Labour’s “tenant tax” is neither a tax nor for tenants

Written By: - Date published: 10:16 am, August 22nd, 2022 - 33 comments
Categories: housing, labour, national, same old national, spin, tax - Tags:

National’s media spin team is at it again.  They have launched a petition against what they describe as Labour’s “tenant tax”.

What they are talking about is the Government decision last year to remove interest deductibility for tax purposes.

Previously an investor would buy a property, mortgage it to the hilt, often get to the situation where the unit was cash flow negative, then sit back and let the capital gain make them lots of money.  They were not in a business to make money from rental, the rental was a secondary consideration.  Instead they were banking on making money when they sold the property and then pocketing a tax free capital gains profit.

Aside from the questionable morality of this sort of behaviour it had terribly distorting events on the market.  First home buyers were unable to out compete landlords at auctions and prices kept rising.

Recently this has changed.  Last year Government measures to remove interest deductibility and bringing in a ten year bright line test, an effective capital gains tax in all but name, came into force.  And the measures are having an effect.  The QV House Price Index has dropped 7% since December last year.  Median rentals have increased from $520 to $545 since October last year which given current inflation rates is a decrease in real terms.  And recent anecdotal evidence is that rentals are dropping as housing supply improves.  Who would have guessed that the market would respond in such a way?

We still have a crisis and this will take years to fix.  But the alternative, essentially crashing the real estate market, would have unleashed all sorts of carnage.  In my view a gradual reduction is the least risky and best option.

As for the claim that Labour said there would be no new taxes, this is a deliberate misrepresentation of the policy.  This is not a new tax.  It is the removal of the ability to reduce tax liability that was having a retrograde effect on the housing market.

This is strange posturing from National.  It may go down well with their base but being really nice to landlords is not something I thought would be a vote winner.

And they are crowing about Labour recently exempting new builds from the policy.  I have no problem with this.  Anything that increases current housing stock is a good thing and the more houses on the market the greater the downward pressure on prices and rents.

For the first time in decades the property market is correcting itself and reversing previous trends that made housing more and more unaffordable.  Why am I surprised that National thinks this is a bad thing.

33 comments on “Labour’s “tenant tax” is neither a tax nor for tenants ”

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  1. Tiger Mountain 1
    22 August 2022 at 10:43 am

    The current residential property market is a gruesome distortion of what houses should really be for–accomodation and a family resource. Yes Micky, whatever any of us think a gradual deflation of prices is the way to go.

    The capitalist model of home ownership, involving for profit developers, bent building suppliers, thumping great mortgages, and individual insurance, is no longer sustainable for much of the population that do have property, let alone those paying extortionate rents for dumps.

    Climate Disaster is yet another reason why the State and Local Councils should play a major role in provision of sustainable public houses, apartments, emergency housing & tiny houses for individual homeless.

    Various Reports have been done on local areas that should not be built on, should be retrenched, or abandoned. But none of the Parliamentary Parties or Local Govt. or Insurance companies seem to have had the guts to widely announce the findings, or who will pay compensation if any.

    Insurance on coastal, subsidence ridden and flood plain dwellings, is set to go ballistic and become totally unaffordable for many. Hard decisions have to made from now–not in 20years time.

    Some professional landlords are ok in my experience, they are in it for the long haul and know very well buildings need cleaning and refurbishment after tenancies. People have transient, messy lives sometimes, and paying some smug bastard’s mortgage off for them is never going to generate much love for landlords.

    Boomer and also younger gen “on the property ladder” landlords take wear and tear or damage as some sort of personal affront, and expect people that can barely afford their exploitative rents for dumps to be grateful!

    Tenants rights groups interviews and surveys show many tenants are scared to raise repairs and maintenance because they know the likely result. Are there good landlords out there? I have known a couple, but don’t feel like giving poor widdle landylords any reassurance or encouragement frankly. Rental Housing should largely be local authority or central Govt. business.

    my political programme while prices fall…
    • Rent Freeze now!
    • Rent Control now!
    • Occupy empty residential & commercial properties on an organised basis to get politicians attention
    • State House mega build from flat packs, low rise apartment mega build, transferable & life time tenancies, use golf courses and horse race tracks for builds, and “forgotten” smaller LINZ jurisdiction land parcels
    • Retire all WINZ/MSD emergency housing related debt
    • CAPITAL GAINS TAX!–are you listening politicians–revisit this. Yes, read the point about bright line being a defacto CGT.

