Parliament has finally (on 29 March) passed legislation removing the ability of residential property investors to claim mortgage interest as a tax deductible expense on existing properties.
It is now just awaiting the formality of royal assent to become law.
The move could bring significant change to the residential property market, although perhaps not in the way some people have been expecting.
Two of the most important aspects of the new rules are that they are being phased in over the next three years with tax deductibility not being fully removed for all investors until 1 April 2025, and that the loss of deductibility won't apply to newly built residential investment properties (see details here).
Investors who buy a brand new residential investment property will still be able to claim their mortgage interest as a tax deductible expense for up to 20 years.
When the Government announced the changes there were dire predictions from various vested interests that they would cause a max exodus of investors from the residential property market.
That hasn't happened and it seems unlikely to occur on any significant scale.
That's because residential property investors who have owned their properties for some time will have benefitted hugely from both capital gains and rental income growth over the last few years.
As long as they have kept their mortgage debt at a reasonable level it's likely that their cash flows will be so strong that the loss of interest deductibility won't take much of a shine off their golden nest eggs.
There could be some who have purchased properties relatively recently and/or who have leveraged up to the max, who may need to do some rebalancing of their portfolios. But their numbers appear unlikely to be sufficiently large enough to have much of an impact on the market.
The main impact of the changes is likely to be longer term and result from differences in the way investors view new or existing properties.
The ability to deduct mortgage interest for up to 20 years gives new properties a definite advantage when investors are looking for an acquisition.
That benefit is enhanced because deductibility is transferable if the the property is resold within 20 years.
So if an investor buys a new dwelling and sells it after 10 years, the new owner will be able to claim mortgage interest as a deduction for the remaining 10 years, provided they have bought the property as an investment.
This should make newly built properties relatively more attractive to investors than existing properties.
If that is the case, we could see fewer investors shopping for existing properties at the lower priced end of the market.
That end of the market is not usually of much interest to people who already own their home and are looking to move up the property ladder.
So with an absence or considerable reduction in the number of investors in that part of the market, it could leave first home buyers as the main customers for these types of properties, giving them an easier shot at home ownership.
And if investors are turning more towards new residential properties when considering acquisitions, that should help bolster demand for new builds and the ongoing supply of new housing stock.
The relative attractiveness of new builds compared to existing dwellings for investors will be amplified by rising mortgage interest rates. That might see some new players such as property syndicators enter the residential property market. Syndicators have tended to operate mainly in commercial and rural property markets.
But if there is sufficient demand from so-called mum and dad investors for new residential builds and the returns look attractive, they could well start to take more of an interest in the residential market.
They could do this in two ways.
Either buy properties for syndication directly from third party developers, or if they have the expertise and resources, undertake medium to large scale developments themselves and tip them into syndicated ownership structures that they continue to manage.
Both options provide plenty of opportunities for ticket clipping along the way.
The Government was almost certainly hoping for a win-win when it introduced the changes to the deductibility rules, by giving first home buyers a clearer shot at existing properties at the bottom end of the housing market, while maintaining and perhaps increasing capital flows into the residential development market, bolstering the supply of new housing stock.
Whether or not it works out that way we will have to wait and see.
But with the new rules finally in place we shouldn't have to wait long.
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84 Comments
The Pendulum Always Swings.
What goes Up must come Down.
In the end the Fat Lady Sings.
A Tax Savings will never compare to the savings of buying low at the bottom.
7% Interest rates this year Guaranteed. -30% Crash in Home Prices this year a Certainty .
7% Interest rates this year Guaranteed.
Guaranteed by whom, you?
So if we don't end up with 7% interest rates, you will personally pay me the difference between the actual rate and this 7% rate that you are guaranteeing?
YES. And any further interest rate hikes you will be required to match that in cash for me ! On your loan. Just like Mega 10 will pay the difference .
This is just lexical semantics. Useless and inflammatory comment Lanthahide
The useless and inflammatory comments are the ones that 2022 posts on every single article, saying the same thing.
I wonder if 2022 is employed by the reserve bank to talk down prices so that they don't have to actually raise rates as much.
