This week: interest deductibility, pet bonds and PREFU

As the policy change was announced late in the day a week ago, when we’d already started sending out Media Links, we didn’t have much time to cover it. I’d like to talk about it a bit more today. 

The big impact of a policy change like this is on how rental owners are going to be feeling as we head into the election. There’s still uncertainty – polls are close and we don’t know who’s going to be in power after November 7. However, the biggest issue hanging over our heads is now gone. 

The return of interest denial would have nuked the rental sector. Landlords with no mortgage would have been fine, some with small mortgages would have coped, but those with more borrowing than that would have struggled. Rents would have gone up, maintenance would have gone down, improvements would have vanished and many would have sold. Anyone who tells you otherwise has no actual experience running a rental business. 

The most frequent question I’ve had following this decision is will it stick? What’s to stop Labour from going into coalition with the Greens and then blaming the Greens for having to reverse their stance? 

I think it will stick. Here’s why. 

First, Labour spent nearly three years bagging so-called ‘tax cuts for landlords’ and then burned a huge amount of political capital making a U-turn on that policy. There’s nothing to win from making another U-turn after the election. They won’t get back any of the votes they lost from making this decision, but they would massively erode trust with middle New Zealand as a result and face a huge backlash from over 300,000 landlords. 

Second, I think our advocacy was effective in making them face up to what would happen if they brought this policy back. Hipkins talked about not wanting to give landlords an ‘excuse’ to put up rents, which shows the message got through. 

Third, the tax purists in the party won the argument. The Herald’s Thomas Coughlan explains this well. The argument goes that when Jacinda Ardern ruled out CGT for as long as she led Labour, she created an impossible tax problem. 

When the Government tried to find a tax policy to dampen down the 2020s housing boom, they “alighted upon unusual interest deductibility changes not because they were a good idea (they’re not), but because Ardern had taken the good idea off the table.” The ‘good idea’ Coughlan references is CGT. (A better idea might have been to address the supply issue, tighten up monetary & fiscal policy and slow migration.) 

Even officials hated interest denial: “Inland Revenue warned that the change would push up rents, mean fewer new homes and impose massive compliance costs on a quarter of a million taxpayers, dragging on the economy. The Ministry of Housing and Urban Development raised the same concerns.“ 

None of these problems with the tax have changed. On the other hand, Jacinda is no longer leader, so CGT is back on the table for Labour. And, to put it bluntly, Labour will make more money from their CGT. Not immediately, but over time. 

So no, I don’t think interest denial is coming back. We’ll have other problems, but not that one. 

Another question is will it affect votes? Will landlords now be happy to vote for Labour and abandon the Coalition? Will a bunch of Labour voters run off to the Greens? 

Some landlords may go back to voting Labour, but I think most won’t forget that National, ACT & NZ First restored interest deductibility and saved the rental sector. They did more with this move to help renters than I think any renters will realise. It’s a shame that connection is unlikely to be made. I don’t think it will shift many Labour voters Green either. 

While I think it won’t do much to shift votes, I do think it takes away a major attack point for the Government that Labour would have had to spend hours defending. It’s cleared space for debate on other issues. Smart politics from Labour. 

I didn’t cover this last week, but ACT floated another policy change at our conference: to increase the maximum amount of pet bond that can be requested from two weeks to four weeks, to better reflect the risk and cost of damage from some pets. 

The reason I didn’t mention it last week was because I wanted to understand the detail a bit better, and after some discussions, I’m now much clearer on what they’re proposing and what they want to achieve – and I think it could be a good policy. 

The important thing to keep in mind with this policy is that you would be able to ask for up to four weeks. You might charge no pet bond, four weeks, or something in between. The important thing is that it must be appropriate to the pet. Four weeks for a hamster might be a bit over the top, but for some other pets it might be reasonable. 

That’s the key word to keep in mind: reasonable. Pet bonds aren’t a given, they’re not automatic, they form part of “reasonable conditions” for having a pet. What’s reasonable hasn’t been challenged in the Tenancy Tribunal yet, and may not be for two weeks bond, but a four-week bond could be. Especially if it’s seen as being used as a barrier to all pets. 

I’m told this policy is up for refinement – what do you think? Is allowing up to four weeks pet bond a reasonable idea? Would it make you more likely to be happy to take a pet? Would it ease your mind over the risks of potential pet damage? 

Send me your thoughts. 

PREFU is an official economic forecast published by the New Zealand Treasury prior to a general election. It’s required as part of the Public Finance Act 1989 and is designed to give everyone an objective view of the country’s finances as we head into election. So political parties don’t go making wild promises to spend money we don’t have. 

Why is that important and why am I mentioning it here? Because this morning the PM said the public will be “encouraged” by what’s in it. The day before, Finance Minister Nicola Willis said, “you’ll like what you see”, referring to PREFU. 

Has the government got better economic news than it has previously indicated? Are tax cuts in the mix? Will we see more signs of an improving economy? Is this the silver bullet the government thinks will win it the election? We’ll find out tomorrow, but better economic news would be very welcome. A stronger economy, more jobs, higher wages are all good news for the rental and housing sector. 

Property investors relieved at Labour’s landlord tax deduction promise

Labour rules out changing landlord interest deductibility

Are National’s tax attacks working? – The Front Page

Labour’s landlord tax deductible u-turn a ‘huge relief’ for both landlords and renters – property investors