Officials side with Government on rent debate, but Treasury wants effective capital gains tax

Officials think benefits of the Government's housing tax policy will eventually pass to renters. Photo / Fiona Goodall Photography

Officials from multiple government departments have weighed in on the Government’s controversial housing tax policies, including the $2.9 billion decision to allow landlords to deduct interest expenses.

Labour has slammed the move as a tax cut that will line the pockets of a small number of landlords, but the Government has said the change will put “downward pressure” on rents, which Prime Minister Christopher Luxon thinks renters will be “very grateful” for.

Officials from IRD, the Ministry for Housing and Urban Development, and Treasury gave their verdict on the changes in a Regulatory Impact Statement, ultimately agreeing with ministers about the impact the change will have on rents.

However, their support for the Beehive’s position is faint, with officials saying any downward pressure – meaning rents will still likely rise, but by less than they might otherwise – will not be happening in the short term. Future downward pressure will be contingent on the Government making good on Housing Minister Chris Bishop’s promise to build lots more houses.

“Treasury considers it unlikely that landlords will pass on the tax change through lower rents in the short run,” the statement said.

The statement repeated advice from the Housing Technical Working Group, a cross-agency group of housing experts, which found the “main drivers of rents over the past 20 years have been household income growth and the physical supply of rental housing relative to demand”.

This meant that neither change would have a big impact on house prices “as the stock of housing supply is fixed”.

“In the longer term, the change could result in some increase to rental housing supply, thereby putting downward pressure on rents,” they said.

But this was not dependent on the policy, but on whether the Government could get enough houses built to encourage competition between landlords who would then be forced to pass savings on to renters in order to win their business.

The extent to which the savings would be passed on would “depend on the degree of flexibility in urban land supply and/or opportunities to intensify existing land”, the statement said.

“As a result, the impact of interest deductibility in the long term will depend on future policy. Supporting the flexibility of urban land supply will make it more likely that restoring interest deductibility increases the supply of housing in the long run rather than primarily raising house prices,” it said.

There was a sting in the tail. The Government is also reducing the 10-year bright-line test, which taxes the capital gains made on rental properties if they are sold within 10 years, back to just two years. Treasury said the Government should can that idea and double the bright-line test to 20 years, or consider extending it even longer, turning it into a capital gains tax on rental property in all but name.

Prime Minister Christopher Luxon and Finance Minister Nicola Willis have defended the changes saying they will ultimately reduce pressure on rents. Photo / Mark Mitchell.

It is not the first time Treasury has offered that advice. It pondered something similar when Labour extended the bright-line test in 2021, and in its briefing to the incoming Minister of Finance, Nicola Willis, it advised the Government to consider a full capital gains tax – something this coalition is almost certain not to do.

And there was a further warning. The interest deductability changes and the bright-line test extension were put in place by the former government to cool an out-of-control housing market in 2021.

Treasury warned binning them could put upward pressure on prices, although it said it had not had time to analyse this fully and promised a more detailed assessment in the Budget in May.

But the statement warned a shorter bright-line period “decreases the tax cost of investing in residential property” and would therefore risk increasing demand for rental property.

“An increase in demand for purchasing such property could then put upward pressure on property prices compared to the status quo and be detrimental to first-home buyers. The impact on home-ownership rates cannot be quantified,” officials said.

Treasury believed increasing the bright-line period would help lead to more sustainable house prices, but reiterated that the key driver of house prices was the availability of land.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.