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Investor 'will sell fourth property if Labour wins, and buy another if National does' - Stuff

If Labour gets back in at the next election, investor Brianna Kerridge says she and her husband will probably sell one of their four properties.

But if National regains power, they already have pre-approval, ready to buy a fifth.

The pair embodies the crossroads that the next election represents for the New Zealand housing market, as National pledges to reinstate a key tax advantage for investors that Labour is in the process of phasing out.

This tax advantage is mortgage interest deductibility, which prior to October 1 2021, allowed investors to subtract mortgage interest payments from their rental income for tax purposes.

Labour labelled this a “loophole” which gave investors an unfair advantage over first-home buyers, because they could outbid them, taking on large debts, and deduct the interest payments on those debts from rental income, keeping their tax bills low.

National has also pledged to reduce the bright-line test from between five and 10 years to two, effectively removing any capital gains tax for most investors, other than those flipping homes quickly.

For Kerridge, the progressive loss of interest deductibility will result in her tax bill going up about $5000 a year for every 25% loss of deductibility.

“We are essentially just waiting on the sidelines now for the election, if National get back in we have our pre-approval ready to go and buy the next one while the prices are still low, and if Labour get in we will probably be selling the apartment in the city,” Kerridge said.

The phase-out of interest deductibility was staged over five years.

In the first 18 months, investors lost 25% of their ability to deduct mortgage interest, followed by three years in which the amount they could deduct would decrease by 25% a year.

Inland Revenue reported that the first six months of the phase-out garnered the Government an additional $66 million in tax, and Kerridge contributed roughly $2500 of that.

“I was quite fortunate that all the properties I bought were bought before October 2021, so we’ve been able to phase them out,” she said.

At 50% loss of deductibility, which is happening in the current tax year, Kerridge said she and her husband would break even on their investments.

“When it hits 75% we need to make some serious changes, also because of those interest rates rising as well.

“Next year we are going to have to start contributing a lot of our own income.”

Three of Kerridge and her husband’s properties are on the North Shore, with the fourth an inner-city apartment.

Kerridge said she and her husband were not the only investors with plans to sell.

She works as a real estate agent, and said she had multiple investor clients who had investment properties ready to list if Labour stayed in power.

Kerridge said sentiment was a powerful influencer of the market, and if a sell-up began, it could also rapidly gain momentum.

She is also considering moving out of residential and into commercial property investing, should Labour stay in power.

STUFF

Deloitte partner Robyn Walker says property investors will really start to feel the true impact of deductibility changes this year.

National’s plans

National Party spokesman Chris Bishop had a simple justification for why the party would reinstate mortgage interest deductibility: “It’s a core principal of the tax system that you tax profits, not income.”

When asked whether that meant National would endorse taxation of investors’ sales profits, he said the party would not be campaigning on a capital gains tax.

The party’s plan to bring the bright-line test back to two years would also make capital gains tax more easily avoidable.

Bishop said National’s housing policies would concentrate on increasing supply by opening more land for building on city fringes and making it easier to build up, although he could not yet discuss details.

He did not have details on when interest deductibility would be returned, or the bright-line test cut back.

“There’s obviously a fiscal cost of bringing interest deductibility back, and we will have more to say on that when we release our fiscal plan,” he said.

These would come out closer to the election.

Chris Bishop says the bright-line test would be taken back to two years because that was where it stood when National was previously in power.

Stuff

Chris Bishop says the bright-line test would be taken back to two years because that was where it stood when National was previously in power.

Housing Minister Megan Woods said Labour had no intention to change its policies, which were introduced to “solve a housing crisis that National refused to even acknowledge existed while they were in Government”.

She said landlords could still claim interest deductibility on new-build properties for 20 years.

“We have specifically put in a lever to incentivise property investors to help us solve the housing crisis by building new houses.”

According to CoreLogic data, the incentive has worked, with more investors buying more new-builds, and fewer buying existing properties.

“National are showing once again that will have no interest in maintaining the momentum we have to finally address the shortage of housing in New Zealand,” Woods said.

