The Government has released a package of housing policies aimed at increasing the supply of houses and curbing demand by investors.
Here is a summary of the changes:
- Bright-line test extended from five to 10 years
People who buy and sell a property within 10 years will need to pay income tax on any profit made.
The test for new build investment properties will remain at five years.
The family home and inherited property continue to be exempt from the bright-line test.
The new rule will apply to property acquired on or after March 27.
See this sheet for more.
- Remove ability for investors to write off interest expenses
Property investors will no longer be able to offset their interest expenses against their rental income when calculating their tax.
The Government will consult on the detail of the proposal Cabinet has agreed to, and legislation will be introduced thereafter.
Consultation will look at an exemption for new builds acquired as a residential investment property, and consider whether all people who are taxed on the sale of a property (for example under the bright-line test) should be able to deduct their interest expense at the time of the sale.
The legislation will apply from October 1.
Interest deductions on residential investment property acquired on or after March 27 will not be allowed from October 1.
Interest on loans for properties acquired before March 27 can still be claimed as an expense. However, the amount someone can claim will be reduced over the next four income years until it is completely phased out by April 1, 2025.
See this sheet for more.
- Price and income caps on First Home products lifted
More first-home buyers will be eligible for the existing First Home Grant and First Home Loan.
The Grant provides eligible first-home buyers with up to $5,000 for individuals and up to $10,000 for two or more buyers to put towards the purchase of an existing home.
Buyers of a brand new home can receive up to $10,000 for individuals and up to $20,000 for two or more buyers.
Under the First Home Loan, a buyer only needs a 5% deposit. First Home Loans are issued by selected banks, building societies, and credit unions, and underwritten by Kāinga Ora - Homes and Communities.
The maximum income people can earn to receive this assistance will be lifted from $85,000 to $95,000 for single buyers, and from $130,000 to $150,000 for two or more buyers.
Price caps on homes that can be purchased using the assistance will be lifted as follows:
The changes will take effect on April 1.
See this sheet for more.
- RBNZ restrictions of bank lending still being worked through
The Reserve Bank (RBNZ) will in May report back to the Government on the possible introduction of debt-to-income (DTI) ratio restrictions and restrictions on interest-only mortgages.
The RBNZ says it already has the power to restrict the use of interest only mortgages.
The Government would need to give the RBNZ DTI tools. It's nervous about doing so, because it doesn't want these hampering first-home buyers' efforts to enter the market.
- $3.8 billion Housing Acceleration Fund
The Government will set aside $3.8 billion to help fund infrastructure around housing developments, including roads and pipes to homes.
The key components of the fund include:
- An infrastructure fund to unlock a mix of private sector led and government led developments in locations facing the biggest housing supply and affordability challenges, and
- additional funding for the Land for Housing Programme to accelerate development of vacant or underutilised Crown owned land, operate in more regions, and deliver a broader range of affordable housing options for rental and home ownership.
Cabinet will consider the detailed criteria of the fund in June. The Government expects money to start going out the door in the second half of the year.
The Government will also help Kāinga Ora to borrow an additional $2 billion to “assist in bringing a range of development forward through strategic land purchases”.
See this sheet for more.
507 Comments
What do you think they should have done? They seem to have done most of the sensible options don't you think?
One thing I do question is why they need the $3.8 billion Housing Acceleration Fund? This implies that they hadn't already put enough money aside to build houses and haven't been running at full pace for the last 3.5 years. Seems very odd for a government that intended on building 100,000 houses in 10 years and not so long ago had $12 billion to spare to build new roads.
Yes, that is why the inflation component of interest isn't an expense. If you took out a loan in 1970 for $20k which was a lot of money then, paid interest only all this time, it would still be a debt of $20k which is now about the price of a mars bar. In real terms you have been paying off *your* debt through that inflation interest. It wasn't an expense, it was debt repayment.
Yes. But why did it take so long? Their excuse this morning was that they expected (feared?) a house price crash arising out of the COVID shock, but that the opposite had happened - hence why they hadn't moved soon.
For goodness sake, they must live in another world and those doing the economic analyses need firing. The general public have been aware for YEARS that the housing market was in an affordability crisis.
I speaks volumes about their priorities - any risk of price falls will spur them into action immediately. But massive unsustainable price appreciation can be dealt with when they get around to it. I've said it before, this government WANTS house price appreciation, but just needs to make a token effort to look like they are looking out for FHB'ers.
Sorry Kate, but rent controls don't work.
It's shown in an easy to digest podcast here:
https://freakonomics.com/podcast/rent-control-rebroadcast/
But it is well supported in the literature.
If you bothered to read the article it proposes that it makes things worse, less incentive to develop properties, rental housing stock would get worse as why would you put any more money into maintenance than the absolute minimum. So no we don't need to try it at all
Your tenants don't have to accept your rent increase, they can leave anytime. You are still on the hook with your bank though. All steps that discourage PIs will increase the pool of affordable properties that some of those tenants will be able to buy at better prices.
