Here are my quick thoughts on the two major housing policy changes announced recently:
Extending the bright-line test from 5 years to 10 years…
No one considers a bright-line test when they buy an investment property. At the buying stage, you think you will hold the property forever (until you retire). Then life changes, business opportunities arise, holidays beckon and the temptation to sell grows once your property has gone up in value.
Sadly, every property investor I know hates paying tax and they would rather hold on to a property for 2 / 5 / 10 years than pay any extra money to the government. Note: I don’t agree with this stance. I personally think we should have a blanket capital gains tax (excluding the family home).
So from what I can see, the bright-line test doesn’t discourage investors from buying in the first place, but it does discourage them from selling when they otherwise might have. And sadly, what we want right now is more people selling to create more supply and take pressure off house prices.
This seems like one of those taxes which looks good on paper, but in reality, can have the opposite effect from what you would hope.
Removing interest as a tax-deductible expense for investors…
This one has a bit more bite. It essentially makes holding on to an investment property less appealing and should discourage investors from sticking all their mortgage debt on ‘interest-only’ payment plans.
It could help first home buyers in the long run as investors should be less likely to go after traditional 2-4 bedroom single family-type homes as rental properties, which traditionally have a lower yield and focus more on buying investor-friendly setups, like a block of flats or home+income style properties, which provide better cashflow.
Will these measures help?
The mortgage interest change has the chance to have a big impact, but it is being phased in slowly over the next few years so it may take a while before we see a decent increase in investors selling up.
In the short term, it appears to have scared off some investor buyers. Any reduction in demand and competition is going to help first home buyers. However, this effect may be short-lived.
Personally, I wish the government had focussed on more ‘carrot’ than ‘stick options, like incentivising investors to subdivide their existing properties.
Countless investors are sitting on blocks of land that could be subdivided and turned into more housing, but the council process for this is incredibly difficult to navigate and most people just don’t have the time to work through it.
Any policy that streamlines this process or reduces the costs involved could have a major impact.
Read my other suggestions here: What we can all do to help the housing crisis.
Will these changes result in rents going up?
It’s possible but complicated. When a 3 bedroom home is put up on trademe as a rental, the owner can’t decide to ask $100 more per week just because their costs of ownership have increased. To secure enquiry from potential tenants, they need to set their price at a market level, in line with other properties available for rent.
So just because I have to pay more tax as a property investor, doesn’t mean I can instantly charge more rent.
However, there is an exception…
While there are some landlords who increase the rent every chance they get, there are also many property investors who have sitting tenants who are paying rent at a level below what that owner could secure on the open market.
Many of these cheap rent arrangements are maintained because the tenants take good care of the property and the owner doesn’t want to lose them. Or, often the landlord doesn’t want to make that tenant homeless so is happy to keep the rent at a reduced rate until that tenant moves out as a way of doing something nice for someone else.
With costs of ownership going up, investors would argue that these types of landlords will need to increase rents, even if they don’t want to, as a way of covering their higher tax costs moving forward.
Any tenants on reduced rents may well feel the brunt of this tax law change.
At the same time, the ‘cost of ownership’ argument has it’s flaws too. Investors didn’t rush to lower their rents when interest rates dropped from 5% to 2.5% over the past few years!
It’s worth keeping everything in perspective. Rental property owners have seen massive equity growth over the past few years, usually with very little work required. Anyone who owns an investment property stands a good chance of having made more money from owning property, than they have from their salaried job or business.
This insane price growth has largely come about as a side-effect of our world-leading response to Covid-19. Why? Extreme (and necessary) amounts of money-printing by the government, fewer people heading overseas and spending that money on housing instead, more investors with time on their hands and a solid local economy.
Personally, I’d rather have higher taxes than thousands of deaths and the sadness and destruction that would have come as a result of a full-on Covid outbreak in New Zealand.
Lastly, stable housing is a pillar of a well-functioning society. As a country, we need to keep working on finding ways to give tenants security of tenure while also making it achievable for first home buyers to get on the property ladder.
Note: If you own investment property in the Wellington region, check out Simply Rentals. It’s our very own property management company. Owners benefit from zero letting fees, no hidden costs and first-name personal service from my long-time property manager, Lynette Sletcher.
Check out this excellent commentary on the housing package from Sonnie Bailey at Fairhaven Wealth
Where do I go to find balanced property information?
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