Anger over government action against real estate investors
The removal of tax deductions on interest charges for rental properties is “outrageous” and will have a negative impact on the rental market, according to real estate investors.
The government on Tuesday announced a series of policy measures to deal with the housing crisis and those measures included several aimed squarely at restricting investor activity.
One measure was an extension of the light line test, which requires investors to pay tax on their capital gains when they sell a property, to 10 years.
Another was the removal of the ability for investors to claim mortgage interest on the rent received on the property.
These changes were to take place immediately, any investment property that became unconditional after Saturday would be affected by the new rules.
* Housing policy: what the changes mean for homeowners, investors, first-time homebuyers, tenants and Bach homeowners
* Housing: Government to double lightline test, end write-off of interests in war on real estate speculation, spend $ 3.8 billion on new supply
* Risk of “sudden stop” of the housing market, according to an economist
The announcement left investors in shock but angry and convinced the government was confused about the difference between investors and speculators.
New Zealand Federation of Real Estate Investors president Sharon Cullwick said most investors buy long-term, while speculators pay taxes anyway.
“Increasing the light line test will do nothing to stop real estate speculation, but the removal of interest deductibility is huge and will dramatically increase the cost of providing rental property,” Cullwick said.
Every investor who manages their investments as a business will need to look at the financial data, she said.
“Without the ability to claim the legitimate expense of mortgage interest charges, we estimate that the cost of providing a rental property of $ 600,000 will increase by approximately $ 6,000 per year. If interest rates went up, it would go up.
Cullwick said that by 2025, when the deductibility rules were fully introduced, she didn’t think there would be enough homes under construction and that would put pressure on the market.
“The demand side measures announced today will simply reduce the supply of rental properties and increase rental prices.
Tenants need more rental properties, she said.
“Private rental 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 lightline test changes were a stealth capital gains tax, but the denial of the tax interest deduction was “outrageous.” .
The company has 10,000 investors as clients.
He said the government’s labeling of all investors as speculators was “reprehensible” as there were many legitimate long-term investors who live off the income from their rental properties and pay taxes on them.
“Right now, investors pay two-thirds of the interest, one-third of which is deducted. Not being able to pretend that a third party means they will pay 50% more. It’s going to really hurt central New Zealand.
Moreover, the government calling the interest deduction a “loophole” was absurd because interest was an ordinary cost of doing business and all businesses in the world operate with tax deductions on interest, Gilligan said.
“This decision will make investment properties shine and the supply will collapse. The government is playing with fire. This is ideology, not good tax policy.
Wellington developer Ian Cassels and Auckland investors David Whitburn and Andrew Bruce said they were not affected by the extension of the light line test.
Bruce, who was until recently chairman of the Auckland Property Investors Association, said it was a big change, but the biggest impact would be on new, smaller investors as well as those who already have cash flow problems.
“Potentially, the changes could also have a noticeable impact on banks’ service standards for investors and this could have serious supply implications.
“It seems very strange to me that when you have a supply problem, you introduce a policy that has the potential to create more supply problem,” he said.
Since the interest deduction changes appeared to only apply to residential properties, commercial properties would likely become more attractive to investors, he said.
“I’m looking to sell some of my residential properties and move into more commercial space now. This is because of all the policies that are now in place in the residential sector and the increased difficulty in dealing with problematic tenants.
Real Estate Institute Acting Managing Director Wendy Alexander said interest deductions would completely change the financial dynamics of investing in residential real estate.
“In our opinion, people are probably already wary of investing in rental properties given the recent changes in the lease law and the prior removal of cantonment,” said Alexander.
“However, this is likely to exacerbate concerns about investing in rental property and may make investors wonder if they can get better returns elsewhere.”
Many landlords are likely to increase their rents over the next few years as they seek to offset the costs, she said. “This makes rentals even more unaffordable and makes it even more difficult for tenants to save a deposit for their own property.”
Extending the clear line test would not be a silver bullet to solving New Zealand’s housing affordability issues and it would do nothing to increase the supply of housing, Alexander added.
“In reality, this should lead to residential real estate investors holding their properties even longer in order to avoid paying taxes, further reducing the total pool of properties available in the market.”