Employed by Jacindas Labour more like but yes its possible
Yes, for sure, right-leaning parties would be far more keen on allowing the bubble to pop :-|
Horse has bolted due to labours mishandling and complete disregard for the promises she made
true, but to be fair things did get in the way...Like Winston, then covid, then Ukraine...cant see anybody else doing anything differently ..or better
National also needed Winston to govern through the GFC and Christchurch earthquakes (which added twice as many dollars into the economy as Covid did). Despite this we did not get inflation nearly as bad as this then?
Fair enough too!
Most landlords seem to have plenty of $$$ and they've made heaps of $$$ over the last decade-plus through capital gains alone......
Overall, they're in a pretty privileged position in our communities so, in my mind, there's little case for them being further privileged with juicy tax exemptions.
TTP
I have a sneaky suspicion that 2022 is CWBW. CWBW was often the first to post ridiculous cut and paste comments on any housing article to trigger people and get a reaction. 2022 seems to be doing the same but with the opposite message now the market has turned.
Professional troll?
2022,
In your previous post, you said that 7% rates this year were likely, now they are certain. have you a direct line to the RB? I cannot help but think that your confidence in your opinions exceeds your competence.
Personally, with considerable cash on hand, it would suit me well to see rates at that level.
Well I guess it’s cracked 6% already with ANZ so 2022 is banking on another 0.5/0.75% ocr rise to take it over the 7. Seem plausible to me?
You are correct Sir!
Plausible = probable in my estimation.
The more they rise the more confident I get.
Its gone by lunchtime in 2023 or 2026 when National get back in, so I wouldnt worry about it too much.
Nice tax on mum and dad investors with 1 or 2 rentals trying to get ahead in life.
Larger property investors with no or low debt or commercial debt / Shares (juts repurpose debt) are not affected.
So not sure why Labour want to support big business, seems weird.
Good point about repurposing debt to shift what the debt is for. This is likely an accountant’s dream. Jacinda supporting corporations, tax lawyers and accountants since 2017 :) .
..trying to get ahead in life. yeah, on the sweat of someone else - who has the pleasure of paying a mortgage via rent for life but ends up with no asset ownership.
All enabled by farcical tax and welfare policies.
100% ↑↑↑↑ this!!!
If a monkey hoarded more bananas than it could eat, while most of the other monkeys starved, scientists would try to figure out what's wrong with it being so greedy. When humans do it we are "..trying to get ahead in life". what a crock of sh*t
If there is no reward for the hard work of hoarding bananas, why would you bother. Could just join the over 50% team of NZ on the WINZ benefit and watch Netflix all day.
Five year interest are already near around 6 so 7 is not very far.
Just last year it was near around 3. Already appox $200 more per week on $550000 mortage. As long as price was jumping up, it was fine but if house price growth stops and starts falling, wait for dominio effect.
As the full effect of the deductibility changes does not occur until 2025, I would think the effect would take a few years to come about. It surely will have a negative effect on the market than otherwise. I already see many landlords listing their Auckland units and they are sticking on the market. Look at the "no bid" proportions at the auction rooms. The other concern here is that with all this regular change, I would not bet on the deductibility on new rentals staying in place. It could be removed as quick as it was for existing properties. When you make a decision to invest in a rental or a business or similar and you have risk that radical change can occur without much warning that completely and adversely effects that investment, it does not give you much confidence to invest moving forwards.
If taxes were 99% we would still find a way.
So second hand houses needing doing up will largely be off the investor shopping list.
This could be very helpful for entry owner occupiers.
I kind of think that was the point. Encourage investors to build, leave the more affordable stuff to those who aspire to a roof over their head that they own.
The incentive is now very much to hold bare land (demolishing dwellings to create it even) especially where councils rate on improved value.
As soon as you build a house if starts to devalue because the tax deductibility of interest starts getting used up (this amount goes up as interest rates rise). For so long as you hold the bare land you can capitalise the entirety of the value of the future tax deductibility of interest.
The government literally created an incentive to remove from the housing stock! Sure only a small number of properties will be impacted, but prices are set at the margins.
Using the existing dwelling as an AirBnB also demands consideration as the country opens back up.