It is something that you do with a good tenant, often by not lifting the rent during a tenancy. I used to do that.
However, when things change (like a government imposed cost) landlords have to rethink. If all rents move to recover those costs,probably $100-200 over the 4 years in addition to normal lifts, then that will have a massive imapct on tenants, and the government because there is already a shortage, plus no short term accommodation or social housing to move into. Vacancies in social housing in 2030 won't fix the problem they create today.
I don’t think you understand. This will incentivise the conversion of residential property into commercial air-bnb or book-a-Bach because having to pay commercial rates whilst having your interest expense be deductible is preferable to non deductible interest. You will likely see a massive shift from long term rentals to short term “holiday” accomodation squeezing supply.
sadr... and that is why Air B n B/ book a batch etc, along with unoccupied homes (in certain urban areas where the homes are needed) should be taxed out of existence, and anyone avoiding the tax should forfeit their home under the proceeds of crimes act. It is no different to taxing cigarettes and alcohol heavily due to the damage inflicted on society. No, you cannot smoke without paying a high sin tax.. No, you cannot keep your property out of the rental market without paying a high sin tax.
Right. So your two-bed donger in South Auckland becomes a desirable Airbnb? Don’t think so.
I’m broadly in favour of the changes, even as a sometime ‘investor’. It’s been far too easy to money out of property in the past. But I think what is urgently needed is thousands of state homes. Lots of low rise blocks of units around the Shore that could have double or treble the amount of housing on them. Have a minimum 150sq m section size with 50% coverage, move golf courses, race courses out to the country, where of course they were before housing expanded to meet them.
So current rental property owners should sell now into this historically high market so FHB's can enter market - good news crystalise a tax free profit, watch the asset bubble inflate further so the crash will be bigger, recent FHB now insolvent, houses sell at fire sale prices and ex Landlords buy at cheaper price so yield increases. You could think this was ardern & robbos deliberate intention I have other views but couldn't possibly comment! Banks may feel a little nervous.
Lh...pretty sure that if you already own your investment property it has no effect and you can still claim. Cannot claim interest payments for houses purchased after 28 March. So of course the Govt has ensured the greedy investors already in the market can go on rorting the system as usual. The non deduction of interest should have applied to all investment properties from October. Another example of the property infestor industry baring its ugly fangs at a cowering ineffective Govt.
Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense.
However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out, as
shown in the table on the next page. This means that in the 2025–26 and later income years, you will not be able to
claim any interest expense as deductions against your income.
https://www.interest.co.nz/sites/default/files/embedded_images/IR%20FAC…
JJ...OK thanks. My bad. Now looks like it is much more important to supports Kate's "rentcontrolnow" idea in order to protect our (mostly) poor renters from greedy landlords who will no doubt do everything they can to ensure they are not out of pocket and it is the poor that suffer yet again.
Your tenants might be able to buy their own home now....fewer multiple home owners and fewer renters, thats what we need to close equality. You landlords are going to get so upset if you don;t make the big dollars on your rentals. An increasing mentality that it's a risk free investment has been developing for some time
No, rents will rise to cover the costs the government has imposed. And the attitude that landlord are pulling in 'the big dollars' is wrong, its never been risk free, or cost free.
As a small (Ma and Pa level ) investor, I paid out of my pocket every month as I try to pay down debt to get cash positive, the governments earlier actions meant that I could never do that, so I sold out in December luckily.
Sadly, the family living in that house cannot afford to buy a house regardless, and as I charged modest rent, could not get a similar rental for less than an extra $100 per week. If I still had the house, my only option would have been to pass on the increases in costs/tax straight to the tenant.
Another note, rental houses tend to have higher occupancy (Stats NZ actual data, not guesswork), so each house that leaves the tenancy pool reduces housing availability even more.
rentals have high occupancy for demographic reasons. The people living with 10 occupants crammed in a 3 bedroom are sadly not the ones who can afford to buy. It will typically be young professional couples with 2 incomes renting their place who will be purchasing their first home.
Your investment property was marginally profitable then... Mine are all debt free FYI.
This is a fat load of nothing. The biggest impact will be market sentiment and confidence more than anything else. Actual affordability? Not a material difference, This is just playing in the margins.
"Property losses are already ring-fenced so this isn't a huge change for investors". Without interest in the expenses you will technically be more profitable (on paper) = tax payable. But not more profitable in cash flow as interest is still payable out of pocket (loop-hole is gone)
GV,
Losses were ring fenced for the same asset type, so mostly impacted Ma and Pa investors.
The removal of a genuine business cost (interest) impacts massively as losses do not exist. Now the carry forward loss also can't be claimed in the future when your property becomes cash positive either., and all rental income is taxable from dollar 1 without genuine deductions for the biggest business expense.
Only 1 solution, recover the extra costs in rent........
