Revenue Minister David Parker outlines the details of the policy limiting the deductibility of interest expense on residential real estate investments. Video / Mark Mitchell
Homeowners showed reluctance to buy residential rental properties in December and their borrowing share fell 7.9% a year, according to new research released today.
KPMG’s latest quarterly Financial Institutions Performance Survey highlighted
what he sees as their changing behavior. The survey through late December cited Reserve Bank data to show what new emerging patterns might be.
The loss of mortgage interest deductibility is cited as the reason.
“Loans to real estate investors continued to decline, falling to 16.8% of total loans in December 2021, from 24.7% a year earlier. Loans to real estate investors in January 2022 were 51% lower than those January 2021, falling to $812 million,” KPMG noted.
Finance Minister Grant Robertson said the changes would tip the balance in the housing market towards first-time home buyers.
Owners borrowed $1.3 billion in October, $1.5 billion in November, $1.3 billion in December but only $812 million in January, the Reserve Bank said. But that picked up somewhat after the KPMG study, to $1 billion in February.
The data shows fluctuating behavior patterns for different types of borrowers. Holidays could affect models as much as tax changes.
First-time home buyers borrowed $1.4 billion in October, $1.7 billion in November, $1.5 billion in December, $819 million in much quieter January and $954 million in February, the Reserve Bank said.
But KPMG cited outside factors influencing owners.
The loss of the ability to claim interest rate tax deductions for mortgages on rental properties was cited as the main factor.
Inland Revenue says the ability to deduct interest on existing loans is being phased out over four years. Starting last October, landlords began to lose the ability to claim full payment of mortgage interest rates on rental property mortgages.
Homeowners gradually lose tax relief, on a decreasing scale from 2021 to 2025. All interest can be claimed from March to March 31, 2021, but this drops to 75% in March 2022, 50% in March 2024. year, 25% during the year of March 2025 and zero from April 1, 2025.
KPMG said the latest data “showed the continued effect of changes to government interest deductibility that impacted investors from October 1, 2021. Investors will see the impact of these changes for now. where they will file their March 2022 tax returns and also be mindful of the impact of rising interest rates on their investments.”
Private landlords house around 1.4 million tenants, and the leaders of the lobby groups that represent many of them threaten to sell out when the government makes reforms, such as the most sweeping changes to the Tenants Act in 35, which occurred on February 11 last year.
The KPMG report cited rising mortgage interest rates and reduced allowance for low deposit loans as other factors contributing to changes in the broader housing market.
Last March, the government unveiled plans that would prevent homeowners from deducting mortgage interest costs from their tax bill. This would effectively increase each homeowner’s tax bill by thousands of dollars per year.
According to IRD advice, the changes would earn the government $1.82 billion in additional revenue over the years 2021-2025, depending on the interest rate.
The government said it would exempt new build homes from the changes as it would encourage people to invest money in new homes. But the government has not clarified what constitutes a new home under the rules.
John Kensington, head of bank finance at KPMG, said many factors influence investors’ buying and therefore borrowing decisions.
“Many factors are clouding the numbers, such as rising interest rates, but these are affecting all buyers. Tax disincentives and LVR changes are keeping people away.
“Perhaps more savvy investors will consider buying. It may not be a good time to buy a property right now and try to rent it out as prices continue to rise dramatically, but rents are not increasing at the same rate. . Long-term investors will be looking at more than just the rental rate, however.”
If fewer landlords borrowed to buy, it could be a major shift in thinking for New Zealanders, as rental property was a type of default superannuation that had worked for many people, he said.
The declining number of rental properties could be worrying because they were needed: some people who were doing well would own their own homes and become wealthier, but others who weren’t doing so well in the life could have a rental life, Kensington said. These people needed a stock of quality rentals available.
Major property investors like Kiwi Property Group were expanding build-to-let portfolios as the government became a bigger landlord by renovating its stock of public residences, Kensington said.
Asked about the increase in homeowner borrowing in February when the study pointed to the January decline, he said investors may have returned from vacation and become more active and prices were down.
But in the longer term, he thinks homeowners would borrow less “if they continue to lose tax deductibility every year, as they are now.”
The Inland Revenue says certain types of residential property are excluded from the interest limitation rules, such as the principal residence if used to earn income, business premises, farmland and various accommodation providers.
In September, the Herald reported how the government decided to exempt ‘new’ homes for 20 years under new tax rules to ban homeowners from deducting mortgage interest charges from their tax bill.
Ministers have also ruled that owner-occupiers who let rooms in their homes to tenants also do not qualify as landlords under the rules.
Detailed tax rules were unveiled, along with advice from the IRD which warned the proposals could risk raising rents and increasing opportunities for tax avoidance.
Last November, the Herald reported Mark Todd, co-founder of Ockham Residential, saying the changes would mean he would sell 85 apartments. He said this year that he is executing that plan.
Losing the tax relief would mean he had no other choice, he complained.
“I could be forced to sell 85 rental units worth $60 million to $80 million if the interest, which is the main cost of owning these buildings, becomes non-deductible,” Todd said, referring to the apartments that the company owns at Sandringham, Gray Lynn, Ellerslie and Mt. Albert.
Social media commentators said in response to Todd’s complaint that the tax change is working exactly as Robertson and Parker intended.
Todd said the government wanted to eliminate mortgage interest deductions on loans for existing purpose-built rental properties, which would put existing Ockham construction at a huge disadvantage to rent properties in the town.
Sharon Cullwick, chief executive of the Property Investors Federation, said changes to credit law have made it harder for homeowners to borrow money. But rising interest rates, loss of tax deductions, high house prices and low expectations of rising prices in the near future have deterred investors.
“It’s a moving target with all the changes the government is making,” Cullwick said.
A survey of landlords in January received 913 responses and 48% of those people had no intention of buying another rental property, although 49% had never sold a rental property.
Among those who had sold, 25% did so to invest in another market and 16% because of legislative changes.
Most respondents expected static home prices over the next six months.
Low interest rates have little to do with investment decisions: 34% decided to pay down debt and 28% increased the size of their portfolio, Cullwick said.