Anger over Government moves against property investors

Removing tax deductions on interest costs for rental properties is outrageous and will have a negative impact on the rental market, property investors say.
The Government announced a raft of policy measures to address the housing crisis on Tuesday and those measures included several squarely aimed at restricting investor activity.

One measure was an extension of the bright-line test, which requires investors to pay a tax on their capital gains when they sell a property, to 10 years.

Another was the removal of the ability of investors to claim back the interest cost of a home loan against the rent received on the property.


These changes were scheduled to take place immediately, with any investment property that goes unconditional after Saturday set to be hit by the new rules.

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* Risk of 'abrupt stop' in housing market, economist says

The announcement left investors reeling but angry and convinced that the Government was confused about the difference between investors and speculators.

New Zealand Property Investors Federation president Sharon Cullwick said most investors were buying for the long-term, while speculators were paying tax anyway.

SUPPLIED
Changes to interest deductions on rental properties will have a negative impact on the market, the Property Investors Federation president Sharon Cullwick says.

The bright-line test increase will do nothing to stop property speculation, but removing interest deductibility is huge and will increase the cost of providing rental properties drastically, Cullwick said.

Every investor who runs their investments as a business will have to look at the financials, she said.

Without the ability to claim the legitimate expense of mortgage interest costs, we estimate that the cost of providing a $600,000 rental property will increase by around $6000 a year. If interest rates rose, that would increase.

Cullwick said that, by 2025, when the deductibility rules were fully phased in, she did not think there would be enough houses being built and that would put the squeeze on the market.

The demand side measures announced today are just going to reduce the supply of rental properties and increase rental prices.

Tenants need more rental properties, she said.

Private rental property owners are not the problem. They are part of the solution to the problem.

Matthew Gilligan, managing director of accounting firm Gilligan Rowe & Associates said the bright line test changes were a capital gains tax by stealth but the denial of interest deduction on tax was outrageous.

Supplied
Accountant Matthew Gilligan says every business in the world operates with tax deductions on interest.

The firm has 10,000 investors as clients.

He said the Governments labelling of all investors as speculators was objectionable because there were many legitimate long term investors who live off the income on their rental properties and pay taxes on them.

At the moment investors are paying two-thirds of the interest, with one-third deducted. Not being able to claim that one-third means they will be paying 50 per cent more. That is really going to hurt middle New Zealand.

Additionally, the Government labelling the interest deduction a loophole was absurd as interest was an ordinary cost of doing business and every business in the world operates with tax deductions on interest, Gilligan said.

The move will take the shine off investment property and crash supply. The Government is playing with fire. This is ideology, not good tax policy.

Wellington developer Ian Cassels and investors David Whitburn and Andrew Bruce from Auckland said the were not concerned by the extension of the bright-line test.

Bruce, who was until recently the president of the Auckland Property Investors Association, said it was a significant change, but the biggest impact would be on newer, smaller investors as well as those already struggling with cash flow.

Potentially, the changes could also have a noticeable impact on banks serviceability criteria for investors and that could have some serious implications in terms of supply.

It seems very strange to me that when you have a supply problem you would introduce a policy that has the potential to create more of a supply problem, he said.

Given the interest deduction changes appeared to only apply to residential property, commercial property was likely to become more attractive to investors, he said.

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Interest deduction changes will lead to greater wariness about investing in rental property, the Real Estate Institutes Wendy Alexander says.

Im looking to sell off some of my residential properties and move into the commercial space more now. Thats because of all the policies that are now in place around residential, and the increased difficulty around managing problematic tenants.

Real Estate Institute acting chief executive Wendy Alexander said interest deductions would completely change the financial dynamics of investing in residential property.

In our view, people are likely to already be wary about investing in rental property given the recent tenancy law changes and the prior removal of ring-fencing, Alexander said.

However, this is likely to exacerbate concerns around investing in rental property and may see investors considering whether they can get better returns elsewhere.

Many landlords were likely to increase their rent over the next few years as they look to offset the costs, she said. Thereby making rentals even more unaffordable and making it even harder for renters to save a deposit for their own property.

Extending the bright line test wouldnt be a magic bullet in terms of solving New Zealands housing affordability issues and nor would it do anything to increase the supply of houses, Alexander added.

In actual fact, what its likely to lead to is residential property investors holding on to their properties for even longer in order to avoid paying tax, thereby further reducing the total pool of properties available in the market.

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