    • Stuart Munro 1.1
      22 August 2022 at 11:04 am

      I'd add legislation encouraging tiny houses too. They have the capacity to cater to one of the emptier ends of the market – the lower price bracket – and concentrate on smarter use of resources. Many councils loathe them however, and impose punitive and unnecessary inspection costs not even remotely justified by the size or complexity of the structures.

      Tiny houses are an escape hatch from the dysfunction of building for real estate companies and banks, and a return to housing as structures for living. As such they're a thing to encourage – and their lighter carbon footprint is just a cherry on the top.

      • Tiger Mountain 1.1.1
        22 August 2022 at 11:54 am

        yes

      • Ad 1.1.2
        22 August 2022 at 4:33 pm

        Good Tiny Houses ain't cheap.

        Shaye'sTiny House site no longer gives prices but they start at $220k.

        Then there's land rent.

        Then utility installation and maintenance.

        Most will still require Bank of Mum and Dad Boomer.

        • Stuart Munro 1.1.2.1
          22 August 2022 at 5:07 pm

          A decent one can definitely be put together for 100k. Mind, 30k in permit fees is no help at all – it's a disgraceful rort, no more, no less.

          Part of the trick is getting people not to throw half or more of their income down the toilet for twenty years. Five years off the landlord and people can save a little.

          • mickysavage 1.1.2.1.1
            22 August 2022 at 7:47 pm

            I am a real fan of tiny houses. And the ethos behind them. We are fine with smaller homes that have no room for our consumptive excesses.

            • Descendant Of Smith 1.1.2.1.1.1
              23 August 2022 at 12:22 am

              Railway and forestry single men's quarters did people for years and were much smaller than today's tiny houses.

              There is no reason the government couldn't once again build such or similar close to work for their single workers. I know my son was quite proud of the fact that he could pack up everything he owned in a single backpack until he was 25ish. Precarious work, bad employers, precarious rentals, employers neglecting to pay him, spending time both couch-surfing and ending up back home – all these things made him travel light.

              State housing was mainly workers housing – e need to get back to doing more of that.

    • Barfly 1.2
      22 August 2022 at 12:00 pm

      I am a big fan of a ramping 'ghost house levy' = increase supply = reduce overall rents.

      Ghost house levies to go to social housing as an additional funding source – seems to have had a limited positive affect in Canada

  2. Sacha 2
    22 August 2022 at 10:56 am

    Landlords vote.

  3. Blazer 3
    22 August 2022 at 11:48 am

    Labours measures are helping arrest increases but they do not go far…enough.

    A levy on houses empty for more than 6 months would make a difference imo.

    Also stamp duties on investors with multiple properties a la Singapore would discourage this fixation on 'unearned' income.

  4. Barfly 4
    22 August 2022 at 11:55 am

    Calling it a tenant tax is of course the usual National Party bullshit

    (lies and songs and stories they made up)

    • mikesh 4.1
      22 August 2022 at 2:59 pm

      Calling it a tenant tax is of course the usual National Party bullshit

      It sure is. A tenant should not be expected to pay for his landlord's property. Mortgage payments, including interest, should be, or should be deemed to be, the personal responsibility of the landlord, and the interest component of a mortgage payment should be no more deductible than the principal component or, for that matter, than the landlord's grocery bill.

      I think I would make it illegal to rent out a property that was not owned freehold. Borrowing only uses up capital which might otherwise have been used productively.

      • Belladonna 4.1.1
        22 August 2022 at 5:58 pm

        And presumably all those current tenants can live in cars…..

        • arkie 4.1.1.1
          22 August 2022 at 6:33 pm

          They could be given a rent-to-own pathway through a shared equity scheme?

          • Belladonna 4.1.1.1.1
            22 August 2022 at 6:37 pm

            So, paying off the owners mortgage under another guise?

            • arkie 4.1.1.1.1.1
              22 August 2022 at 6:44 pm

              No they are building some equity, and working towards home ownership.

              It could be through an expanded First Home Partner type thing or with the Govt as the seller of the property.

              • Belladonna …
                22 August 2022 at 7:14 pm

                Well, they'd have to be paying off the owner's mortgage, too – or why would they retain a diminishing-in-value asset? In order for it to be at least cash-neutral, the annualized payments would have to cover both the mortgage cost (i.e. money going to the bank) as well as the capital value being transferred to the previously-a-tenant.

                And, ignores, completely, any capital value increase (as we're told constantly – it's capital gains which make property investment worthwhile).

                Mostly people only do this kind of thing for family members (e.g. getting a kid on the property ladder).

