Reforms cast l osnh g asdhoawdow

Small players in property investment feel they’re being punished for trying to achieve financial security. By Miriam Bell. a

Auckland software engineer Abhishek Malavalli bought an investment property in Hamilton just three weeks ago and says he has had sleepless nights since the Government’s announcement of new policies on Tuesday.

Prime Minister Jacinda Ardern unveiled a suite of policies, including funding for infrastructure, increases to the income and house price caps for First Home Loans and grants, and the removal of investors’ ability to reduce their tax bills by offsetting home loan interest costs.

The change would apply to any rental property bought after tomorrow, but deductibility would also be phased out on all existing rental properties over the next four years.

Investor representatives have said it will add about $6000 a year to the cost of owning a rental property – and that would affect the rental market.

It is Malavalli’s only investment property and he used equity on his family home, plus savings, to buy the twobedroom house. He had pushed his finances to the maximum to purchase it and it was supposed to be a nest egg for retirement.

But the deductibility change meant the costs he had expected to be paying on his new investment were set to go from an extra $400 a month to $840 a month. It meant the property would have a ‘‘super negative’’ cashflow and that would be a major financial burden.

‘‘I wouldn’t have bought the property if I had known such a change was coming. I realise there is a phase-out period, but there is still uncertainty in the market and I need to build my own cushion to feel comfortable and absorb any further shocks.’’

As he had just bought the property it was subject to the bright-line test, which meant that he would have to pay tax on the profits of any sale.

Malavalli said he would have to do whatever he could to hold the property. That would include raising the rent, although only in line with the market, and managing the property himself.

‘‘I feel small investors like me are being penalised for trying to prepare for our financial future, while larger investors are less likely to be affected.’’

Mum-of-two Chloe Williams, who was also a relatively new investor, said the deductibility change was set to leave her and her husband in a financially vulnerable position.

Williams said that when the couple returned from living overseas a couple of years ago it had made more financial sense to invest in rentals with an eye to the future, than to buy a highly priced Auckland home.

That led them to buy a rental property of their own, on top of one they owned in partnership with her parents. But in order to do so, they were leveraged highly and lived with her parents.

Both their properties were in Auckland so their yields were under 5 per cent but they were cashflow-positive on interest only, Williams said.

‘‘That will now change. My husband is a teacher and I work for a church, so we are not on big incomes. We have little disposable income as it is but we will need to make further sacrifices to try and hold on to the properties.

‘‘We would be subject to the bright-line test if we sold now so we will do all we can to hold on to the properties at this point. But this change makes it very risky to be an investor.’’

She understood the Government wanted to do something bold to rein in the market, but said the deductibility change was not the right thing to do.

‘‘It really hurts ordinary people like us who are just trying to secure our future, not large-scale investors, and the Government doesn’t seem to see the difference, or care.’’

The view that the Government wasn’t accounting for the different types of investor was common.

Mortgage adviser Jasmeet Singh, who owns six properties out of Auckland, said this was evident in the fact that it would be small-scale investors who felt the brunt of the changes. Most investors owned only one or two properties.

‘‘It will be a kick in the guts for investors who own one or two properties. Whereas investors with more properties have more equity and will have owned many of their properties for longer, which gives them more options in future.’’

Professional speculators wouldn’t be affected by the changes at all as taxes like the bright-line test were already part of their equations and deductibility wasn’t an issue for them, he said.

‘‘The deductibility changes means more tax costs for me, but I’m a cashflow guy so it should be okay. I will have to look at ways to cover those tax bills, though, and raising the rent, within reason, will be one of those things.’’

Most investors would be thinking along the same lines, which would have a negative impact on tenants, Singh said.

‘‘They will be hit by higher rents which will make it harder for them to try and save deposits to buy their own homes, so these changes won’t help them.’’

But he wasn’t planning to sell up as he loved working with property. ‘‘I’ll just focus on cashflow even more. So I won’t be going into new builds, although they are exempt from the changes, as the cashflow isn’t great.’’

Veteran Hawke’s Bay investor Graeme Fowler, who owns 80 properties, said while the extension of the bright-line test to 10 years shouldn’t affect long-term investors at all, the deductibility change would have a big impact.

Investors would sell up, reducing the number of properties available to renters, and rents would go up.