While the rental market has softened, commentators say it is unlikely that the return of deductibility is the driver. File photo. Photo: Unsplash / Tom Rumble
New Zealand's rental market is cooling - but how much of that is due to the return of interest deductibility for investors?
In March, prime minister Christopher Luxon said renters would be "grateful" that extra costs would no longer be passed on to them after the government moved to phase back in investors' ability to claim loan interest costs against their rental income for tax purposes - reducing the amount of tax they pay.
Act Party leader and associate finance minister David Seymour said at the time the pressure on landlords from the Labour government's removal of deductibility was reducing the number of rentals and pushing rent prices up.
But six months on, while the rental market has softened, commentators say it is unlikely that the return of deductibility is the driver.
Westpac chief economist Kelly Eckhold said rent rises had dropped quickly in recent months.
"We can see this in the flow rents series in the monthly selected price indices which has fallen to 1.4 percent year-on-year in August. It peaked at 7.2 percent in September 2023. "
But he said that was probably due to a drop in net migration, which had reduced pressure on rents. A weakening labour market would also have contributed. "It may be the introduction of the App tax on Airbnb rentals has also led to properties being offered for rent this year."
The "app tax" requires that people offering properties on Airbnb pay GST.
TradeMe said last month the number of available rental listings was up 38 percent, compared to a year earlier. But demand was down 13 percent compared to July and 36 percent compared to 2023.
"Rents are definitely flatter. In Auckland, if you look year-on-year rents are down a bit and Wellington is still pretty soft. The national figure is still growing but at about half the normal rate," Kelvin Davidson, chief property economist at Corelogic said.
He said the number of rental listings on the market was the highest since 2020.
"As with most things, it's hard to distinguish one effect from another. Rents go to so high in relation to incomes that it had to slow anyway, almost regardless of anything else."
Davidson said because deductibility was coming back in steps, the full effect of the return would not be felt until the year ending March 2026.
"Then your tax bill isn't due until a year after that. It's like two-and-a-half years until you get the full impact in the tax you're paying. It's still pretty early days."
Whether it was deductibilty, dropping migration, the increase in new builds hitting the market or "accidental landlords" opting to rent rather than sell their houses, the rental market had flattened and there was more choice, he said.
But investors feeling less negative could be playing a part, he said.
"There's a sentiment effect, that's definitely true.
"We have seen in the last three months just kind of tiny hints than mum and dad investors might be starting to come back. The overall share of purchases going to mortgaged investors is still low but within that the mix has changed a bit. Bigger landlords seem to have pulled back form extra purchases and there's been a slight shift towards the smaller end of the curve."
Davidson said some investors had felt they were being "harassed at all opportunities" by the Labour government and deductibility had become a focus.
"It's a mindset thing, not to play down the real cash impacts - they get a higher tax bill - but other costs are just as significant.
"Higher mortgage rates are a massive cost impact and would have swamped any extra tax. The thing was the extra tax bill came on top of
extra mortgage rates - it's probably still early days, next year it is going to get more interesting for investors."
Auckland property investors association spokesperson Sabrina Gibbon said the "silver bullet" for the housing market had to be more supply, rather than any new government policy.
"Interest deductibility is going to move the needle a bit but it's not going to flip the reality of unaffordable housing for the ordinary Kiwi household."
She said her organisation agreed with the government's approach to encourage private investors into the rental market, alongside targets for emergency housing.
"In theory if we can grow the private rental sector that is going to create more choice for tenants and give them pricing power over landlords - regain a bit of that power imbalance back."
