Q: I have recently purchased my first home after saving hard and making a deposit on a house in Hamilton. I couldn't afford Auckland, so decided to buy in Hamilton, rent it out and then flat in Auckland near work.
Rough sums mean it's an even game for me. I pay about $13,000 a year in interest for the loan and about the same amount to a landlord in Auckland. In my head I am paying my own mortgage even though not living in my house!
So now it seems I will be penalised as a recent first home buyer as I cannot deduct the interest cost on the Hamilton house, therefore facing a big tax bill which I can't afford.
Looks like I might have to sell the "first step on the property ladder" dream and start again!
Does this sound right? I am a first home buyer but because I don't live in the house I own, I am classed as a property investor?
A: My first reaction to your letter was: if you had bought in Auckland and lived in your house, you wouldn't be able to deduct mortgage interest anyway. While homeowners in some countries can deduct that interest, they can't here. So up until now you've had a bonus!
But that's not really fair. You've been operating under one set of rules, and now the Government's changes are likely to hurt you in two ways:
• You lose your interest tax deduction
• Your Auckland rent might rise because your landlord will also lose that tax deduction
Ideally, any change in a government's economic policy will make the Economy Pie larger.
But usually one person's slice of the pie gets bigger while another's slice gets smaller.
The sad truth is that, if would-be first home owners are to be helped, that seems to be at the expense of landlords and perhaps some tenants. And you have the bad luck to be both.
Tenants who manage to become buyers because of the changes will benefit — and hopefully over the years there will be many of them. But renters who can't do that may just face higher rents. Ditto you, in your circumstances.
Don't despair though. Maybe the Government's changes will lead to a fall in Auckland house prices, and you'll be able to sell in Hamilton and buy near your work.
Note, too, that you will lose the tax deductibility gradually — over four years from October. That gives you time to adjust — perhaps moving to a cheaper rental, or cutting other spending, or earning more.
Whatever happens, I bet you manage to avoid giving up your home ownership. So far you've been creative about getting into the housing market. I'm sure you will be creative about staying in it. Good luck!
Life is for living
Q: I watched you on the AM Show the other day and think your advice, and general comments on the retirement years, is excellent. Life is relatively short, and as you point out — particularly if you own your home — enjoy those years. So many people think they are going to live forever and put things off — holidays etc. Sure, most don't like to leave debt etc. after they die. However, if the average person or couple leave a mortgage-free home to their children, that's very good.
Often it is too late and old age is no walk in the park for many, and your world becomes quite small. So spend and enjoy good quality while you can.
A: Thanks for your kind comments. I'm publishing your letter because I want to repeat the point I made on telly. Long before the Government announced the changes that will make life harder for landlords, I've been suggesting retired people should get rid of their rental properties anyway.
There are two reasons:
• As you get older, you probably won't want the hassles of maintenance problems, government regulation and perhaps difficult tenants. The next correspondent spells out some of this.
• You have hundreds of thousands of dollars tied up in a property, which you can't spend. If you sell and invest in, say, managed funds, you can work through the money at whatever pace you wish.
The other point you refer to is that some people are too frugal early in their retirements. It's not uncommon for those in their eighties and nineties to express regret that they hadn't spent more on fun in their first years of freedom from work, while they were still relatively healthy.
There are, of course, some people who err the other way, spending most of their savings soon after they retire. But I doubt if that's common.
The rental debate
Q: Mary, normally you produce the stats to support your opinions, but the item two weeks ago about rents entered a politically charged debate without seeing the bigger picture.
To understand the rising average rents, we must analyse which sectors are affected. The mid- to top-end house rent increases are similar to those of rates and insurance, but the cheaper rentals have vanished from the market, which skews the average rent skyward.
Rental owners have suffered a perfect storm of well-intentioned but costly legislative changes, while rising property values drive owners to sell older rentals rather than pour in investment for no return.
Tax changes and loss of depreciation mean rental housing cannot be run like any other business, and extra costs for healthy home compliance make basic rentals unaffordable.
The risk of bad tenants who can't be removed now, hefty fines for getting anything wrong, and finally the Government's unprecedented attack on rental business viability ... you see why landlords are selling up and walking away.
Tenants suffer most as rental numbers and choice get less, and it would be beneficial to start an informed discussion about what tenants want and need, and how to encourage investors to provide it. And if you feel like opening a real can-o-worms, ask why so few new rentals are being built.
