Reinstating tax 'loophole' will salvage rental market, industry says Brent Melville Tue, 28 Nov 2023

Vice president of the New Zealand Property Investors Federation, Peter Lewis, places the New Zealand rental 'crisis' squarely on the last government's trifecta of housing rules that pushed private investors out of the market.

"The main contributor to dwindling rental properties were changes to the tenancy laws, removing the 90-day no-cause termination notice and ditching the ability for property investors to offset mortgage interest payments," Lewis said. And with private rentals in NZ making up 80% of the market, he said housing affordability pushed more people into the "renting for life" category.

Under the coalition agreement, the National and Act parties will reinstate mortgage tax deductibility on rental properties and revisit the Credit Contracts and Consumer Finance Act (CCCFA). Changes to the CCCFA, originally created to target predatory lending, came into force in December 2021 and were almost immediately blamed for a sharp drop in mortgage lending.

Fix planning laws

But Lewis said chief among the changes for investors will be the speed at which interest deductibility is restored, with a 60% deduction brought in from this financial year, expanded to 80% from next year and to 100% by 2025/26.

Under the agreement, the government will also "fix" planning laws by making medium-density residential standards optional and encourage more landlords to enter the rental market by reinstating 90-day notice periods to end a periodic tenancy, returning tenants' notices to 21 days.

The changes to investor tax treatment were brought in by the Labour government in March 2021 to close what it considered a 'tax loophole' and reduce housing speculation. That, and with increased mortgage rates and deposit requirements for investors sitting at 35%, mortgaged multiple property owners' share of the market has fallen from a long-term average of 25% to 21% by the third quarter of this year, according to data from property analytics firm CoreLogic.

ASB chief economist Nick Tuffley said while both moves will likely boost the supply of available rental properties by attracting investors back, it could also serve to inflate house prices again.

Under the hammer

That's being borne out almost immediately post-election, with Ray White NZ lead auctioneer Sam Steele reporting a boost to overall auction clearance rates of more than 60% on last week's 236 auctions, up 17.2% on the same time last year. Auctions are seen as a barometer of a boom real estate market. Steele said the realtor was currently tracking at 35.6% of sales being in the auction room, with "active bidding" on almost 80% of offers.

Kelvin Davidson, chief property economist with CoreLogic, said the data shows that 'mum and pop' investors – those buying their first or second rental property – have pulled back the most because of low gross yields and no deductibility on mortgage interest. That's created examples where those investors have been forced to top up their mortgages to the tune of $350-$400 per week.

No immediate comeback

The sums look different for new build properties, he said, given they still have full interest deductibility for 20 years. While Davidson isn't expecting a "full scaled comeback" by investors in the near term, it's those smaller players who could well start to "perk up" the most, he said. That's on the back of a migration boom, which is being reflected in faster rental growth in the main centres and tight rental vacancy levels.

The third coalition partner, NZ First, meanwhile, managed to get National's proposed foreign buyer tax of 15% on transactions valued at more than $2 million off the table, removing what new finance minister Nicola Willis estimated would generate an annual $740m in revenues that would have been used to fund tax cuts. An 'easy out' for National Nick Goodall, CoreLogic's head of research, remains dubious with respect to the tax plan, having originally modelled revenue estimates of between $212.7m to $286.8m-a-year, leaving a hole of up to $526.8m per annum anyway.

"It's probably an easy-out for National. The biggest thing is where they'll replace that funding from the foreign buyers tax, which to me translates to spending less elsewhere, including into public services." From a housing market perspective, he said, not loosening the foreign buyer ban could also limit the potential capital growth of the market in the longer term.