This is why we do need a Land Value Tax on the unimproved value of land, along with the relaxing of authoritarian NIMBY zoning. Would assist a lot in resolving some of the present issues.
But Entitlement Mentality stands in the way...
yeah, but banks will NOT loan on a do-er upper unless you have all the money to do it in the bank..gone are the days of grafting to get ahead
"This should make newly built properties relatively more attractive to investors than existing properties. If that is the case, we could see fewer investors shopping for existing properties at the lower priced end of the market." So who will be the target tenant market for these new builds? I'm guessing it won't be those occupying the bottom end of the rental market, unless landlords are feeling extremely generous and offer discounted rents in a time of negative capital gains and rising building and fixed costs?
Nobody has bothered to consider the mismatch between tenant incomes and new builds. The low income tenant who was quite happy renting the $500k old three bedroom house with a backyard and a garage for $400 a week, won't be looking to move into a $900k brand new 3 bedroom house where the rent will be at least 50% more. Their only choice will be to move into a brand new one bedroom place renting for $400 a week. I'd like to see a family of 6 do that.
If an old build house is no longer owned by a landlord it doesn't disappear, it either gets sold - presumably to a previous renter family and is more attractively priced to buy without investor competition, or is redeveloped into multiple residences. In the first scenario, this is a good outcome for renters who can now become home owners. In the second scenario If the number of potential tenants remains the same, then the landlord risks having a vacant property or adjusts the price to meet the market i.e. increased of investor supply will lead to a rental reduction to what renters can actually afford, a better house albeit with less land.
Actually the government has legislated into existence a third option. If the return derived by renting out the property is below the cost of retaining the property and building a new dwelling causes the value stored in the 20 years of tax deductibility to start diminishing (and for whatever reason air bnb is not an option) and council rates are based on improved value then demolishing the dwelling (or holding it empty to one day demolish in regions where council rate on land value) so as to sell the underlying land to a developer gains merit. By not building you don’t start the clock on your interest tax deductibility, this allows you to capitalise its value into the value of the land.
your premise only works where the government isn’t actively discouraging optimal use.
lets hope national do not roll this policy back, especially since the leader is a rental house owner
Jacinda also owns rental property?
And Helen Clark probably owns more than Luxon and Ardern combined.
She owns 8 properties but 2 are clearly land banking, so maybe 4 rentals. Luxon has 3-4 rentals. Jacinda Ardern has none.
I also feel the practice of land-banking is egregious and extreme capitalistic. Expecting to make outsized gains without contributing a single thing. Many people do it but it is pathetic for a former prime minister who talks herself up and likes to judge capitalists
What info are you looking at? She's only registered on one title in nz. She has no company interests either.
Yep, owns at least 5 properties. Haven't even looked at how many may be registered under company ownership he's a shareholder in.
I'll never again vote for someone who owns more than one property...moral bankruptcy
Isnt this likely to deter new investors to the market?
Established landlords to win in this new environment. Thought we were supposed to lessening the inequality gap in NZ.
Well... for inequality in this context usually people mean difference between landlords/investors vs renters.
not investors vs landlords
Anyways no, investors will still be able to access the market (if they still are so confident that prices can go up)
We should be lessening the inequality gap by not allowing non-established investors flood the market through equity leveraging and interest only residential mortgages. Every prospective Landlord not trying to buy another rental property by leveraging to the max is one less person a FHB has to compete with for their first home.
As always with this Labour government, the measures to tame property investors don't go far enough.
We still need a compulsory warrant of fitness by a state inspector before any dwelling may be tenanted. We still need property owners and property managers to be licensed as fit-and-proper persons before they may tenant or manage the tenancy of a property.
Clearly you've never been a landlord. We need prospective tenants to be licensed as fit-and-proper persons before they may tenant a property. Including those tenanted by the taxpayers.
You may also recall that the State excused itself from the Healthy Homes std it mandated for private rentals so a State Inspector would be blatant hypocrisy.
Interesting... and what you do with non fit-and-proper ones?
If it was for me every rental unit should end in a pool, and every renter should enter another pool, and automatic market making should deal with assignments.
If it was for me you would never have discretionality on who rent from you.
communism
noun
a theory or system of social organization in which all property is owned by the community and each person contributes and receives according to their ability and needs.
