New Government housing policy out today. Photo / George Novak
Prime Minister Jacinda Ardern and three senior Cabinet ministers today announced major changes to the housing sector but neither landlords nor tenant bosses have so far expressed support.
Ardern, Finance Minister Grant Robertson, Housing Minister Megan Woods and Revenue Minister David Parker announced the capital gains tax-esque bright-line test would double from five to 10 years, rental property mortgage interest rate tax deductions would be banned and close to $4 billion would be poured into accelerating new house builds.
The multi-billion dollar sector provides housing for around 1.5 million tenants and NZ Property Investors Federation president Andrew King was aghast at the tax deduction loss, today calling it "crazy". Renters United says the Government hasn't stopped landlords from pushing up rents and is also disappointed about the package.
Q: What will the changes do?
A: Tax is at the heart of today's announcement for the rental property sector - a stick and stick approach from the Government to landlords. Not only will they pay their full applicable tax rate on profits if they sell a renter within 10 years of buying, but tax deductions on rental property mortgage payments will be axed.
Another big change is the boost to new housing, which the Real Estate Institute welcomed.
"The $3.8b infrastructure fund sounds like a sensible move as it should help to speed up housing developments by funding services such as roads and pipes which are well known to hold up development," said REINZ acting chief executive Wendy Alexander.
Q: Who is affected?
A: The tax aspects of today's announcements target landlords. New Zealand has around 500,000 rental properties, home to around 1.5 million tenants, often the more vulnerable members of society, renting sometimes because they are young or unable to afford to buy their own home due to various circumstances like their income, disability, illness, employment opportunities, family circumstances, rapidly escalating prices and many other reasons.
Q: What does it mean generally?
A: Owning a property just became more expensive on the tax front for landlords, or to put it another way, investors will now be far more likely to pay more tax. Flippers are now given a firm message: pay your full tax rate if you sell within a decade.
Last decade, no tax applied to investment house sale profits, under our essentially non-capital gains tax system. Then that new tax was introduced, axed during Covid for fears on the economy, reintroduced and now extended.
Accountant Anthony Appleton-Tattersall explains that: "People are underestimating what a difference the prevention of interest claims is going to have on the investor market, and eventual flow through to rents rising enormously. If a landlord purchased a property recently for say $800,000, even at current low interest rates that's $20,000 of interest a year.
"Losing that write off will cost them an additional $6500 every year in tax. Who knows what this will mean whether it's landlords selling out or drastic increases in rents over the next year or two, but it's going to be a big impact."
Q: What does this mean for landlords?
A: More costs, fewer tax breaks, more expenses, a major disincentive to buying and selling within a decade, financial strain: being able to get a tax break from the cost of interest on mortgages when owning rental properties was, according to King, one of the aspects which helped offset costs and enable people to buy rental properties. That changing was what shocked him the most. He never saw that coming. Neither did federation executive officer Sharon Cullwick. It seems the Government gave no warning to the sector on this front.
Word on the street was that Robertson might target interest-only loans. REINZ's Wendy Alexander said today: "We were surprised. Currently, you can use the interest deductions as a legitimate property cost, however, this will no longer be allowed from October 1. People are likely to already be wary about investing in rental property given the changes to the law and the prior removal of ring-fencing, however, this is likely to exacerbate concerns around investing in rental property and may see investors considering whether they can get better returns elsewhere."
Q: What does this mean for renters?
A: Renters United spokesman Ashok Jacob - himself a recent Victoria University honours graduate and Aro Valley tenant - was unimpressed with today's package. He sees very little change in terms of new housing supply, despite the boost announced, and his main worry is rising rents which landlords push up "because they can". He doesn't have a one-to-one cause-and-effect view about the tax changes pushing up rent. But he holds general fears for continually rising rent and that, as he sees it, was a major missing link in today's announcement.
Q: Will this affect property prices?
A: Yes, says Westpac senior economist Satish Ranchhod: "Today's announcements indicate significant downside risk for house prices and economic activity more generally. Before today, we were already expecting house price growth to slow through the back half of this year as we forecast mortgage rate rises.
"Today's developments indicate material downside risk to that forecast. As today's announcements are likely to be a significant drag on house price growth, we expect this to reverberate through economic activity more generally. The housing market plays a key role in shaping economic conditions more generally.
"In particular, growth in house prices tends to be associated with increases in household spending and residential construction. We'll review our economic forecasts in light of these changes over the next few days."
Q: Will this affect rents?
A: No, according to Renters United's Ashok Jacob. Not directly. But NZPIF president Andrew King is worried about the rising cost of being a landlord, not just from today but from the major overhauls enacted on February 11, ending no-cause terminations and limiting evictions to a specific set of new circumstances.
King sees no way out but for landlords to attempt to recoup rising costs by putting up rents - the only alternative being to see.
But economist Shamubeel Eaqub has previously said that landlords have consistently used the "we will sell" threat against successive Governments.
Eaqub doubts the sincerity of that message from landlords and with wife Selena, wrote a Bridget Williams Books-published work, Generation Rent which argued strongly for a major policy shift to redress the inherent power imbalance between landlords and tenants. The Eaqubs investigated how we ended up here and what could be done to ensure all New Zealanders live in affordable and secure housing.
Q: What do builders say about the $3.8b boost today?
A: Master Builders chief executive David Kelly is pleased and welcomed moves to build more homes: "The plan's provision for infrastructure funding to support new homes and developments is a positive step. While some will start to make a difference now, they are also focused on providing a better continuity for supply for the future. The Government is seeing housing as a key part of our critical infrastructure. This is something we have been advocating for many years. The infrastructure fund will address one of the key issues that has been holding back development for many years. Our members have been frustrated with the lack of infrastructure around key sites, making it impossible to get developments off the ground."
Kāinga Ora would also now be able to make strategic land purchases, supporting greater development of affordable housing across the regions in need.
"We will be interested in seeing more details on how this will work, and how the private sector can be involved," Kelly said.
Q: When do the changes come in?
A: The Government will axe property investors offsetting interest on loans as an expense against their income from October 1 for properties bought after this Saturday. For existing property owners, deductibility will be phased out over the next four years. The Government is looking at exceptions for new builds, effectively encouraging new supply, even of rental properties.
Prices and interest rates have fallen, offering a window to buy homes now.