                I think this would require the government to buy the property off the current landlord. Otherwise, there are lots of conflicting interests (e.g. what happens when one party wants/needs to sell and the other doesn't) and potentially a lot of court cases.

                A. Does this suppose a fair price? If not – there will be court cases running right up to the supreme court, and taking decades.

                B. Where is the money coming from, to buy all of this property? (we're talking multiple billions)

                C. What happens if there is no willing seller? (e.g. people who might be off-shore for a couple of years for work, but don't want to sell their house)

                D. What prevents the owners ditching the current tenants in favour of a family member (to benefit from the tenant to buy scheme) – I think most mum and dad investors would do this – often they buy a house both with retirement in mind, and to give kids a step-up on the property ladder.

                I definitely see the rent-to-buy thing possibly working with the Government as the landlord – but not through legislation enforcing it on private owners.

            • mikesh 4.1.1.1.1.2
              23 August 2022 at 1:51 pm

              The house belongs to the landlord, so the tenant should not have to contribute to its acquisition costs through his rental payments. And nor should the taxpayer have to contribute, hence the non deductibility of interest provision.

        • mikesh 4.1.1.2
          23 August 2022 at 1:40 pm

          If my suggestion was in place then such a landlord would not have been able to enter the market in the first place; so the problem would not arise.

          • Belladonna 4.1.1.2.1
            23 August 2022 at 5:39 pm

            Well, yes, going forward. But you have to deal with the transition provisions.

            • mikesh 4.1.1.2.1.1
              25 August 2022 at 9:37 am

              There are always 'transition' problems when moving from one set of rules to another, but these problems can be dealt with: for example, the government's phasing in of the interest non deductibility transition over a four year period. However, in the present situation a property can be deemed to have been rented out on a freehold basis as long as interest is non deductible. Then it would be largely be a matter of ensuring that mortgages are not taken out for rental properties in future.

    • Kiwijoker 4.2
      22 August 2022 at 5:47 pm

      But yon David Farrar and his minnions are honourable men! ( apologies to Will)

    • Patricia Bremner 4.3
      23 August 2022 at 1:41 pm

      Absolutely Barfly. I call it "The Landlord's Lament"

      Finally they are going to pay for unearned capital gains.

      Some have changed from not investing in their stock to doing that as a way to claim.

      A changed playing field.

  5. newsense 5
    22 August 2022 at 5:21 pm

    Because they are confused.

    Or someone who doesn’t like it gave them a big donation and asked them too?

  6. Nic the NZer 6
    22 August 2022 at 5:54 pm

    "bringing in a ten year bright line test, an effective capital gains tax in all but name"

    Good to see the understanding that Labour has actually moved on this. The problem with economic policy in this area is we don't have an explanatory theory of economics which can actually explain what will and won't have desired effects. We don't know if a policy reform will or won't work and politics economic implications is frequently about speculating on what has, or hasn't actually had an effect on the market. That gets completely non-sensical when the debate factions can't even agree if a policy change has been made or not.

    I think its actually the non-interest deductibility changes which have had a really significant impact on the market however. Credit to Grant Robertson for going ahead with that despite any treasury miss-givings. For this policy to have the most effect the timing is right and this policy has been somewhat unique to NZ.

    • Belladonna 6.1
      22 August 2022 at 6:02 pm

      Yeah, exempting the family home from the bright line test, meant that the property flippers went right on driving up the market, while collecting all of the capital gains.

      It's hard to know whether the interest deductibility rules made an impact – as the banks were also tightening rules around mortgage lending at the same time – so difficult IMO to determine which had the greater influence.

      • Nic the NZer 6.1.1
        22 August 2022 at 6:20 pm

        Plenty of tightenings and loosenings to lending before without noticeable change in the property price trajectory.

      • mikesh 6.1.2
        23 August 2022 at 2:13 pm

        I'm inclined to think that all residential property, whether rented or privately owned, should be subject to the same rules. Therefore assuming that the brightline test cannot be applied to private home owners for political reasons, it probably should not be applied to landlords.

        However, there is an argument, which I think has some merit, to the effect that any interest which has not previously been deducted for tax purposes should be deductible against any liability for either capital gains taxes or brightline taxes. In time such a requirement would probably obviate any effect that the brightline tax might have.

        • mikesh 6.1.2.1
          25 August 2022 at 9:52 am

          Even a landlord who has not had to borrow could probably argue for 'opportunity cost' to be be taken into account as a reason why the brightline test should not be applied in his case. In other words, if it is accepted that interest should deductible against capital gain, capital gains taxes and brightline tests would become rather pointless.