Communism is a beautiful concept, and in a post-scarcity utopia it would work wonderfully.
Today we are not yet there, because there is scarcity, and the market works better in allocating resources.
What we have today is not a free market, not even close.
If you are suggesting I am communist you are being very naive, anyways.
But let's get back to the real point, because you avoided the question:
" and what you do with non fit-and-proper ones?"
what you would do with those guys? Get rid of them?
There is a name for this way of thinking, and is not a good one
Communism is a beautiful concept
It's a horrendous concept with bloody murderous consequences, and will never "work wonderfully" under any circumstances. You would think the 20th century would have made that abundantly clear.
In a post-scarcity utopia it would work wonderfully, I said.
There is no need of private property if there is more than enough for everybody.
If you need anything go to the Magic 3d Printer and ask for what you need.
In that case the last thing you want is somebody that claim property rights on that machine, creating artificial scarcity again.
I stand for what I said.
but noworries, won't happen in your lifetime
“and what you do with non fit-and-proper ones?"
Couldn’t give a flying fat rats ass. If they are that bad as tenants and no-one wants to rent to them their options are many; sleep under a bridge, in a tent or bunk down with family.
how noble.
What about pets? I bet you are one of those "no-pets" guys.
What about kids? You prefer "professional couples", right?
Stick with the straw men, reality is a bit different. "Post scarcity utopia" ROFL
I was hyperbolic and I made a case.
"Post scarcity utopia" is a valid case, to state my point: communism is good when and if there is more than enough for everybody.
You can't read, or you can't think or you can't compute... I don't know what is wrong with people like you.
Happy mocking :D, if that makes you feel better.
Anyways, this thread is getting boring, I'll move on. ciao
You may also recall that the State excused itself from the Healthy Homes std it mandated for private rentals
Why do people repeat this falsehood?
Great! Will add $500 pa to costs and a new cottage industry is born.
I have just been talking with a guy from the Bay of Islands, and he says there is a massive culture of dependency up there. He reckoned he could feel the difference down South. He also reckons the dependency is being passed from generation to generation, so is very hard to break.
This comment sounds suspect. Disagree entirely.
No matter what part of the country or the world you come from, poverty is hard to get out of, you have no role models and generally your parents do not have same drive. You also don't have same resources.
I came from very poor family, the difference my kids have and the resources we have is vastly different. Not to mention the value of education I have for my kids. I have business which I will pass on to my kids, but after they work for a few years, go to university and travel.
It wasn't my parents fault they just didn't realise and it wasn't how they were brought up they had a hard life.
Your kids had parents who loved and cared for them. Straight away your kids have a massive advantage over the kids whose parents promote the generational dependency. We could go on for hours about influences and environment and bad decisionmaking, but the fact you are here probably means we are all preaching to the converted so to speak.
Yes great parents had the most important thing. But NZ was a paradise back then as well.
Investors turning to the tax savings of new builds...I though they all said they were investing for their civic duty to help provide housing for their fellow man/woman. Hahahah...it was and is still just about debt leveraged tax offset.
End of the day if this keeps money pouring into new builds and keeps tradie's employed during the coming reset, then that is a good thing in my books. The loss of young tradie's to Aussie during the GFC when construction stopped is a result of poor Govt policy, and still being felt now. Aussie were smart at that time in only allowing foreign investors to purchase new builds. This served to somewhat protect FHB's in older stock, and kept their construction sector from stalling.
In my opinion it makes new builds risky & less desirable than before (due to the built in depreciation associated with losing years of tax deductibility). Foreign real estate or local “land only” holdings look like a better bet for capital gains. local land only holdings as at any point a buyer has the option to start the clock on their 20 years of interest deductibility (preserving the future value of the interest deductions on new builds that can occur in the future). It becomes akin to retaining a lunchbox in mint condition in the packaging to retain (or even increase in) value as opposed to using it to transport lunch.
aren’t most mortgages 30 years, how did they decide on 20 years?
It works as an incentive for people very cashed up invest in new properties, instead of competing with FHB.
FHBs usually don't have interest only mortgages, investor do.
FHBs deducibility is zero, investors will still have some.
