Photo: RNZ
More than 50,000 property investors are losing money on their rentals, Inland Revenue data shows.
Information released under the Official Information Act shows that there were 53,350 taxpayers who reported negative rental income - where the rent they received did not cover their expenses - in the 2023 tax year.
Their average loss was $9020.
That is likely to understate the amount investors are losing though because it is after allowable deductions are claimed from income. In that tax year, they could only claim 75 percent of their interest costs as an expense.
A year earlier, 51,740 taxpayers had an average loss of $7450.
For many, the situation will have got tougher since the end of the 2023 year, as interest rates increased and the amount of interest that could be deducted dropped.
In New Zealand, losses from rental properties are ringfenced so they can only be offset against current or future rental profits - in the past, and in some other countries, they could be used to reduce tax on other income. Interest deductibility is being phased back in, so that investors can claim progressively more of their interest cost to reduce their tax bills.
Kelvin Davidson, chief property economist at Corelogic, said recent investors would predominantly be the ones making a loss.
"If you bought a rental property in the last 12 months or 24 months, it's pretty unlikely you're going to be making a profit. But of all the landlords, most didn't buy in the last year or two,. Most have been investors for a long time."
He said it was common to buy rental properties that had to be topped up at the start, with the view to some rental growth and capital gains.
Many investors also paid down the mortgage to be able to make a property cashflow positive, he said.
"Whether people are investing simply for capital gain I don't know. The investors I speak to, that's not right. Any investor I speak to says 'I just want to pay down a mortgage over 30 years and have a mortgage-free asset. That's always the focus.
"Capital gains are nice but for most people I speak to it's more about reducing the debt over time."
He said cashflow was something that was in an investor's control whereas capital gains were not able to be predicted in the same way.
"It always seemed like a good idea to me to target cashflow, you might make a loss at the start but over time you can fix that up. No doubt there are others targeting capital gains but getting top-ups to a manageable level is what most people are looking for."
Sarina Gibbon, spokesperson for the Auckland Property Investors Association, said it used to be that negative gearing was common.
"Over time with paying down debt and growing their equity, investors can reverse the cash imbalance to their advantage.
"Negative gearing is still popular and viable for newbies but in a different way. Lending restrictions and interest rates and interest limitations all have an effect on new investors' appetite to gear negatively and the extent to which they can financially. So yeah, still a popular strategy but not as easy and available to as many people as before.
"What that tells me is that we are moving towards a generation of investors who are likely to be more cash rich from their personal circumstances - such as higher income earners -and that demographic shift has implications across the rental sector not just to with with the resilience of our financial system, but also rental price trends and tenancy relationships and policy developments."
ANZ economist Henry Russell said being able to claim losses against rental income meant investors were likely to pay more for properties.
"The reinstatement of interest deductibility means all else equal, the net present value of a given housing investment increases, supporting housing demand. That additional demand is likely put upward pressure on prices. So in isolation, the reinstatement is positive for prices, but there are a lot of other moving parts."
