Interest Deductibility, when will it return?

The long awaited 2023 New Zealand election results are in, signalling an anticipated change in government. While signs point to a National-ACT partnership taking the lead, the nitty-gritty details of their policies are still in the pipeline. Both parties campaigned on repealing the removal of interest deductibility, but when will this happen?

Removing the ability to deduct interest as an expense against rental income was a major change affecting the property market in 2021. It likely contributed to the rapidly increasing rental prices as landlords look for every available option to manage the increases in costs to hold on to their properties that provide accommodation to a third of the country’s population.

Based on our own research, we haven’t been able to find another country that has put such restrictions on landlords with regard to interest deductibility. In the U.S. you’re even able to deduct interest on your personal/owner occupied property (with some conditions). So, testing the theory of removing interest deductibility in New Zealand in an attempt to keep the balance in the property market, in an effort to slow down increases in both house prices and rental prices was an interesting move with no proof of concept.

In the midst of the pre-election uncertainty surrounding interest deductibility, one thing is crystal clear – Kiwis, both homeowners and renters, have been feeling the pinch of the rising cost of living. As we eagerly await the new government’s announcement, let’s dive into the housing strategies presented by the major parties over the past year.

ACT’s Swift Moves:

ACT is all in for an immediate comeback of mortgage interest deductibility from April 2024. This move is designed to swiftly ease the financial load on rental property owners dealing with surging interest rates and tax bills. It’s a plan to offer quick relief to property investors and give the housing market a little push.

National’s Steady Approach:

On the flip side, National suggests a gradual return of interest deductibility for rental properties, aiming for full restoration by 2026. This laid-back approach is proposed for a smoother transition period for property owners and the housing market as a whole. National’s intent is a measured return to the previous tax policy, looking for stability in the property sector.

As these parties pitch different timelines for interest deductibility, it begs the question: How will these variations play out in potential coalition talks? The outcome will definitely shape New Zealand’s housing market and have an impact on property owners, renters, and the wider economy. Finding a sweet spot between timely relief and a gradual shift will be key in these political discussions.

What about New Zealand First?

While all eyes were on Winston Peters, New Zealand First could still play a part in the coalition talks. The party gives a strong shoutout to home ownership and housing quality as core elements for societal progress and equality. Through a series of policies, including reinstating interest deductibility, New Zealand First aims to create a housing environment that invites widespread home ownership and high-quality living for everyone.

While these parties have similar housing values, the when and how of relief on interest deductibility, and the broader economic impact, are still up in the air. The coalition talks ahead will be critical in deciding the future path of housing policies in New Zealand.