Raise the rent or sell up?
That's the corner experts say Bay of Plenty landlords are being pushed into with the removal of a tax "loophole" expected to hit property investors' pockets.
Bay property investors are forecasting a rise in rents and mortgagee sales, with some already putting their rentals on the market.
The Government announced a $3.8 billion Housing Acceleration Fund this week as part of a plan that included doubling the bright-line test from five to 10 years and removing the ability to deduct mortgage interest from tax returns.
First Home Grant income caps were also lifted and house price caps for the grants were set higher.
The new changes have been met with criticism by Bay property experts, who say the only way to recoup their losses will be to raise rents or sell up.
But a spokesperson for Minister of Finance Grant Robertson says the package's intention was to shift the balance back to first home buyers and boost the affordable housing supply.
Removing the interest deductibility loophole that advantages investors over first home buyers will reduce investor demand for residential property investment, the spokesperson said.
Tauranga Rentals Limited manager Dan Lusby said some property investors were already on the edge of being able to afford their investment, and not being able to claim interest as an expense meant struggling landlords will exit the market.
"I had one straight away [saying] 'we're putting it on the market' because as it was she was struggling, now she just won't be able to do it.
"Another one, we were signing up the tenancy next week and they've brought it forward and asked we sign it up this week before the 27th to make sure the tenancy starts before that deadline.
"It will be another reason for landlords to put the rents up."
Tauranga Property Investors' Association president Juli Anne Tolley said the changes were not what was expected.
"The extension of the bright-line to 10 years is ludicrous. Kiwis move around a lot, so it won't be just investors caught by this.
Tolley, who owns Quinovic Property Management Tauranga, said the removal of the ability to deduct the mortgage interest will "trap a lot of people in a combined punch".
Removing the deduction means an investor with mortgages on three rentals acquired over five years, which were all breaking even or a slight income after all expenses, will now take a loss - especially if interest rates continue to rise, she said.
Selling one of the rentals to pay down debt means the investor will have to pay capital gains because it falls further under the bright-line rules and means missing out on valuable long-term investment dollars because their hand is forced to survive financially, she said.
"So, are we rewarding or punishing success?"
Tolley said the only way investors can recoup those losses was to sell or raise rents.
"If they sell, that is one less rental and another family displaced. We are already seeing that all occur over the country."
Tolley said the Government seemed to have a vendetta against anyone trying to get ahead.
"They have year after year targeted property investors instead of solving the real problems. They have chosen an easy target and just keep firing away, passing laws constantly under urgency. They just keep fuelling the fire and making the whole housing situation worse."
Property Brokers Bay of Plenty regional manager Simon Short said it was too early to measure the impact the changes may have.
Short said on one hand changes may enable first home buyers to "reactivate" and enter the market but whether it changes the supply and demand issue was yet to be seen.
"That's really the inherent issue we have. We've got a lack of stock and the overzealous demand."
Short said landlords increasing rents may be a byproduct of scrapping taxable deductions.
"Landlords are going to be pushed into a corner to elevate rents based on the fact they can't treat their investments in the business capacity where they can get taxable rebates on the interest payments they're making, which seems I think unfair."
Rotorua Property Investors' Association president Debbie Van Den Broek said the new changes were "absolutely horrific" for renters.
She said it meant younger investors may not be able to hold on to their properties and will have to sell up.
"Young people are getting crucified in their efforts in buying for their long-term future by buying a rental home ... It's really quite scary."
The inability to claim interest as a business tax deduction was one of her main concerns.
"If you're paying tax on money you haven't even got in your hand, where do you find it? Where do you find the money to pay the tax and the mortgage when there's no income. Because usually a rental barely breaks even.
"I think in the next couple of years there will be lots of mortgagee sales with landlords who just can't afford to pay the bills anymore. They will hang on as long as they can with their tenants but then they will just hit the wall."
Rotorua Rentals director Pauline Evans said she did not see how the changes would help anyone.
"I don't they have achieved what they want to achieve. They have just made a bigger mess."
Evans said doubling the bright-line test to 10 years will not matter to serious investors but it will hurt speculators.
"Speculators want to get in and out as quickly as they can with the most gains and an investor wants to get in and stay in.
"I don't think the Government is getting that. They're focused on the get-in-quick, make money while the sun shines speculators."
The new changes would also reduce the size of the rental stock, which will increase demand and prices.
"Until they build more houses and get on with it ... there's always going to be higher rent increases because there's demand but no stock."
Evans said scrapping interest deductibility loopholes will stop a lot of investors from entering the market.
"A few are thinking of selling up already. I think that people are going to have a knee-jerk reaction too."
A spokesperson for Minister of Finance Grant Robertson said the intention of the package was to shift the balance back to first home buyers and boost the supply of affordable housing.
"The tax system favours debt-driven residential property investment over more fully taxed and more productive investments.
"To reduce investor demand for these investments, we will remove the interest deductibility loophole that advantages investors over first home buyers."
The plan did encourage investment in new builds, with the bright-line test for new-build investment properties remaining at five years to help increase housing supply, the spokesperson said.
The impact on rents was uncertain and depended on market supply and demand, including the ability to pay, the spokesperson said.
Trade Me's latest Rental Price Index showed Tauranga's median weekly rent was $580, a 6 per cent increase from $545 in February 2020.
Trade Me Property sales director Gavin Lloyd said it was not totally clear what impact the announcement will have.
"We might see some landlords sell their investment properties due to the increase in tax costs. This would in turn impact tenancies as rental properties change hands."
The Government's housing announcement at a glance
• $3.8 billion to accelerate housing supply in the short to medium term by offering infrastructure investment grants for build-ready land
• More Kiwis are able to access First Home Grants and loans with increased income caps and higher house price caps in targeted areas
• Bright-line test doubled to 10 years with an exemption to incentivise new builds
• Interest deductibility loophole removed for future investors and phased out on existing residential investments
• Government to support Kāinga Ora to borrow $2b extra to quickly scale up land acquisition with the aim of boosting housing supply.
The jury's marathon deliberations ran for two weeks.