Here's why tenants shouldn't worry about housing changes

If you’re a tenant in a rental property right now, you’ve probably had a fairly worrying couple of weeks.

The Government announced policy changes to cool demand from property investors. They removed mortgage interest deductibility for landlords and moved from a five-year to a 10-year window for tax on capital gains.

Landlords and property associations came out swinging.

Rents will rise and you, the tenant, will pay the price of this “bizarre”, “outrageous” and “crazy” move by the government. Some even called the property market “uninvestable”.

There are 1.5 million Kiwis living in 600,000 rental properties. That’s a big important group. The key questions for you are:

1. Will my rent go up because my landlord can’t claim back mortgage interest?

2. Will my rent go up because of this new 10-year capital gains tax?

3. Is my landlord about to sell up to a first-home buyer and flee?

The answer? In my opinion, it’s a no on all counts.

While leveraged asset owners were all sobbing into their accountant’s handkerchiefs and rattling off another outraged press release, the Government got fed up and issued an unsubtle counter-attack.

It may consider capping rents in some way. Both sides were a little reactive and when it calms down we can only look to common sense to guess how the dice might roll.

Mortgage interest?

Firstly, nothing is happening fast. It doesn’t begin until October so landlords will effectively get to deduct 87.5 per cent of their interest this tax year. The following year is a 75 per cent deduction followed by 50 per cent, then 25 per cent. It’s not until 2025 this new policy really hits.

It would be hard to justify rent rises in the next two years.

Secondly, when you look at the numbers put out by ASB, they estimate that landlords hold $82 billion in debt against $400 to $500b in property. That means on average, they own 80 per cent of a property and only have 20 per cent debt.

Averages are deceptive. There will be many thousands of landlords with no debt whatsoever. At the other end of the scale there will be those who are highly indebted and can’t absorb the tax change.

Regardless, 20 per cent debt is a loud warning for those with big mortgages. Everyone is certainly not in same boat, so it’s going to be difficult to get traction on rent increases.

Landlords who can’t cope will need to think about restructuring first.

Owners of multiple houses can sell a property to create a lower debt/equity ratio and rebalance what is affordable, given the tax change.

What's happening to tax-deductible interest on existing home loans?

Under the government's proposed housing rule changes, if you acquired a property before March 27 2021, you can still claim interest on pre-existing loans as an expense against your residential property income, but this will be phased out over the next five tax years.

Those with one property will need to extend the term of the mortgage, add equity from other personal savings or take on second jobs. It doesn’t always fall on a tenant to fund a problem.

Thirdly, some numbers reported are a little disingenuous in their presentation. One report gave an annual cost increase of $6000 for a landlord with a $600,000 property. While it’s correct, it’s not static.

Repayment mortgages are heavily weighted to interest in the early years.

Total repayments don’t change, but landlords face a constant reduction in the level of tax-deductible interest.

10-year capital gains tax?

We’ve had a capital gains tax on investment property since 2015. It’s moved from two years to five years to 10 years and it’s not retrospective.

This means your landlord is not subject to the new 10-year rule.

New landlords will be exposed, so they now need to commit to a decade of investing. Then they will be rewarded with a tax-free party. The vast majority will never pay any tax on their capital gains – unlike most OECD countries.

This tax is not going to be a factor in setting rent levels.

Landlords have no incentive to sell the rental property you are living in and upgrade it to a newer or cheaper one, because they’ll be exposed to the 10-year rule by doing so. If anything, this stabilises your tenancy.

Sell and run?

If lack of interest deductibility makes this asset class uninvestible, landlords will sell up and move to the sharemarket. They can borrow to invest and it’s tax-deductible, so roll on up. Fund managers are ready to take that call. I predict silence on that one.

Property investors won't sell up and run, due to a very common trait. Most are wusses when it comes to risk. That’s not a bad thing. They know their tolerance level and they’re stable investors. They won't switch asset classes easily and often have no diversification.

This is good news for tenants as their attitude to risk makes them more prepared to absorb regulatory shock. Long term, tax-free capital gains on borrowed money will always attract them.

Entering a new property paradigm

It’s very likely the New Zealand market will go through a larger restructuring phase and the face of landlords will change. They will enter the market with less debt and higher equity and there will be more demand from cashed-up retirees who can’t get returns from deposits.

This all leads to a more stable market for tenants.

Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. She is a financial commentator with expertise in banking, personal finance and funds management. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.