National wins: 3 changes coming for Property Investors
In the aftermath of the 2023 New Zealand election, the landscape for property investors and landlords is set to undergo a minor transformation.
As the dust settles, let’s examine the three critical changes looming on the horizon that will have far-reaching implications for the property and rental market.
#1 - Interest Deductibility: A Revival
In 2021, the Labour government labelled interest deductibility a 'loophole' for property investors. Their response was a gradual phase-out of the ability for investors to offset loan interest payments on existing properties against rental income.
Back then, with 1-year home loan rates around 3%, this policy shift did not cause immediate ripples. Fast forward to the present. The 1-year rate has climbed above 7% and the removal of tax deductibility is being acutely felt by property investors.
For the current 2024 tax year, deductibility stands at 50%. The National Party has pledged to gradually reinstate it, and ACT has gone even further, promising a swift return to 100% deductibility in the 2025 tax year. NZ First, who may yet play a role in the new government, also want to restore interest deductibility.
I think these changes will be a good thing for investors and tenants alike, decreasing the likelihood of landlords selling due to negative cashflow, forestalling the nation’s pool of rental properties from shrinking further, at a time when supply is already short.
#2 - Bright-Line back to 2 years
In March 2021, the government extended the bright-line test, a measure that taxes investors’ profits from property resales, to encompass a ten-year period.
In a welcome move for property investors, the National party has vowed to slash this time frame back to two years. What's more, this shorter bright-line test will also apply to properties already owned, irrespective of when they were purchased.
For what it’s worth, ACT has taken a bolder stance, advocating for the outright elimination of this test.
Investors grappling with negative cash flow and the ominous spectre of substantial tax bills should they sell under the former, more protracted regime will find solace in these proposed changes.
July 2024 could see a flurry of properties hit the market as these rules take effect.
#3 - A Return to "No-Cause" Terminations and Fixed-Term Tenancies
Pre-election, the National Party's housing spokesman, Chris Bishop, pledged to reverse Labour's controversial removal of 'no-cause' terminations and provisions that automatically shifted fixed-term tenancies into periodic tenancies in most cases.
These regulations, introduced in 2020 under the Residential Tenancies Amendment Act, aimed to provide tenants with greater security and certainty in their living arrangements.
Ironically, these well-intentioned regulations triggered unintended consequences.
Investors became unwilling to take any risks when selecting new tenants and many owners decided to switch to Airbnb or leave their properties vacant for long periods, all of which further limited housing supply and pushed up rents.
With National’s changes, landlords and property managers will be more inclined to give the benefit of the doubt to applicants who have a less than perfect track record, which should increase supply of housing available at the lower end of the market.
Overall, I think the 2023 New Zealand election results are poised to usher in a new era for property investors, landlords and tenants, with significant potential to alleviate the challenges they've all faced in recent years.