Real iQ says its idea is to incentivise landlords to provide, for example, a fixed-term tenancy for 10 years with the flexibility for the tenant to give notice if their circumstances change and they want to leave.

Director and consultant at Real iQ, David Faulkner, says the Government’s decision to remove the ability for investors to claim mortgage interest as a tax deduction will have a detrimental effect not only on landlords and tenants but also on the property management industry.

He says landlords will be forced to aggressively increase rents whilst also potentially looking to either vacate the market or cut costs wherever they can.

This will lead to fewer rental properties which will deteriorate due to a lack of maintenance as well as capital expenditure.

Real iQ is making this submission on the 143-page discussion document, now open for consultation, on the details of the Government’s changes to the tax deductibility and bright-line rules.

“The consensus of opinion is that these changes will do nothing to improve the plight of tenants and will actually make their situation worse,” says Faulkner.

Market in lockdown

“The Government says within the discussion document it wants to improve affordability for first home buyers by dampening investor demand.

“However, this flies in the face of the Government’s actions of reportedly buying more than 1,000 homes from the private sector for public sector housing.

“This is housing that could have been purchased by first home buyers.”

He says since the radical announcement with regards to housing, what appears to have happened is the market has gone into its own lockdown with stock drying up leading to a shortage of property available for sale.

From a tenant’s perspective, the interest deductibility rule is likely to have negative consequences.

Tenants will be subjected to a more aggressive rental increase in an attempt by landlords to recover the losses they will be subjected to. 

Landlords will look at cutting costs through maintenance and self-management.

“I do not see how this achieves the Government’s objective. So, if Government intervention fails what can be done?”

Faulkner says the obvious thing to do is to increase supply, particularly of three-bedroom homes as they are always in the highest demand.

“However, this will take time and it will not be cheap. A lack of skilled labour, building materials and infrastructure means that it will be years before demand catches up with supply.

“The building industry already looks to be at maximum capacity.”

The other aim the Government has set out is to ensure every New Zealand citizen has a safe, warm, dry, and affordable home to call their own, whether they are renters or owners.

He says it is the interest deductibility most people have serious misgivings about.

“It is hugely unfair and increases expenses for landlords by as much as $100 per week which will lead to higher rents. There are no winners.”

The chances of the Government backtracking on its housing strategy are probably as likely as a cycle bridge being built across the Waitematā Harbour on time and under budget, he says. It isn’t going to happen.

Making renting desirable

“Landlords need to work with what has been put on the table even if it does leave a sour taste, including the extension of the bright-line rules to 10 years, which means more rental properties will be leased long term.

“Private landlords house roughly 30% of the population.”

He suggests making renting so desirable that people will look at alternative ways to build equity and wealth other than bricks and mortar.

As a comparison, looking at Germany, the average length of a tenancy is 11 years and nearly 50% of the population rent.

Whereas in New Zealand the average tenancy is about 2.5 years and one third of the population rents. Faulkner says something has to change and different thinking is needed if the Government’s aim is to have stability and security for tenants.  

Under Real iQ’s proposal landlords will be incentivised to offer long-term contracts. Faulkner says it will give tenants a place that they can call home and establish roots in communities whilst their children will remain in the same schools with the same friends.

“This benefits New Zealand as a whole. The agreements will be written in a way that allows a tenant to give notice meaning that they do not have to pay break lease fees when they decide to leave.”

Faulkner says the proposal can go further, with bonds being replaced by tenants paying specialised tenant insurance. This can protect them from accidental damage or temporarily support them if they find themselves in financial hardship due to losing their job or income.

“There will be no need to undertake intrusive three-monthly inspections which are invasive and unnecessary, particularly if a landlord has long-term tenants who have a great record.

“The purpose of this is to ensure that landlords are motivated to provide long-term rental accommodation that fits the needs of both tenants and investors.”

Other considerations

Real iQ has also suggested other things the Government needs to consider about the implications of the tax policy on housing.

• Exclude purpose-built rental accommodation from interest limitation rule
The current laws around interest deductibility are simply unfair as it particularly penalises landlords who own multi-unit dwellings or student accommodation. These types of properties are not going to sell to first home buyers and essentially if landlords own them they are stuck with them as whoever purchases them will have to allocate roughly 30% of the rental income to tax from day one. Investors who own such properties should be exempt from the interest rule.

• Allow interest deductibility on renovations
The Government’s policy hurts tenants in other ways. Landlords will simply have no incentive to do extensive renovations on their properties since any extension on their mortgages will automatically not be allowed to be offset against rental income. Therefore, more and more rental properties will simply be let go and will not be maintained. This makes no sense at all when there is a huge push to get landlords to improve the quality of their stock.

Faulkner says as Finance Minister Grant Robertson has specifically termed landlords as speculators, he doubts if the Government will listen to new ideas.

“If landlords are offering 10-year tenancies they can hardly be called speculators.

“Most landlords are in it for the long haul, and they are a vital component of the housing structure of New Zealand.

“Rather than vilifying them as the problem, the Government should look at how we can collectively get round a table and work together to find a solution.”