After all, maybe someone in Government reads your articles too!
P.S. Just a note on where this evil grasping property-owner is coming from: many small-time landlords got into niche areas of the rental business. I know people in wheelchairs, and 20 years ago started subdividing suburban sites and building mid-range four-bed disabled-access rentals aimed at families with one member on wheels. There is a huge demand for that.
With capital gain and leverage it grew. Most of the tenants are friends, but it is a business not a charity. This Government has made what we have been doing untenable. I can sell up, and always offer the house to the tenants first, but most tenants do not have a deposit, so what happens to them?
This will be a widespread personal disaster and is so unnecessary.
A: Sorry, but I'm not sure you are seeing the bigger picture either. You write about how both landlords and tenants are being harmed by the changes, but you don't mention first home buyers — the ones the Government aims to help.
The increased eligibility for first home grants and loans, and the various ways home construction is being encouraged, should enable some tenants to get into their own homes.
And the fact that some landlords will be less inclined to buy more properties, and may sell the ones they've got, will make more homes available for first home buyers, and could put some downward pressure on prices.
I suspect many people would welcome, or at least tolerate, a house price slide.
Homeowners still have their home regardless of its value. True, when they move home they'll get less for the old place, but they'll also pay less for the new place. It might be difficult psychologically for some, but they'll get over it.
Also, many homeowners, and indeed landlords, have family and friends struggling to buy their first homes. And lots of people are, quite simply, appalled to learn about the country's worsening housing situation. We're not all driven by self-interest.
Unfair on tenants?
Q: Great to see your column two weeks ago highlighting the pressure landlords face from property management companies to raise rents to line the companies' own pockets. Also an observation of my own on a different tangent. A house down the road on the market doesn't sell. Sign comes down, goes on rental market. Tenants move in, then "for sale" sign goes back up. Doesn't sell. Tenants move out. Sign comes down and new tenants move in. Stays on market. "Quietly/online" property sells, "sold" sign goes back on property. Tenants move out soon.
Hope that makes sense. But I feel like these tenants, whether they knew the property was on market or not, were slightly duped.
A: Let's not get carried away here. It's easy to beat up on landlords, but they are not always unfair.
Once when I moved cities and couldn't sell my lakeside house before moving, I decided to rent it out until the following summer, when it was more appealing.
I told would-be tenants I would put the house back on the market in six months and halve the rent at that point. They went in knowing that was the deal, and it worked fine — apart from a few hassles arising from being a long-distance landlord.
In your house down the road, the tenants might have had a similar deal. But if not, I agree, it's not okay to muck around tenants like that.
Q: It was refreshing to read two weeks ago about landlords who resisted pressure from rental agents to increase the rent on their rental property, out of concern for their tenants who were still studying.
Taking into consideration a tenant's circumstances is to be applauded. However, if landlords expect to claim 100 per cent of running and maintenance costs as tax deductions against the rental income, are they not duty bound to charge a "fair market rent"?
I doubt the IRD would be impressed if such costs were claimed against a rent set demonstrably below the market rate.
A: I asked Inland Revenue. Their reply: "Inland Revenue assumes that a landlord will charge whatever the market will pay.
"But if there is an associated person in the transaction and the rate charged diverges from what would normally be expected, then IR starts to take interest."
I'm sure, though, that they are talking about someone renting to, say, a relative at half price. I just can't see the department challenging the landlords I wrote about, who started out charging a close-to-market rent and then didn't raise it for several years. The officials must have better things to do.
For more on this, read on.
IRD takes an interest
Q: One factor for landlords to consider is the tax rules. For instance, a number of years ago one of my tenants had an accident and was unable to pay rent or could pay only a reduced rent.
I was audited that year by the IRD and my tax loss on the property was queried. The IRD has the power to determine the market rent and to tax you on what the rent should be, not what you have received. In the end, though, it was okay.
PS: I am a long way down the queue to borrow your book from the library, so will buy one next time I visit a store, or is it available online?
A: This is an example of a situation in which Inland Revenue "took an interest" — when the rent you received was seriously low. It's good to know, though, that your kindness didn't result in a penalty.
Thanks for your interest in my new book. You can buy it in most bookshops or online, including from maryholm.com.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or click here. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.