Interest deductibility back, but it won’t mean rent cuts
Landlords will not start dropping their rents because their tax burden has got lighter with the return of interest deductibility, experts say.
Until recently, landlords had the ability to claim back all the interest cost of a home loan against the rental income received on a property.
But in 2021 the Labour government announced it would be phasing out that ability as part of its bid to rein in the housing market. While there were some exemptions, such as for new build homes or ones that were used in social housing, landlords have always been staunchly opposed to the policy.
National and ACT campaigned on reinstating interest deductibility, and on Sunday Associate Finance Minister David Seymour announced it will be phased back in from April.
He said Labour’s policy led to higher costs for landlords that were passed on to tenants, and a reduction in the pool of rental properties, which helped push rents up.
“Restoration of interest deductibility will ease pressure on rents and simplify the tax code.”
But Labour finance spokesperson Barbara Edmonds said there was nothing that guaranteed tenants would have savings passed on to them.
So, will the policy change lead to improve conditions for renters?
Will a smaller tax bill for landlords translate to a fall in rents?
CoreLogic chief property economist Kelvin Davidson said existing landlords would have smaller tax bills in future, but it was hard to calculate the cost benefit the change would have.
Last year there were estimates that landlords were paying $5000 to $6000 more in tax because they had to pay a higher percentage of their interest bill and interest rates had increased, he said.
“That change in tax payments will help landlords, but mortgage rates are high, while rental yields are still very low, at an average of 3.2% nationally. And then costs such as council rates, insurance, property management, and maintenance have all gone up, and will continue to do so.”
The improved tax situation would not change a running loss to a running profit for most landlords, they would just have a smaller loss, he said.
“So, it’s unlikely rents will go down, but some landlords might not put them up for a while, or might increase them more slowly than they would have.”
Property accountant Anthony Appleton-Tattersall does not expect many individual landlords to drop their rents as a result.
“And I don't think anyone should as rents shouldn't be based on the costs incurred by an individual landlord, they should be based on market forces.”
But it would affect the market by making it less costly to provide rental accommodation, and so more people would buy it, or less would sell up, he said.
“That means more rental supply and the natural impacts on the demand curve. Rents will either fall or rise more slowly than they otherwise would.”
Are there other factors that put upwards pressure on rents?
Landlord tax costs are not the only factor in the mix when it comes to rent pressures, Davidson said.
Recent record high migration has impacted on supply, while higher interest rates have made for less investor purchases, for example.
Opes Partners property economist Ed McKnight said recent rent rises were not solely due to the removal of interest deductibility.
There was a strong correlation between rents and wages, as rents tended to go up when wages increased because that determined tenants’ ability to pay, he said.
“There has been high inflation, wages have gone up fast, and that is reflected in rent increases. And inflation does equal cost increases for landlords too, so that contributes too.”
But will the change ease rents by increasing rental supply?
High interest rates had, and continued to, put barriers in front of many would-be landlords, Appleton-Tattersall said.
But many existing landlords who had been considering selling no longer would because they did not now need to pay tax on imaginary profits, he said.
“The impact is huge, as private landlords should be encouraged wherever possible. It's only by having enough landlords that tenants will start to get a good deal, and we aren't even close.
“The change is going to be positive for tenants over the coming years, but there won’t be much immediate change.”
More investors were likely to buy rental properties with the return of interest deductibility as it would make a big difference to the numbers on investments long-term, McKnight says.
“If you purchased a property in 2022 with zero deductibility, at today’s tax rates you could lose tens of thousands in tax deductions over time.
“If the estimated loss is about $7000 a year, and that no longer needs to be paid, that will make them better off by about $105,000 over 15 years.”
But it would not open the floodgates for landlords at this time because with interest rates high and yields low the cash flow equation was not that good, he said.
“It does set up conditions for when interest rates start to come down. It will make investors think things are getting better. Some who would not have otherwise will start to buy, and that means more supply, and when supply increases, rents can’t go up as fast because landlords have to meet the market.”