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Lifting The Tax Burden

Lifting The Tax Burden

Reversal of deductibility rules by our new administration is about creating a fairer tax system that benefits all, writes David Faulkner.

By: David Faulkner

6 May 2024

The coalition government has announced the reversal of one of the most controversial tax policies from the previous administration to the delight of property investors.

However, many media commentators report this as a tax break for well-off property investors at a time of austerity as many public sector departments face huge cuts.

In March 2021, the then-Labour government dropped a tax bombshell for property investors in a range of measures to try and take the heat out of the housing market. A landlord’s ability to offset interest payments against income was to be phased out, resulting in investors being hit with significant tax bills.

In many cases, investors would have to find between $50 to $100 a week extra per property to offset the losses they would incur. Slashing the OCR and pumping billions of dollars into the economy through the Covid lockdown stimulated the property market. We witnessed a surge in property prices, resulting in thousands of first-home buyers being priced out of the market.

The decision caught everyone off guard without warning from the government. It proved unpopular, especially after the (then) finance minister accused thousands of property speculators of exploiting a tax loophole.

Firstly, this wasn’t a tax loophole; property investing is a business that can deduct interest from income. Secondly, labelling them as “speculators” was misleading. Unlike investors who dominate the residential rental market and plan for the long term, speculators aim for quick profits by betting on short-term market gains.

Most investors, primarily mums and dads who own up to two properties for retirement, are long-term focused. Labelling all residential property owners as speculators is inaccurate and unfair.

Rent Pressure

Decisions such as the removal of interest deductibility result in upward pressure on rents. There are other reasons rents rise, but if a business incurs increased costs what typically happens is that those costs are passed onto the consumer.

Rents have risen far faster since Labour came to power towards the end of 2017. In the six years from October 2017 to October 2023, rents increased $180, or 45 per cent. From October 2011 to October 2017, rents increased $90 per week, or 29 per cent. Many argue that the previous government had an anti-landlord agenda, and decisions such as this had unforeseen consequences.

If a government is to target landlords, it needs to ensure that it has the ability and the capacity to replenish and maintain the housing stock. There is a significant deficit around rental properties, and strong immigration will only add fuel to the fire.

The government needs private landlords as part of a multi-faceted approach to resolving our housing crisis and our new coalition government is simply removing draconian rules that benefited no-one.

More Subsidies

All that happened was that landlords passed on increased costs to tenants, which resulted in more subsidies paid to tenants. Rising inflation has compounded the issue, resulting in banks raising their interest rates and other costs, such as insurance and rates.

One region demonstrating that rent prices can be controlled through supply and demand is Canterbury, particularly Christchurch. Post-earthquake in 2011, the (then) Earthquake Minister, Gerry Brownlee, forced Christchurch City Council to release land for development that had been scheduled to be released over 30 years.

From August 2014 to April 2021, rents in Christchurch increased by only 0.37 per cent. Back in February 2011, the median rent in Christchurch was $315 per week. In Palmerston North, where our head office is based, it was $248 per week. In December 2023, the median rent for both these locations was $550.

Taking this tax burden off landlords will help slow the rent increase, also impacted by a strong net gain in immigration and a chronic lack of supply. This change by our new administration is about creating a fairer tax system that benefits all. ν

Information sourced from MBIE Rent and Bond Data.

David Faulkner is the General Manager of Property Management for Property Brokers and is recognised as one of the leading experts in the New Zealand Property Management industry. He has been involved in the industry developing robust policies and procedures, training, and consultation services for many years.