Farmers' nuts are getting pretty numb by now.
https://www.interest.co.nz/rural-news/109624/rural-support-mental-healt…
If you are right then all it does is improve Govt short term cash flow so if the Landlord during rental period is liable to tax at 17.5% then the addition of a gain that takes him to say 30% means that the effective relief is higher unless the gain is apportioned to the years of ownership and taxed at the rate in that year but then you run into the statute of limitations. I am "sure" robbo will claim he already knew this after reading this article! Why do I always hear the Eagles singing You cant hide your lying eyes whenever this Govt announces policy?
I wonder how this will be implemented .. every other business can deduct interest expenses - residential property will be an exception now . What about commercial property ? Mixed-used property ?
It does not seem like they have thought this through - perhaps the implementation timeframe ( not until October .. ) is a sign of the same.
Yip, quite a can of worms. Wouldn't be surprised if they ultimately decide it only affects properties who are already subject to brightline test.
Edit: From the IRD fact sheet now linked in the article, it's clear that this will apply to all properties, not just those subject to bright line test.
I do not think it is clear .. lots of detail yet to be worked out.
The keyword is of course "purpose" as in
"The Government's intention is that the rule change will not apply to loans for non-housing business purposes."
Try policing that .. wish I was in the accounting business.
It will incentivise the conversion of residential property to commercial. Previously commercial rates may have deterred investors from switching to air bnb or book-a-Bach, but now commercial rates will look cheap relative to the interest expense not being tax deductible.
Interest should be treated as a cost of the capital and not as an operating expense. It should apply to all capital no matter where it is invested eg all real estate, shares etc. This also applies to house builders. The corollary is that interest earned should be non-assessable. This of course will require a readjustment of all interest rates. Too difficult?
Yeah I always thought you kept a ton of debt in your rental so the interest offsets the tax on rent payments. So now most PIs will be getting 33% less profit from rent won't they? And unless they hold for 10 years or more (a big commitment) then they will also pay tax on the capital gain. Seems like Labour have got rid of the two big PI tax loopholes, and put a big smile on my PAYE paying face!
They will not get 33% less profit. They will get 33% less income, which means that many will be making losses. In effect this means that you are now capitalising your interest costs to offset gains when sold (Brightline test on 10 years). This is the silliest way of not introducing CGT on property and then doing something completely unreasonable (disallowing a legitimate expense from being deducted) to get a CGT like tax. Just introduce CGT for property, exempt family home, and simplifies and fix everything.
But a good proportion of interest (inflation) is not a legitimate expense, it is decreasing the real value of your debt so it is debt reduction not an expense. It is the opposite of when you put money into the bank and you unfairly pay tax on all of the interest even though most of that interest is just to compensate you for inflation.
I actually thought the government would try and remove the interest component from both savings and debt which would be fair on both accounts, but I guess they either thought it was too big a change to push through quickly or wanted to have their cake and eat it too.
Real economic income is calculated with adjustments for inflation. And that adjusted income would be a fair basis to calculate tax. Taxing interest income not adjusted for inflation is theft by government. Again two wrongs do not make a right.
BYT, if the reduction of the real value of my debt (due to inflation) is my income at my lender's expense (as surely his loan worth less). So if I pay tax on it (as disallowing the inflation component of interest rate) then the lender should be allowed to deduct an expense. It is zero sum game from taxing perspective if done right. But the tax man taxes my "income" as well as my real expense (surely you would accept that there is a real cost of money component to interest) and then tax the gross return of my lender too. Double dipping.
I don't really care whether the government is double dipping, I'm just happy they have fixed the two tax distortions that made residential investment good from a tax perspective. Especially as a PAYE tax payer where I don't get to claim ANY of my expenses; if I take out a loan to invest in myself I can't claim the interest against my income, yet it would no doubt be much more productive to society then property investment.
But you should care. Tax must be fair. Double dipping is not. I am a PAYE payer too. And to me your point is valid. Clear out of pocket expenses in increasing my professional capability (i.e. paying professional membership, fees for training courses and any financial expenses incurred to make these happen etc) directly linked to my earning capacity must be deductible expenses. If a company pays training expenses of staff, it will deduct it 100% and it will not be treated as a benefit to you. So if you do it yourself, it should be the same.
But it is a little sad that instead of thinking and wanting what is fundamentally reasonable and fair, we are happy that more people are treated as unfairly as us. If the principle is to tax income, then you should be consistent in how you calculate it.
I am more than fine with the local dairy owner buying a can of coke wholesale for $1 and selling it for $1.50 and only paying tax on the profit not the income. But in your case you are buying a business (a house which already existed) and trying to claim part of the cost of buying that business as an expense for running the business which in my opinion it is not. Then you can sell it to someone else who will do the same and that business may never make a profit (despite obviously making a profit). Whether this rule should apply to all types of businesses I don't really know, but I still see this change as a net positive regardless.
jj.. yes it is a nice start and goes some way towards fairness in the tax system. Can't wait to hear how Mr Mosque will attempt to spin all this.
