Property investors losing one of last ways to keep interest deductibility

Friday, 5 May 2023

If mortgage interest deductibility stays in place, Michael Burge says a lot of investors will be in trouble.

Investor and property coach Michael Burge has all 17 of his investment properties with a community housing provider, providing for social housing tenants.

That means that, while other landlords have their ability to deduct home loan interest rate expenses from their rental income for tax purposes phased out, his remains untouched.

Burge said he advised many of his clients to do the same thing, and investors often discussed renting to community housing providers (CHPs) in online forums.

“I am seeing more people being more open to wanting to do it because of the interest deductibility rule,” he said.

But the Ministry of Housing and Urban Development (HUD) is progressively closing this avenue to investors, unless they are offering new-builds – to which the interest deductibility rules do not apply, anyway.

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Burge had noticed community housing providers (CHPs) were also offering lower rents than in the past.

He said CHPs used bond data to establish median rents, and in some areas where providers had previously offered landlords upper-level rents, they were now generally offered closer to the median.

“I think funding is drying up a little bit, or at least being allocated to other parts,” he said.

At the end of June the number of public houses was 76,271. Of those 64,870 were Kāinga Ora properties while 11,401 were CHP properties, according to HUD’s figures.

A HUD spokesman said it was not possible to identify how many properties were leased by CHPs from landlords, because that information was held by each individual CHP and there was no centralised figure.

HUD also did not keep a register of private landlords who wanted to provide their properties for public housing.

“We are unaware of any sentiment that private landlords may be wanting to fill their properties with social housing tenants to retain any tax advantages,” the spokesman said.

But HUD does have one measure that suggests the number of private rentals being allowed to turn into public houses is shrinking.

When a home is swapped from another purpose to public housing, it is called a “redirect”, and all redirects must be okayed by HUD, if the community housing provider wishes to receive money from the Income-Related Rent Subsidy (IRRS), which is essentially government cash available to top up social housing tenants’ rent.

In the four years prior to the mortgage interest deductibility rule change, an average of 72 private properties per month were redirects.

This is the home after he renovated, prior to renting to a community housing provider.

This was one of the homes as it was when Michael Burge bought it.

Since October 2021, when the phase-out of mortgage interest deductibility began, that number has dropped to an average of 49 per month.

The HUD spokesperson said under the Public Housing Plan for 2021-2024, there was an expectation that the number of new purpose-built public housing units would increase, and there would be a progressive decrease in the proportion of private market homes that HUD redirected for public housing.

”The policy for this was determined because while redirects can be delivered quickly and increase CHP holdings, they do not add new housing, and remove existing homes from other parts of the market, exacerbating supply and affordability pressures,” the spokesperson said.

To support this, HUD only accepted redirects in limited circumstances, including where they supported specific programmes or initiatives, for example where immediate access to housing was required, or they allowed community housing providers to progress redevelopments of their own.

Burge said he had become more aware of CHPs being pickier about which private rentals were allowed to become social housing.

“Some areas still accept existing stock, but there's a push towards only accepting or ideally only taking on new builds,” he said.

“My portfolio, a lot of it’s in rougher sort of areas, so it’s typically going to be people on Winz, benefits or social housing anyway.”

This could cut off one of the last methods investors had to continue deducting their mortgage interest, which he said quite a few investors were reliant on to keep their rentals afloat.

He said the number of investors struggling would increase markedly, should interest rates stay high, and the new rules be kept post-election.

Investors lost their ability to deduct 25% of their mortgage interest during the last tax year, lost 50% this year, and this will increase yearly by 25%.

“At the moment at 50% it's pretty bad. At 75% and 100% non-deductible, if rates are still high in a year or two, most will have to sell I would think.”

Burge declined to comment on how reliant his portfolio was on mortgage interest deductibility.

He said by restoring unliveable homes, he was doing a social good, and he questioned why new-builds should be allowed to retain mortgage interest deductibility when he could not.

Burge often speaks about the “cashflow principle”, which he said many investors have ignored.

That was the ability for rental income to cover expenses, including mortgage payments, rates, and maintenance.

He said most investors had taken on large debts to purchase their investment property and had to contribute their own money to top up rent in order to make repayments.

Since the Government changed the rules to make most investors unable to deduct mortgage interest payments from rental earnings for tax purposes, Deloitte predicted many more rentals would become cash flow negative, effectively meaning they made a loss every month.

Some investors have reported facing paying thousands in additional tax, on account of the large debts and risk they took on to buy rentals and rising interest rates.