Few landlords putting up rents, despite interest rate hikes costing them thousands - survey

A survey of landlords commissioned by the Government has found very few are hiking rents because of the changes to the tax system.

However the Opposition notes that only a quarter of the policy, which will mean hundreds of dollars in added costs each week for many landlords, has been rolled out.

According to a survey commissioned by the Ministry of Housing and Urban Development, 7.3 per cent of all landlords surveyed in October 2021 had increased rent in the prior 12 months because of changes to property tax law.

A year later, in November 2022, this increased to 9.3 per cent of landlords increasing rent in the prior 12 months because of changes to the property tax law.

In both cases, MHUD says that property taxes were cited as one reason among many for hiking rents.

The survey related to changes made in March 2021, when the Government prohibited landlords from deducting interest costs from their tax bills.

The policy applied immediately to properties purchased after it was introduced by the Government, but existing landlords had their ability to deduct interest costs phased out between 2021 and 2025.

The tax change was designed to tilt the property market in favour of first-home buyers. Previously, investors could pay more for properties because they could deduct interest costs from their tax bills, whereas owner-occupiers could not.

Under the new rules both owner-occupiers and investors had equal treatment in terms of their ability to deduct interest costs (and owner-occupiers were advantaged by the Reserve Bank’s LVR rules).

A Regulatory Impact Statement (RIS) from the time warned the changes would put upwards pressure on rents. There was division among MHUD, IRD, and Treasury over whether the policy was worthwhile, given fears about how much it may push up rents (Treasury believed pressure would be minimal - other agencies disagreed).

“While [the changes] will put downward pressure on house prices, they will put upward pressure on rents and may reduce the supply of new housing developments in the longer-term,” the RIS warned.

The big question is whether landlords will pass these added costs on to tenants, or whether a soft rental market forces them to absorb costs.

The two surveys suggest the changes have had limited impact on rents so far, however they come from a period when the full policy had not yet been rolled out.

Currently, landlords are still able to deduct 75 per cent of their interest costs, dropping to 50 per cent on April 1.

National Party housing spokesman Chris Bishop said the full cost of the policy had not yet been felt. Photo / File

This, combined with retail interest rates which have shifted from below 3 per cent to close to 7 per cent, would see costs increase by hundreds of dollars on many mortgages.

By the time the policy is fully phased-in, no interest costs will be able to be deducted. The average mortgage borrowed by investors in the two years before the housing policy was implemented was $400,000 (it was about $346,000 borrowed across more than 300,000 mortgages in the seven years prior).

Interest costs at the time the policy was announced would have been about $200 a week on an average 2-year interest rate. They would also have been fully deductible at this time.

Those costs would more than double to about $500 a week based on current retail interest rates. Those costs are still 75 per cent deductible, but will only be 50 per cent deductible after April.

National housing spokesman Chris Bishop said that the full cost of the changes was yet to be felt by landlords, because the two surveys captured a period when interest rates were at near historic lows and interest costs were still 75 per cent deductible.

“It is another cost for landlords that will be passed on. When you talk to landlords they are really feeling the pressure because of it and that will really flow through to rents,” Bishop said.

“There is a reason we call it a tenants tax, because ultimately the tenants pay it,” Bishop said.

National has promised to repeal the tax changes. But this comes with a cost of its own. With interest costs so high, allowing landlords to deduct interest will come at an even greater cost to the Government’s books.

Housing Minister Megan Woods noted that fewer than one per cent of survey respondents cited the tax change as the sole reason for hiking rents.

“There is no evidence that regulatory changes were the main cause for rent increases, and nationally, we are seeing that rental inflation for new tenancies is trending down,” Woods said.

She noted that the number of rented properties actually grew by 3 per cent between March 2021 and December 2022, and that investors remained active in the market, purchasing 35 per cent of properties in the last quarter of 2022.

Infometrics Principal Economist Brad Olsen said landlords will try and pass those costs on, but they may struggle.

“They will, broadly speaking, try and move rents on.” It depends a lot on where you are in the country.

“We know rents in the likes of Wellington and Auckland - I’m not saying they’re cheap - but they haven’t been going up quite so much in recent times.

“Rental gains have been slowing - it is getting more difficult to pass on those costs,” he said.

Olsen said that property data suggested current owners were not feeling enough interest rate pressure to force them to sell their homes. The bright line test changes could mean that many were reluctant to sell even if they wanted to. This could mean many landlords sucking up increased mortgage costs and charging whatever the market accepts.

“Important to note that not all of those costs have come through yet. We know about half of the mortgage book is yet to refix and now you can only raise your rents once a year there is a question of how that plays into it as well.

Olsen said it was possible that some of the costs had been “frontloaded”, noting that rents were already high in New Zealand.

“It’s worthwhile noting that even if you’re not seeing massive increases in house prices and rents housing is not magically affordable, it is just not going up by as much,” he said.

Woods said that the main factor affecting rents was “supply and demand for housing”.

“This is why this Government is doing so much to increase new housing. We have overseen a record number of residential building consents and construction activity, after massive system changes we’ve to encourage density in our urban areas where more people want to live and work,” she said.