New Zealand Property Investors' Federation

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Landlord borrowing falls annually as mortgage tax deductions phase-out kicks in. - 13 April

Landlords showed reluctance to buy residential rental properties in December and their share of borrowing fell 7.9 per cent annually, according to a new study out today.

KPMG's latest quarterly financial institutions' performance survey highlighted what it sees as their changing behaviour. The survey till the end of December cited the Reserve Bank's data to show what could be the new, emerging patterns.

Loss of mortgage interest deductibility is cited as a reason.

"Property investor lending continued to decrease, falling to 16.8 per cent of total lending in December 2021 from 24.7 per cent a year earlier. Lending to property investors in January 2022 was 51 per cent lower when compared to lending in January 2021, falling to $812 million," KPMG noted.

Finance Minister Grant Robertson has said the changes would tilt the balance of the property market towards first-home buyers.

Landlords borrowed $1.3 billion in October, $1.5b in November and $1.3b in December - but just $812m in January, the Reserve Bank said. But that recovered somewhat after KPMG's study, to $1b in February.

The data shows fluctuating patterns of behaviour for different types of borrowers. Holidays could be affecting the patterns as much as tax changes.

First-home buyers borrowed $1.4b in October, $1.7b in November, $1.5b in December, $819m in the much quieter January and $954m in February, the Reserve Bank said.

But KPMG cited exterior factors influencing landlords.

Losing the ability to claim tax deductions on interest rates for mortgages on rental properties was cited as the biggest driver.

Inland Revenue says the ability to deduct interest on existing loans is being phased out over four years. From last October, landlords began to lose the ability to claim full mortgage interest rate payments on rental property mortgages.

Landlords lose tax breaks gradually, on a descending scale from 2021 through to 2025.

All interest can be claimed in the March to March 31, 2021, but that falls to 75 per cent in the March 2022 year, 50 per cent in the March 2024 year, 25 per cent in the March 2025 year and zero from April 1, 2025.

KPMG said the latest data "showed the continued effect of the Government's interest deductibility changes which impacted investors from October 1, 2021. Investors will see the impact of these changes for the times time when filing their March 2022 income tax returns and will also be conscious of the impact of increasing interest rates on their investments".

Private landlords house around 1.4 million tenants and the chiefs of lobby groups that represent many of them threaten to sell when the Government makes reforms, like the widest-sweeping changes to tenant law in 35 years which came in from February 11 last year.

KPMG's report cited rising mortgage interest rates and reduced allowance for low deposit lending as other factors contributing to changes in the residential market generally.

Last March, the Government unveiled plans that would bar landlords from deducting the interest costs of their mortgage from their tax bill. That would effectively increase the tax bill of each landlord by thousands of dollars a year.

Advice from IRD said the changes would bag the Government $1.82b in additional revenue over the years 2021-2025, depending on the interest rate.

The Government said it would exempt new build homes from the changes as this would encourage people to invest money in new housing. But the Government did not say what qualified as a new home under the rules.

John Kensington, KPMG head of banking finance, said many factors were influencing investors' buying and therefore borrowing decisions.

"A lot of factors are clouding the numbers like rising interest rates but those things affect all buyers. Tax disincentives and LVR changes are pushing people away.

"Perhaps some more savvy investors will be looking at buying. It can't be a great time to be buying property right now and trying to rent it when the prices are continuing to rise dramatically but the rents don't rise at the same rate. Long term investors will be looking at more than just the rental rate though."

If fewer landlords were borrowing to buy, that could be a major shift in New Zealanders' thinking because rental property had been a type of superannuation by default that had worked for many people, he said.

The numbers of properties for rent dropping could be worrying because they were needed: some people who did well would own their own homes and become wealthier but others who didn't do so well in life could have a lifetime of renting, Kensington said. Those people needed a stock of quality rentals available.

Major property investors like Kiwi Property Group were developing build to rent portfolios as the Government became a bigger landlord by refurbishing its stock of state homes, Kensington said.

Asked about landlords' borrowing rising in February when the study emphasised January's drop, he said perhaps investors had returned from holiday and become more active and prices were dropping.

But in the longer term, he believes landlords would borrow less "if they continue to lose tax deductibility every year as is the current policy."

Inland Revenue says some types of residential property are excluded from the interest limitation rules, like the main home if it is being used to earn income, business premises, farmland and various accommodation providers.

In September, the Herald reported how the Government has decided to exempt "new" houses for 20 years under new tax rules to bar landlords from deducting the interest costs of their mortgage from their tax bill.

Ministers also decided that owner-occupiers who rent rooms of their house to tenants do not qualify as landlords under the rules, either.

The detailed tax rules were unveiled, along with advice from IRD which warned the proposals could risk putting up rents and increase opportunities for tax avoidance.

Last November, the Herald reported Mark Todd, co-founder of Ockham Residential, saying the changes would mean he'd sell 85 apartments. He said this year he is carrying out that plan.

Losing the tax break would mean he had no other choice, he complained.

"I may be forced to sell 85 rental places worth $60m to $80m if interest which is the main cost of owning these buildings becomes non-deductible," said Todd referring to apartments the company owns in Sandringham, Grey Lynn, Ellerslie and Mt Albert.

Social media commentators said in response to Todd's complaint that the tax change was working out precisely as Robertson and Parker planned.

Todd said the Government wanted to eliminate mortgage interest deductions on loans for existing purpose-built rental properties which would hugely disadvantage Ockham's existing build to rent city properties.

Sharon Cullwick, Property Investors Federation executive officer, said changes to credit law had made it harder for landlords to borrow money. But rising interest rates, losing tax deductions, high house prices and low expectations of price rises in the near future deterred investors.

"It's a moving target with all the changes coming through from Government," Cullwick said.

A survey of landlords in January received 913 responses and 48 per cent of those people had no plans to buy another rental property, although 49 per cent had never sold a rental property.

Of those who had sold, 25 per cent did so to invest in another market, and 16 per cent due to law changes.

Most respondents expected static house prices in the next six months.

Low interest rates have had little to do with investment decisions: 34 per cent had decided to pay off debt and 28 per cent have increased the size of their portfolio, Cullwick said.