Raise the rent or sell up?
That's the corner experts say Rotorua landlords are being pushed into as the removal of a tax "loophole" is expected to hit property investors' pockets.
Bay property investors are forecasting a rise in rents and mortgagee sales to soar with some already putting their rentals back on the market.
The Government announced a $3.8 billion Housing Acceleration Fund this week as part of a plan that included doubling the bright-line test from five to 10 years and removing the ability to deduct mortgage interest.
First Home Grant income caps were also lifted and house price caps for the grants were set higher.
The changes have been met with criticism by Bay property experts who say the only way for landlords to recoup their losses will be to raise the rents or sell up.
But a spokesperson for the Minister of Finance Grant Robertson says the package's intention was to shift the balance back to first home buyers and boost the affordable housing supply.
Removing the interest deductibility loophole that advantages investors over first home buyers will reduce investor demand for residential property investment, the spokesperson said.
Rotorua Property Investors Association president Debbie Van Den Broek said the new changes were "absolutely horrific" for renters.
She said it meant younger investors may not be able to hold on to their properties and would have to sell up.
"Young people are getting crucified in their efforts in buying for their long-term future by buying a rental home... It's really quite scary."
The inability to claim interest as a business tax deduction was one of her main concerns.
"If you're paying tax on money you haven't even got in your hand, where do you find it? Where do you find the money to pay the tax and the mortgage when there's no income. Because usually a rental barely breaks even.
"I think in the next couple of years there will be lots of mortgagee sales with landlords who just can't afford to pay the bills anymore. They will hang on as long as they can with their tenants but then they will just hit the wall."
Rotorua Rentals director Pauline Evans said she did not see how the changes would help anyone.
"I don't think they have achieved what they want to achieve. They have just made a bigger mess."
Evans said doubling the bright-line test to 10 years will not matter to serious investors but it will hurt speculators.
"Speculators want to get in and out as quickly as they can with the most gains and an investor wants to get in and stay in.
"I don't think the Government is getting that. They're focused on the get-in-quick, make money while the sun shines speculators."
The new changes would also reduce the size of the rental stock, which would increase demand and prices.
"Until they build more houses and get on with it... there's always going to be higher rent increases because there's demand but no stock."
Evans said scrapping interest deductibility loopholes would stop a lot of investors from entering the market.
"A few are thinking of selling up already. I think that people are going to have a knee-jerk reaction too."
Property Brokers Bay of Plenty regional manager Simon Short said it was too early to measure the impact the changes may have.
Short said on one hand changes may enable first home buyers to "reactivate" and enter the market but whether it changed the supply and demand issue was yet to be seen.
"That's really the inherent issue we have. We've got a lack of stock and the overzealous demand."
Short said landlords increasing rents may be a byproduct of scrapping taxable deductions.
"Landlords are going to be pushed into a corner to elevate rents based on the fact they can't treat their investments in the business capacity where they can get taxable rebates on the interest payments they're making, which seems I think unfair."
A spokesperson for the Minister of Finance Grant Robertson said the intention of the package was to shift the balance back to first home buyers and boost the supply of affordable housing.
"The tax system favours debt-driven residential property investment over more fully taxed and more productive investments.
"To reduce investor demand for these investments, we will remove the interest deductibility loophole that advantages investors over first home buyers."
The plan did encourage investment in new builds with the bright-line test for new build investment properties remaining at five years to help increase housing supply, the spokesperson said.
The impact on rents was uncertain and depended on market supply and demand, including the ability to pay, the spokesperson said.
Trade Me's latest Rental Price Index showed Rotorua's median weekly rent was $465, a 6 per cent increase from $440 in February 2020.
Trade Me Property sales director Gavin Lloyd said it was not totally clear what impact the announcement would have.
"We might see some landlords sell their investment properties due to the increase in tax costs. This would in turn impact tenancies as rental properties change hands.
"At this stage, we reckon it's unlikely that these changes will see rents drop in the Bay of Plenty or any other regions.
"Rents are high because of a lack of supply next to high demand - from what we've seen so far these measures won't provide more supply in the short term."
'Huge shock' to landlords
Rotorua landlord Dave Fowler said the new changes had come as a "huge shock" to landlords.
Dave and his wife Sandra own 11 rentals in Rotorua that they bought between 2004 and 2009.
Sandra said the couple wanted to become landlords for their retirement.
"Our strategy has been long-term. It's been to buy, hold on to it for a long time until we reach our 60s and do the places up as nicely as possible to attract good quality tenants.
"On the whole, our tenants don't move, we've had tenants who have been with us for many years. We also have a lot of returning tenants who come back to us.
"We're in business with our tenants and we see our tenants as our customers. We always try our best for them and in return we have the reasonable expectation of rent being paid and for our homes to be looked after."
But Sandra said the continual rental law changes were making it difficult for them to be able to run their "business" as landlords.
"We're happy to oblige. Our philosophy has always been if we can't live in it why would we expect anyone else to."
Sandra said she and her husband had worked full-time jobs on top of being landlords.
"We're doing this in our spare time to have some options for ourselves later in life and a have a sense of security.
"But we're not going to react. We're certainly not going to rush out and sell anything. It's just another blow and means we're going to have to work harder."
Dave said it wasn't property investors that first home buyers were competing against, it was speculators, immigrants and more recently cashed-up Kiwis returning home.
"In all the properties we've bought we haven't competed against first home buyers.
"It is speculators who are the ones the Government needs to be targeting."
"I think increasing the bright-line is sensible but not taking away the ability to claim interest, which is often the largest expense compared to rates and insurance."
Dave said the Government was targeting the wrong people.
"At the end of the day, all it's going to do is hurt the tenants if rents go up and there will be less rentals in Rotorua if people decide to sell up."
The Government's housing announcement at a glance
· $3.8 billion to accelerate housing supply in the short to medium term by offering infrastructure investment grants for build-ready land
· More Kiwis are able to access First Home Grants and Loans with increased income caps and higher house price caps in targeted areas
· Bright-line test doubled to 10 years with an exemption to incentivise new builds
· Interest deductibility loophole removed for future investors and phased out on existing residential investments
· Govt to support Kāinga Ora to borrow $2b extra to scale up at pace land acquisition to boost housing supply