I would have preferred making the housing market completely unpalatable as a form of investment. And is not just me. The current govt is still being very nice to property investors, so don't complain.
How is buying a new build more profitable than holding bare land (even demolishing dwellings to create bare land if council rates on improved value)? As interest rates rise the value of the 20 years of tax deductibility of interest rises and the profitability of renting decreases (due to added interest cost).
As soon as you build your property starts to devalue because the 20 years starts getting used up. Land allows you to accrue capital gains and hedges against inflation. You got your wish, housing investment from a returns perspective is now less attractive than land banking, now we just need to wait. In 2-5 years housing supply should start to drop or rents rise to make renting more profitable than land banking.
Interesting. Am I the only one who sees the capital value of the asset dropping as the number of years worth of interest deductibility decrease, essentially building in a depreciation and making new builds look less attractive (especially given that ROI is likely to take more than the 20 years for which deductibility is permitted). Further to this will any other unavoidable changes hit the property sector? What happens if I have a bunch of units under s instruction and new rules hit again? Does the now dwindling reward really merit taking such a risk? Why not sit in the sidelines for 5-10 years to let the changes bed in and see if any volatility is present before looking at more new builds?
Nah property doubles every 7 years mate, she'll be right...average house will be worth $2,000,000 in 2028 so that's a million dollars of capital gains in 7 years right there guaranteed!
Your portfolio of property stocks and bonds needs reweighting toward property
Yeah and we can all become filthy rich from buying houses! Sounds great :-)
Exactly I_O... and anyone who doesn't believe that doesn't believe in the power of 'the Church' !
https://www.1news.co.nz/2021/03/24/property-commentator-ashley-church-p…
'But one property commentator is urging anyone thinking about taking the plunge to get in quick as he expects house prices in New Zealand to double between 2020 and around 2026 or 2027.
Ashley Church told 1 NEWS it would be "nonsense" if anyone had been advised to wait for a dip in prices'
"It's just the wrong thing to do," he said.
"The boom is here for a while."
Ashley Church - March 2021
Basically the new rules mean that new buy and hold investors will make no money with existing properties,
Of the total rent
61% will go to the bank
9% to insurance and maintenance
30% for rates and new tax on income go to government
0% to investor who is doing the work and taking the risk...
Only options are for parking money (better than mattress or bank deposits), capital gains or development
And thats if you can find a deal that breaks even..!
The banks and the government take the largest share of the rent - period.
So apart from the house you live in, find something else to do.
Exactly second hand residential investment is now a capital gains play. Watch prices go up even more...
The world doesn't owe property investors a living - the fact that new rental properties are generally uneconomical does not mean that the world will magic up a capital gain to compensate.
Sometimes investments are just poor decisions and you lose money.
You mean tax payers who are allowing investors to take a risk....because central banks appear to have derisked markets to zero...i.e. they will always come to the rescue....but its the general tax payer who is footing the bill of that....and perhaps not the investor who in the past has rigged the system so that they pay no tax.
Doing what work? Sitting around on an asset is not work.
Someone receiving the benefit of rental yield and price subsidies and not being taxed like productive workers is still a Beneficiary.
I'm increasing rent by $15-20 per week, per bedroom, each year for 4 years. I still go backwards but by less. Top end student rentals. User pays.
Ok, good to know, bravo!, that will make your competitors ( mortgage free landlords ) more interesting and more successfull.
I imagine it will reset market rent upwards so it will make them rich.
“I imagine it will reset market rent upwards so it will make them rich. ”
unintended consequence? It is probably intended. Who knows.
We will be reviewing rents annually now, last week I checked we are still below market rate. Felt bad putting the rent up but tenants didn’t even blink.
I take it that you were dropping rents each time mortgage rates went down right? As expenses fell and you generously shared that cost reduction with your tenant...
Sure if everything else drops, supermarket, petrol, your local takeaways meals….etc.
Miss the days when you can buy a chicken pie for a $1.20….will those days ever return?
I miss the days when you could cash in a few coke bottles and get enough wine gums for the bike ride home...never mind property investment, how about real kiwi things like 4c milk, spearmint leaves and chinese gooseberries
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