I hope the Govt is going to pre-empt any bully-like threats from investors of moving homes from rentals to Air B n B or leaving urban homes unoccupied. When threatened by a bully the best response is to punch him in the face and I do not know if it is just me but Ashley does have one of those faces that you just makes you want to.....
Removing interest deductability will be a pretty decent disincentive for investors if it's done the way Grunter is proposing. Investors who buy from 27th March now going to have to pay nearly a third of the rent they receive in tax. Rates and insurance and maintenance wouldn't bring tax down by much compared to loan interest for most. This is significant. I'm guessing that is why the advice from Orr other meaures to come will wait till April. They dont want to overdo it and trigger a massive sell off when invested realise it may never get this good again for a long time. Still will never forgive Labour for not doing all this 6 months ago instead of wait and see approach or trying to send 'signals' and playing pen pals with Orr
dago...it should have always been done this way. They are just putting things right just as they did with depreciation. Did you know that when I owned rentals that were appreciating considerably I could claim depreciation on the houses every year as well as negatively gear my investments and offset the losses against my personal income. Everything has always been designed in favour of the property investor and yet they still moan about how hard things are for them. Give me a break.
You got no depreciation on the land, but only on the house, which should have then been spent to replace those items that depreciated.
But instead, most people used it to pay down the mortgage, go on holiday buy, a boat, etc. And when you sold you had to pay back the depreciation.
The depreciation was real, how you sent the money wasn't.
Any appreciation you got in price was due to the tightening restrictions on land, and general inflationary costs.
If you get relief on interest its like the government helping to buy you an investment property and funded at the expense of the majority of tax payers who do not have more than one home and many who have no home .
It will encourage some to pay down debt and it will hit those speculators who just hold empty properties for the fast buck capital gain .
This is literally just tinkering with existing policies, there is nothing bold or innovative about this. If it hasn't worked up until now, a couple of tweaks aren't going to do it. This is a classic case of doing something just to be able to say you're doing something, while doing your best to not actually do anything.
How about you explain what you would have done ShoreThing? It seems to strike a right balance between not going over the top but enough. The $3.7b for infrastructure for new builds is great as councils can't sit on their butts and not approve new land and fund that infrastructure.
Firmly set the expectation that house prices are going to come down, as that is going to have the most impact. Set an actual target, say 5x household income by 2030. Introduce a nominal LVT, remove the RUB, phase out Accommodation Supplements, phase out Homestart grants, incremental tax brackets that increase per number of properties owned. Announce changes to the Policy Targets Agreement, forcing the RBNZ to adjust the risk weighting on property so that banks aren't incentivised to lend against it. End interest only loans. Introduce DTI at current levels, communicate that it will reduce annually to the target 5x by 2030. Announce a population target, with infrastructure, education, health and construction spending tied to this target.
Not going over the top? They have barely scratched the surface. This is most definitely not BOLD. Bright line extended to 99 years would have been bold. No interest only loans for investors would have been bold. Considering first division lotto with powerball is over the top, I thought they were going to give us a bold housing lotto first division, no powerball, but they gave us a 15k scratchie.
Well if a developer or say spec builder is running it all through a limited liability company, then it is just either a trade or a product, that all washes out in the P & L including finance costs. Unless they are saying now that any interest paid on property finance full stop is no longer tax deductible? Cannot imagine it will take too long for the accountants to work out a way round that.
Pretty weak all up. Extending the bright line test to 10 years ... but only for new purchases? Won't have any short term impact.
More FHB support in terms of grants ... I mean, really? That doesn't make houses more affordable, it just means people can take on unaffordable levels of debt to purchase them.
Interest deductibility seems like a good change, but no movement on Interest Only loans or DTI is very very disappointing.
I've said before that they will keep pouring taxpayer money into this subsidised Ponzi scheme, and that is what they are doing. Shovelling money to FHB's to catapult them onto the last rung of the ladder. It's effectively buying votes, that the only way it can be viewed, otherwise Labour would lose that cohort of young voters.
Not surprised. Knew that will do something on BLT and grants as will not make much difference to housing ponzi but will give them media byte to potray that are serious.
Real shame that have still not touched dti and ingerest only loan. What advise are tbey waiting and since when.... No one is asking them and fall to the narrative set by govetnment.
Real Shame.
Best option that could have made some difference has not been acted upon - in air
RBNZ restrictions of bank lending still being worked through
The Reserve Bank will report back to the Government on the possible introduction of debt-to-income ratio restrictions and restrictions on interest-only mortgages in May.
When Jacinda When .....Give us time frame as did has been in discussion over years and RBNZ asked for it earlier so what is it that RBNZ will get back or even I terest loan as that is something that RBNZ can act now.
Please do not BS anymore and come out clean.
Today's announcement good for performance but will not achieve anything.
