On Tuesday the 23rd of March at 9.00 am, the face of property investment changed drastically in a major housing policy announcement by the Labour Government.
There was a lot of good in the announcement such as investments in infrastructure and giving support to Kainga Ora (formerly HNZ). There is even a strong argument with regards to extending the Bright Line Test to 10 years. This ensures that people invest in property long term rather than looking to flip in a few years for a substantial profit. This will give greater security to tenants.
However, one change that was announced has taken everybody by surprise and will likely have major consequences to renters, landlords and potentially the wider economy. The announcement that interest payments on mortgages for residential investment properties can no longer be offset against rental income changes the face and potentially the viability of residential property investment. The change will apply to any new investment purchases and will gradually be phased out over the next five years.
Up until now, I could offset interest payments on my investment mortgage against my rental income. What this means is that if I am renting out a property at $500 a week, I would have an annual rental income of $26,000. If I am paying $15,000 of interest on a mortgage, I am offsetting this against the rental income, meaning I am paying tax on $11,000 rather than the $26,000. This means the tax bill, at 33%, goes from $3,630 to $8,580. The benefits of owning a rental property have taken a massive hit.
The inevitable thing that many landlords will do is increase the rents and increase them significantly as, based on the example I have just provided, this will be an additional cost to the landlord of nearly $100 a week. this is why rent controls are a possibility. More money on rent means less disposable income for the economy. Also, the ballooning social housing waitlist which has increased by a whopping 548% since December 2015, will increase even further.
New builds and Build to Rent is the way to adapt.
The changes mean that traditional models of property investment will have to evolve with investors moving towards new builds, buying off the plans, and Build to Rent. Concepts such as this look likely to be exempt from the 10 year Bright Line Testing as well as not being penalised with the highly controversial decision that stops you offsetting interest against your rental income. First home buyers may end up competing against each other for older housing stock, whilst investors move en masse to new builds which may make these properties out of reach for first home buyers.
Build to Rent is a concept where investors buy shares in a Build to Rent complex and get a return on these shares through the rental returns. The properties are purpose-built rental accommodation meaning that tenants have security as well as flexibility knowing that they can give notice when they decide to move on. The developments are better managed as Property Managers do not have to shop around for quotes to appease landlords who scrimp on maintenance, and rents will be fixed, increasing in line with inflation. Naturally, tenancies such as this will be far more appealing to renters than renting from a private landlord.
Is the Government being fair and will the changes make an impact?
Let’s look at the first part of the question. The language that has been used by the Government and in particular Finance Minister
Grant Robertson has been rather discriminatory towards property investors. Firstly, he does not seem to acknowledge that many landlords are people, like myself, who bought an investment property as a means of saving for retirement. If we had capital gains, it was simply a bonus.
However, according to Mr Robertson. I, along with every other landlord are not investors but speculators. He is implying that I am only investing in property due to the fact that I want to see significant capital gain and I will flip the property once I have realised those gains. There is a big difference between someone who speculates in property compared to a long-term investor.
Next, Mr Robertson says that we have been exploiting a tax loophole. It has well been documented in the media of late, this is not a loophole. A loophole is an ambiguity or inadequacy in law or a rule that allows people to exploit or avoid their responsibilities.
The practice of offsetting interest against income is a standard worldwide business practice. If a business takes out a loan to buy a car or a commercial office, the interest can be offset against the income. What is the difference in owning a rental property?
Is it fair? Absolutely not. New Zealanders have been encouraged to save for their retirements and the fact that there was no warning, and they went to such an extreme length suggests that they are simply looking for a scapegoat rather than looking in the mirror.
Farewell and thanks for reading
Finally, it is time for me to step aside and give the controls back to Managing Director Harrison Vaughan who is back on board. As a bit of a Star Trek fan, I refer to him as Captain Kirk and I have been Spock who has been responsible for the US Enterprise (aka Tommy’s Property Management) whilst he has been away.
I want to thank all tenants and landlords and also the amazing team of contractors who help us run the portfolio. The people who need the greatest thanks are the wonderful team at Tommy’s Property Management who have made my job easy over the last nine months. I will still be on board as their trainer and consultant and I will continue to write articles for Tommy’s but for now I must hand you back to Captain Kirk. Live long and prosper.