A fiscal flip is taking place with the Government phasing back in the interest deductibility rules the previous Labour government had been phasing out.
So, what does this mean and how will it shape the housing market?
What is interest deductibility?
The interest deductibility rule relates to the mortgage interest rates on investors’ rental properties.
If someone owns a rental property that has a mortgage on it, the interest they pay on that mortgage can be deducted from their rental income when it’s time to calculate their taxes. This means they pay less tax because their taxable income is lower.
The previous government made changes to these mortgage interest deductibility rules in 2021.
What were those changes?
The Labour government removed the ability for property investors to offset those interest expenses against rental income.
It said the move was meant to stem investor demand for existing homes and “further level the playing field” in favour of first home buyers.
There were some exemptions to that rule, such as properties that were new builds or part of social housing. Then-Revenue Minister David Parker said this was to stimulate investment in new housing.
So, what is the new government doing?
The changes Labour made to the interest deductibility rules will now be reversed, according to Associate Finance Minister David Seymour – however they won’t return on the timescale outlined in ACT’s coalition agreement with National.
That agreement promised to restore interest deductibility with a 60% deduction in the 2023/24 financial year, followed by an 80% deduction in 2024/25 and 100% in 2025/26.
Now, the Government is promising landlords will be able to claim 80% of their interest expenses from April 1, 2024, and then 100% of those expenses from April 1, 2025. That change means landlords won’t be able to claim the expenses retrospectively as initially indicated.
Seymour said bringing back interest deductibility was “a step in the right direction” for addressing problems in the housing market.
“Landlords have been hit with a double whammy of rising mortgage interest rates and increasing interest deductibility limitations during a cost-of-living crisis,” he said.
“These costs are inevitably passed on to tenants, one of the reasons New Zealand has all time high rental costs.
“This heaped pressure on landlords and renters alike by reducing the number of rentals, pushing rents up, and making it harder for Kiwis to save for their first home.
“Competition helps keep prices affordable. Reducing supply reduces the number of options and drives up prices. Removing the ability for landlords to claim interest expenses made residential properties less attractive and reduced the pool of properties for tenants to choose from.”
What does the Opposition think of these changes?
Bringing back interest deductibility is a “tax advantage for the wealthy”, according to Labour’s Finance spokesperson Barbara Edmonds.
“The decision shows where the coalition Government’s priorities are,” she said.
“It’s not lunches in schools, the smokefree generation, or continuing the Cook Strait ferries, it’s mega landlords.
“This is yet another example of the coalition Government making decisions that solely benefit the wealthiest New Zealanders.”
Will the cost of rent come down if landlords are paying less tax?
The reintroduction of interest deductibility for landlords won’t ease the pressure on the housing market, according to CoreLogic’s Chief Economist Kelvin Davidson. (Source: Breakfast)
While the Government maintains “help is on the way for landlords and renters alike”, Edmonds said that was unlikely.
“The assertion that this will bring the cost of rent down is a wolf in sheep’s clothing; there is nothing in today’s announcement that guarantees tenants will have savings passed on to them as a result,” she said.
CoreLogic’s Chief Economist Kelvin Davidson told Breakfast today it’s unlikely rental costs will fall.
“You don’t tend to see rents go down,” he said.
Instead, rents will likely rise more slowly than they otherwise would have.
Davidson said migration is still high, putting pressure on the country’s rental stocks.
“So, tax changes might favour landlords but there are a lot of other market forces that are pushing rents up.”
Davidson also doesn’t expect to see an influx of property investors following these tax changes.
“I’m not convinced we’ll see a flood of investors,” he said.
“Mortgage rates are still high ... [and] it still costs a lot to get into these properties and the rental return on them relative to the mortgage rates are still pretty low.”
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