Extremely bad policy. Interest is a perfectly valid expense, and why the heck would they remove tax deductibility for repairs! There's no need for this policy because house owners are already at an advantage over property investors due to the fact that they're indirectly claiming 100% tax deductions on their imputed rental income, ie the money they're "earning" by not paying any rent. The unintended consequences of this dumb policy are so obvious. Landlords will do zero repairs from now on! The trades will suffer while we're heading into a recession. House prices will go down bankrupting new entrants to the market. Banks will be in danger of becoming insolvent. Because there's no deposit guarantee scheme the government will be on the hook for bailing the banks out. Everyone loses. Negative sum game.
Well, they were only parasitic - so what?
But this is interesting: "or underutilised Crown owned land,"
So leaving biodiversity alone, to be biodiverse, is obviously out. Translation: we are a human-centric Government, unaware of the ecological impacts such a myopic attitude induces.
We are in trouble.
Removal of tax deductibility for interest - anyone know if this is retrospective? (i.e. existing borrowing)
Anyone who has bought and borrowed to the hilt for an investment property recently will be in trouble. They are probably in negative cash flow, now they need to pay the tax on the "income".
I guess they can always just increase the rent....
I realise that, I was referring to interest deductability as an accounting expense. It is inconsistent not to be able to deduct it as an individual but to be able to be able to do so in a corporate envelope - or maybe even a trust. This will catch a few people out though, it is punitive for the amateur and favours the professional.
It won't be that easy to hide I'm afraid. Its easy to adjust for, the IRD and Tax accountants will be all over it. Just because it is a business expense doesn't mean it cant be excluded from the tax calculation. Actual expenses and tax deductible expenses can be different.
The IR factsheet is clear "Interest deductions on residential investment property... will not be allowed" According to this, if you are a commercial property landlord you will be fine, but not so if you are a residential property landlord. Your organisation structure is inconsequential. Evading tax is still evading tax.
If the infrastructure fund was a seriously big number ... $ 20 billion or so , I'd applaud Robbo ... but $ 3.8 b. is less than they squander on WFF each year ...
... and , still no announcement on reform of the number 1 handbrake : the RMA ... waiting ... waiting ...
It's been well publicised that they are releasing their draft planning in May and it will be going to the house at the end of the year. They've already described the three acts they're looking to bring in. New legislation won't change anything. The RMA is just a scapegoat. The problem isn't there, it's just an easy target.
I'm providing a rental property as a service to a large family (3 generations) who couldn't otherwise all live together / afford their own homes. They're currently paying quite a bit under market rent right now, and I *was* running a small profit. Thanks to this change that will now be a loss.
Guess I'll put the rent up for them, when the last rent change I gave them was a rent reduction in 2015.
But if the investors keep leveraging their existing properties to acquire more it keeps demand increasing and therefore prices increasing until supply can match demand. But there are still many investors who invest for yields - which in many cases are supported by the taxpayer in the form of accommodation supplements.
Yes, your points are correct, but only if supply is less than demand, that is the way our system is set up. If we had policies that allowed supply to always equal demand, as they do in places like Texas, then investors cannot get capital growth so they invest in other investments that offer better returns.
And the only reason the yield investors get topped up by the accommodation supplement is that the capital growth has pushed prices beyond what people can afford. If this did not occur, then no top-up would be needed.
Supply is less than demand due to my points above. Investors have the market cornered at the expense of the FHB and renter. The responsibility is for the government to design policies to divert investment into productive industries and discourage investing in socially harmful areas. Investors are not to blame as such - don't hate the player, hate the game.
Yes agreed, but I'm saying it is just policy (hate the game), as you are, and is not some immutable law of the universe that it should be this way.
We have got what we have got because Govt. has designed it this way. They are doing it out of design or ignorance, neither is acceptable.
There's demand for accommodation and there's demand for a government subsidised and protected investment vehicle. Which is what we've had for a while.
Hence rent increases lagged price increases significantly during large parts of the last decades. The demand for a government subsidised and protected investment vehicle (a 'welfare scheme'?) was insatiable.
No, it's because of the families in the house:
1 couple are pensioners
1 is a divorcee and her adult children have children of their own
1 couple have intellectual disabilities so are on low-wage jobs + government disability top-ups
None of these people are in positions to buy houses of their own, but they all enjoy living together and are saving substantial money in doing so.
And if I told you I was an accidental landlord and the house is only rented out because it 'appears' to be leaky (due to its construction date and materials) and so therefore is worth more on paper than if I were to sell it on the market?
I've lost ~$200k equity in the house. I'm using it as a rental because it returns a small profit. I'm charging below market rent to a large multi-generational family, allowing them to live together and save substantial rent money by sharing 1 large 6 bedroom 3 living room house.
You have just given us a good example of what happens with real losses in equity, ie you only take them if you sell, so if you can get away with not needing to sell, and cover your expenses in the meantime, you hold on and hopefully time/inflation will claw away those loses either by selling in the future at a profit, or your yield giving you enough to cover the fact that you may never recover the equity from a house with the potential to be leaky.
That's why the stats. never show the true losses when things go wrong. All the best.
