One change could help renters’ cost of living crisis

Whether international students, immigrants and short-term workers from overseas arrive in big numbers this year will determine the rental market for landlords.

Tuesday, January 31st 2023

Landlords are facing increasing costs in higher interest and council rates, insurance and a bigger tax burden along with a drop in the number of people who rent.

Property Investors Federation vice-president Peter Lewis says if students and workers do return rents could go up, but it’s not guaranteed as rents are set to market conditions and the amenity of the property: The market is price sensitive – as little as a $20 per week rise in rent can make the difference between a property renting quickly and sitting vacant for a long time.

Lewis says the Government’s removal of mortgage interest deductions would make the biggest difference to landlords and tenants. 

Federation president Sue Harrison says the new Prime Minister Chris Hipkins could make this change. “It’s pretty well understood that if you borrow money to then derive income you can claim a tax deduction for the cost of borrowing that money. On that basis, investors should continue to be able to offset that cost against rental income earned.”

Interestingly, advice from Inland Revenue to the Government at the time the March 2021 policy warned the proposed legislation could risk putting up rents to tenants and increase opportunities for tax avoidance.

“In addition, says Harrison rising interest rates for mortgaged investors on top of the policy make for a ‘perfect storm’ where some rental properties will need to be sold if owners cannot meet the additional costs. This will drop the number of rentals available.”

One rental property owner has owned a Wairarapa property for four years. This coming year the investor will pay $22,800 in interest costs and they can only deduct 50% of this as an expense. This will cost an extra $,3762 in additional tax this year or $72 a week. The tenant’s rent will need to go up to help cover some of the cost. If the policy is not reversed and the investor cannot deduct any interest cost in the future, then the additional tax will be $7,524 or $144 a week, which will invariably increase the rents.

Harrison says ultimately it is tenants already struggling with other increases in the cost of living, who will suffer.

“If the newly refreshed Labour Government is serious about combatting the rising tide of inflation it should immediately move to reverse these misguided, illogical changes to tax law.”

Another difficulty for landlords, says Lewis is the drop in suitable applicants for rental properties. “People are under more financial pressure so credit checks may reveal areas where they have gotten into trouble, such as unpaid bills.”

Combined with the difficulty landlords have in being able to remove tenants, some have become more risk averse, says Lewis.

Another factor becoming problematic is how hard it is for new players to enter the rental market.

Landlords retire, die or otherwise drop out of the industry so there needs to be an influx of others ready to enter but market and bank restrictions are making it harder for new entrants.

“Some years ago if you owned a property in which you had equity you could use that as a security to borrow 100% and buy a rental income property effectively with no cash deposit. However, banks are now not open to that and require a 40% deposit, which is a big hurdle for new landlords.”


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