Just hype? Experts say landlords’ “threats” lack foundation and urge a rational response!

The public debate has put the new tax policies at the centre of controversy. Perhaps, as we see it, people simply need time to adjust to the new taxes. With house prices continuing to rise, investors remain the market’s ultimate beneficiaries.

In response to landlords’ various irrational “threats”, experts have also taken a position, saying these threats may lack foundation because the new tax costs “pale in comparison” with their capital gains.

The government also said last month that it would progressively close “loopholes” in the property market. Removing interest deductibility prompted many property owners to speak out in opposition. Despite continuing criticism, the government has remained firm. The Prime Minister said last week: “If the new tax policies do not work, more policies or legislation will be introduced in response!”

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Survey finds: 77% of landlords plan to raise rents

Economist: the impact ahead will be very limited 

This week, the Property Investors’ Federation (PIF) surveyed its members and found that 77% planned to raise rents and 22% planned to sell.

Property market analysts from CoreLogic and economists have offered their views on the issue.

Senior property economist Kelvin Davidson told the media: “We think the impact of the new tax policies over the next year or two could be fairly limited. The tax increases will be phased in and ramp up over several years, so the additional tax costs will actually have a relatively small effect on landlords over the next year or two.”

The tax rule changes will be phased in over four years, although some landlords have publicly said they have no choice but to raise rents immediately.

 “In fact, the extra cost from removing interest deductibility is fairly small compared with the income tax payable under the bright-line rules. The costs will be lower if people hold on. For many people, provided they can find the extra cash to pay the tax, the cheapest option is to keep the property, because selling now could incur a more expensive tax bill under the bright-line rules,” Davidson said.

Government: landlords do not have pricing power

Rents are constrained by what people can actually afford

Finance Minister Grant Roberston also said: “All the evidence shows that rent increases are constrained by what people can actually afford. Historical data shows us that rents tend to be anchored to incomes, so we do not believe landlords have pricing power. The UK introduced similar tax measures about four years ago, and rents did not rise.” 

Davidson also said: “We are fairly cautious about this argument. First, we do not think the new tax rules will have much impact on existing rental properties, nor will there be a large-scale sell-off. There is currently no clear evidence linking rent increases to government regulations. For example, previous changes to healthy homes rules or ownership costs, such as removing depreciation and restricting tax losses, did not directly lead to higher rents.”

New law took effect yesterday

Landlords could face prison for arbitrary rent increases 

In Germany, a landlord who unilaterally raises rent by more than 20% is acting illegally. An increase above 50% is considered profiteering, and tenants have the right to take the landlord to court, where they could be sentenced to 3 years in prison. Yesterday, the New Zealand Government urgently introduced a new law taking effect on 8 April, criminalising “cartel conduct”, which includes price gouging, bid rigging and undermining fair competition. Those convicted could face up to 7 years in prison. In other words, landlords could face imprisonment for arbitrary rent increases.

Commerce Commission chair Anna Rawlings said: “Conduct that raises prices, reduces quality, harms consumers and undermines fair market competition is known as ‘cartel conduct’.” She also reminded investors: “Landlords should make independent decisions about rents and rent increases to avoid breaching the cartel prohibitions in the Commerce Act.”

Under the Commerce (Criminalisation of Cartels) Amendment Act 2019, cartel conduct carries severe financial penalties: NZ$500,000 for individuals, and NZ$10,000,000 per breach for companies, or three times the annual gain, or 10% of turnover. Alongside the imprisonment penalties that took effect yesterday, this demonstrates the government’s zero tolerance for breaches of the cartel prohibitions.

House price growth is slowing

but property remains a very attractive investment

Economists said: “Even if the new measures cause the property market to grow more slowly than last year, property remains a very attractive investment compared with the lower returns on other assets, such as term deposits.” 

A set of figures shows that New Zealand property values will double every ten years. Since 2020, Auckland house prices have risen by NZ$750 a day. Let us do the sums: using Auckland’s current average house price of NZ$1,200,000, a conservative estimate puts the annual increase in a home’s value at around NZ$120,000. Some areas may deliver even higher investment returns. Compared with today’s low term deposit rates and volatile share market, property remains a highly popular investment.