Lanthanide: What are you doing renting out a toxic home. If your your house is leaky you can confirm by cutting out a say 300mm x 300mm section of the external cladding and if you are then staring at a black sticky substance all over the wooden framing timbers then you have a very, very toxic home; the house would be uninhabitable. The black stuff is called staphylococcus aureus, a fungus toxic to human beings.
Hear hear. It’s Stachybotrys chartarum, a fungus, it is known to be toxic. Staphylococcal Aureus is a bacteria which causes skin infections. People in unhealthy homes are also at risk of streptococcus which is a bacteria which causes the throat infections which damage your heart. All 3 are found in unhealthy overcrowded living environments. https://www.hrc.co.nz/files/7014/7407/6639/Thematic_snapshot_report_of_…
I never claimed to add to supply. Given I have 3 generations of a family living there, that before they moved into this 1 house were occupying 3 separate houses and paying more in total rent than they pay me, I think I have actually helped overall supply of houses.
Read my other replies and judge if you think I'm providing a service or not. I genuinely think I am (because of the circumstances of my tenants). I'd say a slim majority of private landlords aren't genuinely providing a service, though.
Also they aren't protected by consumer law, they're protected by tenancy law. Which is different. Just like companies that buy products from other companies aren't protected by consumer law either.
There is a reason it's called tenancy law not consumer law. I believe you are a good landlord and look after well your tenants, but that still doesn't change my view. To me, a service is for customer. Renters are clearly not customers. The scenario of companies buying products from other companies doesn't apply here. Renters are not companies and they don't resupply in trade.
What if the business is a property developer that purchases a residential home, keeps the long term tenants there under market rent while they take 2-3 years to get the appropriate consents and plans to subdivide and build multiple dwellings? On the face of this announcement, their interest would not be deductible (assuming no tax planning in place). But they got the loan to do something and pursue other goals.
This policy is about as well thought through as your comment.
In this case it would be good to distinguish between the money borrowed for productive investment (new dwellings) and that borrowed to capitalise on the natural monopoly value of land (the property). Treat them as separate entities for tax purposes; I'd be all in favour of making the 'development' part totally tax-free and punitively taxing the land-banking/existing-house-hoarding element.
I think that’s a fair argument in favour of what you’re saying. I guess where I get a bit concerned is that once you start exempting some things and not others, you open a can of worms. For example, many people often argue for GST exemptions but right now we have the cleanest and most efficient GST in the world. Similarly, If we stopped deductibility then carved out exemptions in this area, tax professionals will have a field day. I guess we will create more problems than we will solve. A better approach, if you were concerned about interest deductibility favouring residential property investment, would be rules around IO loans, thin capitalisation concepts limiting leverage or debt-to-income limits.
You are deducting interest as a loss, but the corresponding inflation component of that interest has decreased the amount of real debt you owe so there was actually no loss. And this is fairly unique to property because normally business capital decreases roughly inline with inflation but with property it doesn't.
But who cares anyway? The old "property must be treated as a standard business (except for health and safety where landlords don't expect to invest even the tiniest percentage of their asset price in insulation and heating and mould prevention)" is starting to wear a bit thin.
It is a standard business expense but should it be? Interest is simply the cost of debt capital i.e. it is not a cost required to generate a profit, it is a cost relating to a financing decision. A business could be entirely funded by equity yet dividends are not tax deductible so why is interest expense deductible then? I understand in certain countries and historically, interest expense has not been deductible or subject to certain limits. Unfortunately, with interest rates so low you wonder whether correcting this anomaly (for residential property investment only) will actually have a material impact at this stage. But still, every bit helps - the arguments for being a landlord because of tax reasons are becoming more fraught. Now you have to argue that the tax free capital gains after 10 years or taxed capital gains for any lesser period will compensate you for the pitiful net rental stream (and possibly losses, which you can't offset) and the hassle involved.
If debt is not available and only equity is used then that will slow down growth. Some may see that as a good thing. But what about community housing providers for low income or elderly families who also need to scale in this environment? Limiting interest deductions by applying, for example, thin capitalisation concepts have some merit. Disallowing interest deductibility altogether is going a step too far. I suspect there will need to be many exemptions and / or accountants and lawyers will find loopholes that don’t trigger the GAAR. I know this sounds exciting for people that hate property investors with a passion, but objective observers won’t be impressed or discouraged by this announcement.
The availability of debt will not be reduced but the marginal demand for debt should be. But if the demand for debt reduces because it is no longer tax deductible (and therefore relatively more expensive viz equity financing ) it is because people see the cost benefit of equity financing (lower risk) has relatively improved. It is not clear to me that less leverage is a bad thing. And let's be honest, the only reason why house prices are excessive is because of mountains of cheap leverage.
Interestingly, the government is not proposing that interest income from investor loans become non-assessable for banks and then term deposits that effectively fund bank lending (although that has always been an asymmetry as far as owner-occupied lending is concerned). It's a tricky one though.
