Kelvin Davidson: Our ‘top down’ perspective on the Government’s investor tax policy changes

It’s an understatement to suggest that the content of the Government’s housing policy announcement on 23^rd March was a surprise to most. In
reality, it was a major surprise to all. However, now that the dust has settled a bit, our perception is that the changes won’t have
as much impact as first thought. Sure, some landlords will look to sell properties and/or raise rents sharply, but for the most part, we think people
will carry on, just a bit less profitably than before.

Our analysis boils down to three key points:

• Existing landlords are unlikely to sell en masse over the next few years. After all, the full brunt of the removal of interest
  deductibility won’t be felt until 2025/26, and only by those with large mortgages. Then we also need to keep in mind that the cheapest option for
  many investors from a tax perspective is still going to be to avoid Brightline by not selling. And finally, there’s still the thorny issue of what
  to do with any sale proceeds anyway.

• Rents are unlikely to rise noticeably more sharply than they would have done anyway. First, if there’s no big landlord sell-off, then
  the supply of rental stock will be similar. Second, the historical evidence suggests that rents are much more closely tied to tenants’ incomes
  than landlords’ costs – for example, previous law changes (such as depreciation removal and Healthy Homes) haven’t caused rents to spike across
  the board. And of course many landlords value a good tenant and want to avoid vacancies.

• But further investor purchases of existing properties from here on will be curtailed. The extension of the Brightline Test to 10 years
  for purchases of existing properties and the instant loss of interest deductibility incentivise investors to shift their focus more towards new-builds
  (which of course are also exempt from the loan to value ratio speed limits).

Now it’s important to note that those views reflect a top-down, aggregate perspective – but we also acknowledge that some individual landlords will of
course follow a different path, and that’s understandable. We had already heard anecdotally that some long-time residential landlords had started to
question whether they had the time/inclination anymore, so that might be a cohort looking at their options – especially if interest rates were to rise
over an 18-24 month horizon.

Finally, looking out five or 10 years, it’s uncertain how these regulations might impact the market, but we suspect that property will still be a chosen
path by many. They’ll just look at other ways to make property ‘stack up’, which of course could include paying less in the first place than they otherwise
would have done. In addition, for new landlords 10 years down the track, they may never know that interest deductibility even existed, so it just won’t
be a factor them.

This is a guest blog submission from Kelvin Davidson from CoreLogic NZ. Guest submissions are a way for APIA members to share their views and experiences with each other and do not necessarily reflect the views and position of the APIA.  The content of this article is general in nature and not intended as a substitute for specific professional advice on any matters and should not be relied upon for that purpose.

ABOUT THE AUTHOR

Kelvin Davidson