“The interest deductibility changes had specific aims; to encourage new builds and shift the balance back to first-home buyers."

She also questioned how National would fill the revenue hole left by the return of the tax break.

Housing Minister Megan Woods says National’s policies would reverse the trajectory the country was on towards solving its housing crisis.

Stuff

Housing Minister Megan Woods says National’s policies would reverse the trajectory the country was on towards solving its housing crisis.

National’s current fiscal plan has been criticised recently, with leader Christopher Luxon acknowledging it had underestimated by $1.5 billion the cost of the party’s proposed tax changes.

National’s plan to return interest deductibility wipes out another revenue stream, which was estimated by Inland Revenue to add $1.22b in tax-take over the forecast period ending March 31, 2025.

Woods questioned what services would be cut to provide the tax break to landlords.

She pointed to bond data that showed the number of tenancies was growing, despite the loss of interest deductibility.

“The number of actual tenancies, based on bonds lodged with Tenancy Services, continues to grow – up 4.9% since the March 2021 changes were announced, up 4.3% in the last year alone – showing a strong response to increased demand from rising net migration,” she said.

She said there was no evidence of any significant exit from the market by investors.

Kerridge bought her first property on her own about six years ago, which she lived in until before moving into her current home in June last year, and renting it out.

JASON DORDAY/Stuff

Kerridge bought her first property on her own about six years ago, which she lived in until before moving into her current home in June last year, and renting it out.

Investor says taxing gains is reasonable

Kerridge said she disliked the bright-line rules “purely for selfish reasons” but that she understood why they were in place.

“Essentially it’s just capital gains tax with a time limit on it. We pay tax on our profits for everything in life so why should property be any different?” she said.

Kerridge said investing in property outside the family home was a business.

“You do it to make a profit and in turn you pay tax on your profits no matter what you invest in.

“However, not being able to claim interest is like not being able to claim a business expense.”

Big re-fix still ahead

The Reserve Bank estimates about 60% of housing lending is either on a floating interest rate or on a fixed rate that was repriced within 12 months.

Kerridge is part of this big refix.

Her rentals face a sharp refix, with all three coming to the end of their fixed term in December, when they will go from the high 2% and mid-4% to around the mid-6%.

She said she and her husband had budgeted for this, but had not expected to lose their ability to deduct interest.

Geordie Rogers is the Renters United president and lives in Island Bay.

BRUCE MACKAY/Stuff

Geordie Rogers is the Renters United president and lives in Island Bay.

Renters United president Geordie Rogers said someone who could not afford their properties without interest deductibility did not need to buy another property.

“Those people probably also can’t afford to do maintenance, or give some leeway when renters are having a hard time, or when they need to upgrade the home to meet higher Healthy Homes Standards.

“Those are people who are overleveraged, who have too much money on loan from the bank against their houses.”

Rogers said there was also a moral element to the discussion.

“If you own four houses, you do not need a fifth, I will make that pretty clear, there are people who can’t even get one house and the fact that this person believes they are entitled to a fifth house when some people can’t even afford one, is disgusting.”

Rogers said keeping the bright-line test longer was important, as it would reduce speculation on housing.

“What we are seeing from National is a lot of policy that seeks to ensure people who own houses keep wealth, while those wanting to buy houses can’t afford to, that’s fundamentally what we’re seeing.”

Labour was not exempt from criticism, with Rogers saying most of their policies realistically benefitted higher-earners, and did little to help those on lower incomes.

Kerridge said if she and her husband bought another property, it would likely not be a new-build, because they like to improve properties.

Kerridge said she respected some would be critical of her intention to expand her portfolio should National return to power.

“At the end of the day not everyone will be homeowners and not just because of investors making it more difficult. It is tough for many to save for deposit or fund a mortgage,” she said.

“Therefore rental properties are always needed for those who do not have the means or desire for homeownership.

“We have not increased rent for three-plus years, we have a great relationship with our tenants, and we like to think we are fair, understanding landlords respecting that although it is our house, it is their home."

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