Interest rate relief: Has the Government opened the floodgates to property investors?

1. A win for property investors

Over the weekend the Government confirmed that property investors will get 80% interest deductibility from April 1 this year, and 100% from April 1 2025 – although it has kept the figure at 50% for the current tax year, instead of 60% as was set out in National's power-sharing agreement with ACT.

Setting aside the politics, what do the changes mean for property investors and the housing market as a whole?

In a nutshell, not much. Yes, existing landlords will have smaller tax bills in future, and new landlords will also save some tax, possibly bringing forward a few entrants to the market. But with rental yields low and mortgage rates high (at least for the foreseeable future), this is unlikely to open the floodgates to property investors.

The ability to claims interest costs won't, in most cases, turn a loss-making property into a profitable one. New investment purchases will still need to be significantly topped up out of other income.

2. But who owns the most investment properties?

Still with property investors, CoreLogic's latest Women and Property report found that ownership rates are similar for men and women across all dwellings but there’s a significant gap when it comes to rental properties, with 26.3% owned exclusively by men, and 21.6% owned exclusively by women (the remaining 52.1% of investments are in mixed-gender ownership). It’s difficult to be sure exactly what’s causing that wedge in ownership rates, but it seems pretty likely that the gender pay gap – estimated to be 9% at last count – will be a primary factor. Lower wages for women simply makes it harder to access the investment property market.

3. Keeping a close eye on first home buyers (and investors)

First home buyers have routinely accounted for 26-27% of property purchases over the last few months - and the number of deals has been reasonably solid too. First home buyers are often tapping KiwiSaver for at least part of their deposit, and they’re also making full use of the low deposit lending speed limits at the banks. Indeed, recently about 80% of low deposit lending across all owner-occupiers has actually been going to first home buyers, while 35-40% of first home buyers are entering the market with less than 20% equity.

Of course, first home buyers have also probably benefitted from the pull-back by mortgaged investors, who have been struggling to get the sums to stack up (see above). These factors might just start to shift a little, however, over the next six to nine months, so investors remain a key group to watch.

CoreLogic chief economist Kelvin Davidson: "New investment purchases will still need to be significantly topped up out of other income." Photo / Peter Meecham

4. Tough for tenants, migration past its peak?

Another factor that might be pushing some people towards first-home ownership more quickly is the recent strong growth in rents. Indeed, the Stats NZ figures based on new tenancies have been showing annual growth of 6-7% in recent months, roughly double the long-term average. Auckland and Christchurch have been hotspots, no doubt driven by strong net migration inflows and tightening supply of rental stock.

Unfortunately for tenants, this week’s latest refresh of the figures, covering February, will probably show more large rises in rents, although this trend will have its limits, given that rents are already very high in relation to average household incomes.

Speaking of migration, this Thursday we’ll get the next monthly release, covering January, and it might confirm that the peak for annual net migration inflows to New Zealand has passed, although calling the peak is difficult, given the tendency for these figures to be heavily revised. But even if the peak is behind us, the figures will probably still be pretty strong, boosting the demand for rental housing.

5. Fixing shorter and shorter

Lastly, the Reserve Bank’s mortgage lending data showed that 46% of new loans in January were fixed for up to one year, the highest proportion since 47% in June 2021. This pushed up the overall share fixed for less than two years to 76%, the highest in the (short) history of this series. These numbers can be a bit volatile, but nevertheless, there’s clearly still a strong preference at the moment to fix for short periods – and that’s despite one-year mortgage rates still being quite a bit higher than say 3-5 year rates. In other words, borrowers seem to be confident rates are at a peak, and are prepared to pay a bit more now to avoid locking in for too long and having to overpay later.

- Kelvin Davidson is chief economist at property insights firm CoreLogic