Banks are owned by shareholders and therefore the dividends from bank profits are taxable. If interest income was not assessable as bank profits and their interest expense was not deductible, then the higher dividends flowing from higher after tax profit would be taxed accordingly at shareholder level. Net, net the tax take should be the same. And btw, most countries do not have an imputation tax system, so most corporate profits are effectively double taxed.
"Business"? Nice to hear you are in Business, I guess we should be charging you commercial rates and applying GST.
Now that would be a great change... Apply GST to current rents, legislate that the rent is already inclusive of the GST - i.e. straight out of LL pocket, and implement a rent freeze for 5 years.
If being realistic, we have to acknowledge that investors in NZ are buying for capital gains, and interest is an expense deductible against that income. We seem to have had an odd best of both worlds mix here though where folk have not been paying tax on their true income ("whoops, capital gains, that was an accident, totally didn't buy for that!") while getting to deduct their expenses.
A good start. Addressed actions within their sphere - e.g. tax issues (deductibility and BLT) and supply.
Expect RBNZ to introduce other actions such as possibly DTI and interest only in addition to further tinkering with LVRs.
Bottom line is property investment has just got a hell of a lot less attractive for most.
On the face of it, looks pretty reasonable. Not a huge fan of the first home buyer grants, but like the extended brightline test and removal of interest deductions. Perhaps not the massive change that some were hoping for, but I'll take sensible incremental changes over a massive misstep thanks.
10 year brightline is probably a necessary step on the path to full CGT at some later date.
I think 10 year bright line is probably a reasonable CGT. It is targeted to the problem (residential PI) instead of applying to owners and standard businesses. And after 10 years it gets quite unreasonable without inflation adjustment. Its probably what Cullen's team should have recommended in the first place.
extending the BLT seems like a slightly pointless half measure. It provides incentive to just hold the property a little longer. Just remove the 5 year cap and make any capital gains taxable. This would create a strong incentive for those investing purely for capital gains reasons to sell now - which would address the imbalance immediately.
I agree a full CGT makes a lot more sense, and I imagine the government does too. But politically it wasn't acceptable, so 10 years is still a lot better than 5. It'll be a lot easier for some future government to say "Well, we have this 10 year brightline test which is really just a limited capital gains tax. It has been working well but it'll work even better, and be simpler, if we just convert it into a full capital gains tax.".
And equally a future Govt may decide this whole mess was an avoidable one and retrospectively void it especially if an asset crash results in no additional tax take and a reluctance of previous landlords to invest in activity with an exposure of Govt stupidity no matter how well meaning. Perhaps robbo and his team of clowns will disallow Farmers cost of fertilizer to save the planet.
Did knew that will play with time ( waiting for information / waiting for advise) from rbnz on dti and interest only loan..... Really still waiting.
As mentioned by many in comments tbat is as expected will not interest only loan and dti for the very reason that tbey do not actually want to make a difference.
Increasing the rent my only option other than selling. This will turn my property cashflow negative. The good news is that I’ve refrained from increasing the rent so there is definitely room to increase it. I decided that if the tenants were good I wouldn’t increase the rent unless my costs increased. Dropping interest rates offset the increase in rates etc.
"Increasing the rent my only option other than selling" - exactly. Now in your case maybe you can increase the rent, but in most other cases landlords will be charging as much as possible. So in their case the only option is to sell. And if enough try and sell, house prices will come down, possibly by quite a lot. And if house prices come down, rentals will become profitable again at the same amount of rent or maybe even less.
NPC - " This will pump up entry level homes. They're increasing demand.
The bright line test is nonsense and will be evaded. The interest deductibility will increase rents.
This government is beyond incompetent. "
You are very correct, whilst trying to do something or rather look like they are doing something these changes will increase house prices and sadly rents.
I think you're onto something...
Perhaps this government is very competent. You cannot tell me with all their advisors they couldn't see how this would play out. Perhaps the intention really is to further ramp up prices, with the impression of taking action...
With the majority of the media and the left (who are utterly incapable of second order thinking) on-side, I'm sure they'll get away with it.
> The Reserve Bank will report back to the Government on the possible introduction of debt-to-income ratio restrictions and restrictions on interest-only mortgages in May.
When people were predicting another announcement of an announcement, I thought it was supposed to be satire...
In Auckland, basically the only homes that will come under the 700k cap are new builds ( and a few crappy old flats). Therefore the policy helps stimulate new construction.
If there's lots of construction and sale of sub 700k housing then the lower quartile will drop.
Developers have been struggling to build 3 beddies under 650k, 700k will start to be realistic.
It's far from perfect, and still not addressing fundamentals, but it can help for sure.
And then a 5% deposit is 35k, which is quite accessible, plus a couple get 20k from the govt.
I am not going to come here and just be endlessly negative and cynical, I think this can help.
The speculation is a direct result of people trying to preserve wealth. With interest rates at close to zero and real inflation (not the CPI bulls***) far above that, people are incentivised to seek a) yield and b) store of value elsewhere to prevent their life savings from vanishing into thin air.
Socialists like Jacinda don't want to fix the real problem. They want an eternal source of strife to pretend to fix - you know to "help" the little guy.
