housing against those first home buyers they profess to favour. Perhaps the back story of this move to remove interest as a tax break is to reduce prices and competition at auctions to allow the government to buy more social housing.

On Thursday, March 25th 2021 2:18 am Glenn Morris said:

It is my lucky day (week). Saved by the bell. One of our family trusts have been trying to get finance to buy a $1m property. The trust equity placed it well within the 40% needed LVR and is of course seriously cash positive. The proposed property is bringing in $50,000 Gross. Interest would have been $30,000 and the remaining $20,000 would have been sufficient to pay for principle on a P&I rates and insurance. With the tax changes the trust would need to pay an extra $10,000 tax on top of the expected 33% tax already being paid on the profits across the portfolio. So it is not worth while buying. The only way to make it worthwhile buying would be to increase the rents by $10,000 PA or pay only $700000 for the property.

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