Election 2023: Rental prices unlikely to fall under National’s plan, investor experts say

A residential property investor has welcomed a proposal by National to bring back interest deductibility and reduce the bright-line test from 10 to two years but says a drop in rental prices is unlikely.

National yesterday announced a tax policy proposal that would give $14.6 billion in tax cuts funded through about $8.4b of cuts and $6.2b of revenue increases.

As part of the plan, National has said it would phase the deductibility back in by keeping it at 50 per cent for now, bringing it up to 75 per cent by April 2025 and it would become fully deductible by April 2026.

It would also reduce the bright-line test to two years from July 2024, which means any property acquired before July 2022 would not be subject to it.

The current test means any gains on residential investment property sold within 10 years must be taxed. It was increased from five to 10 years by Labour in 2021.

The interest deductibility rule prevents most investors from writing off mortgage interest as an expense when paying tax. It was introduced in early 2021 and is being phased in with no more deductions allowable from April 2025.

Sharon Cullwick, who sits on the executive of the New Zealand Property Investors Federation, said bringing back the interest deductibility was “great news”. “We did know it was coming but we were hoping they would do it quicker.”

Cullwick said it wanted the change brought in sooner because some people were having to sell their rentals because they couldn’t afford to pay the interest.

If they were forced to sell they were also being hit by the bright-line test and after real estate fees it often meant they were not making any more money and some were walking away with a loss.

She didn’t know if the changes would encourage more investors to buy. “I do think people will look at going back in. But even though rents are high they are not getting the yields.”

National has said that since the two policies came in rents have risen an average of $75 a week.

Cullwick doubted rental prices would come down if the policies were changed.

“It comes back to supply and demand.”

She said insurance and rates were going up and on top of the healthy home requirements, landlords were facing higher costs. “I can’t see them coming back.”

If more investors bought rental property then that would increase supply and that could help keep a lid on rental price rises.

Nick Goodall, head of research at CoreLogic NZ, said the proposed changes to the bright-line test and interest rate deductibility would be a sentiment boost for property investors.

The percentage of houses being snapped up by property investors has fallen to record low levels in recent years.

“There’s no doubt removing interest deductibility made it less profitable.”

Bringing it back would mean less of a loss on property investments but he said the main factors keeping property investors on the sidelines were the high property prices and high interest rates.

“Of course, it would improve it. It will be seen as a sentiment boost.”

Goodall said the move could see property investors return to the market and may even do so before the election given polls were pointing to a higher possibility of a National and Act-led government.

“It might see a boost in demand prior to the election.”

But he said the Reserve Bank was also working with the banks to enable the use of its debt-to-income ratio tool which could be rolled out from April next year.

That could see a sweet spot open up for investors from now.

Goodall did not believe the proposed changes would result in any drop in rents. He said recent research had shown the increase in rent was tied to increased incomes, not increased costs for landlords.

Tamsyn Parker is the business editor. She joined the Herald in 2006 as a business reporter and has covered tourism, manufacturing, capital markets and personal finance. She became the business editor in April.