What incentive is there for Labour to help kiwis to be wealthy and healthy? That would reduce their voting base!
"The Reserve Bank will report back to the Government on the possible introduction of debt-to-income ratio restrictions and restrictions on interest-only mortgages in May."
Hahaha, report back in May about possibility, draft a plan in July, government discusses about it in Oct, Make a decision in December, new rule takes in place in March 2021. Haha, do they really think they can cool down the market by only doing this?
???
In November Grant Robertson asked the Reserve Bank about consideration of house prices when it sets interest rates. In February he tweaked the RB interest-rate setting process to include a consideration for housing.
Not sure why you think it would take 1 full year to do what they're proposing here.
I was being sarcastic about how they just keep dragging it along to miss the opportunities. I thought Orr have already indicated RBNZ wanted to introduce DTI. That was in November last year. So almost 5 months now, they are still discussing the possibility to implement DTI. It will take another 2 months for RBNZ to report it back. But when Covid hit, RBNZ took the LVR straight away. After they realising it was a mistakes, they took 3 months to put it back. Clearly, they are trying to delay regulating the housing market.
Lifting the house price cap for government support just means there will be another surge in house prices until housing supply catches up with demand (not happening any time soon).
At this rate it increasingly looks like there are only a couple of things that could bring down house prices. They all end with very sad people rushing to sell their houses because they can no longer afford mortgage payments.
This government simply found it too tough to make hard decisions and by always choosing the middle option they've really boxed themselves into a tight spot politically. Their legacy is going to be very negative.
One policy was required, which requires being anti-Neo liberal and up to date: instructing banks not to give loans to any investor leveraging. And set a limit of borrowing per investor. But no, gov not allowed to interfere in private sector (sorry, banks). Government (despite supposedly being left wing. Ha) must not try to control financialisation
ha ha ha ha ha ha -- Really - FHB's can have an extra $5K even though prices went up $100K in February alone - price caps up 50-75K -- but prices up 200K plus since last rise that was not sufficient
Accelerated Housing funds -- they have built 1000 out of 100,000 ..... are they now saying it was because no money was available ?
SHAM SHAME SHAMBLES
the best result right now would be rampant inflation to cause the lift in the OCR and force interest rates up.
That would instantly correct the market to some extent, which is desperately needed.
The Ponzi has gotten so out of hand that catch up of wages is impossible and with every month of housing price increases the chances of an orderly decline become less likely
I love that Jacinda is still talking about house price moderation. The number one issue with housing affordability is that the houses are too expensive - yet not a single politician will say that house prices need to come down. There is no possible way they can solve the housing affordability crisis without house prices coming down.
But the cost of building new houses is high. Periods of time where houses have been considered affordable where times when either interest rates where high or demand was low. When demand is low people trade existing houses at below replacement cost. Nobody plans to build houses and sell them at a loss so very few houses get built.
I think if Key said something, even now that he is no longer PM, along the lines of housing is an asset and all assets in all markets can go up and down, and the New Zealand housing market is showing signs of exuberance, and people should make investment decisions with that in mind, we would see a minor correction. People trust what these leaders say.
The removal of interest deductibility is outrageous. Businesses pay tax on profits not income. What they should have done is made the increasing of debt after the initial purchase not deductible. It completely screws over rental investment. Ironically I now what to put the rent up. I have never done that to my tenants before
Think of all your huge capital gains Dave, they are eye-watering mate. You must have made squillions. Sad to see landlords saying "I feel I've been punished, so now I'll lash out at someone else and make them feel my pain". Your renters will never be as well off as you Dave, they are stuck for life. I don't know why blokes like you don't just sell up and go fishing or surfing every day - this 'lowest interest rates in history' environment has gifted you an Aladdin's Cave of riches: just enjoy it & forget the punitive and nasty stuff.
Can’t eat capital gains and the reason I own an investment property is insurance against house price increases. We needed to buy a bigger house to support parents. They contributed some money towards the house. When they die, their share will need to be paid out as inheritance. It is likely we won’t be able to afford to buy out the others so the house will have to be sold. That means we may not have enough to buy another house without having to pay a lot more. The arrangement I made means that we would either go back to our old house or sell it to buy out the others. So before you go on about how lucky we are etc you might want to consider that the tenants dishwasher got replaced within 2 days if it breaking and ours has been months. There is no nasty stuff from me other than I’m effectively being punished for being kind. Should have just shipped them off to a nursing home and not had to deal with any of this.
"the tenants dishwasher got replaced within 2 days if it breaking and ours has been months"
The fact that you point this out as something that means you're not 'lucky' to own an investment property really demonstrates that you don't seem to understand something fundamental about being a landlord. The tenants are paying you rent, for a house which includes a working dishwasher. You are obliged to provide the thing that you are being paid for. Ensuring that your tenants get what they paid for by fixing the dishwasher is not some special favour you are doing them. The fact that you have chosen not to fix your own dishwasher is neither here nor there.
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