Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (No 2)

Members, we now come to Part 5. This is the debate on clauses 184 to 198, “Amendments to other enactments”. The question is that Part 5 stand part.

The Supplementary Order Paper that was tabled had the Government applying interest deductibility limitations to large developers to give them a benefit. We wanted to explore with the Minister of Revenue why this is not applicable to all landlords, and if we could have the reasons why, please.

The tax treatment of property in New Zealand has been problematic for a number of years, and it’s led to distortions in the economy, which has been one of the reasons why, in recent decades, the proportion of existing homes in New Zealand that are owned by people who live in them has decreased, and the proportion of homes that are owned by people who own multiple homes and rent them out has increased. So the balance between owner-occupation and landlords, if you like, has changed.

We don’t think that’s socially desirable, on this side of the House. It’s in part being caused by the ability of a landlord who’s already got a property portfolio being able to leverage that portfolio to borrow, effectively, the full amount of the next purchase. Now, there are some constraints around that according to bank rules that are imposed by banks, or by the Reserve Bank. But in general terms, the ability to 100 percent leverage the next property has meant that landlords have been able to outbid the person who just wants one home for themselves, because of the tax position that they are in and the ability to leverage that class of assets through a mortgage to pay for the extra second-hand home.

So we as a Government moved to limit that by saying that we were phasing out interest deductibility for landlords for existing homes. That happens progressively over a number of years, and we’re partway into that. And it’s actually one of the reasons that’s credited by the Reserve Bank, and various other commentators, for the fact that this dramatic house price inflation that we had that was creating a bubble—which if it had popped quickly would have created risks to the economy more broadly. But it would also have caused significant harm to the more recent purchases of those properties if they were leveraged and they were, for example, a first-home buyer rather than a person who sold one home and bought another one in the same market.

Now, as we did that, we also were conscious that we actually do want an increase in rental stock, more in line with the rental markets that we see overseas where professional rental market investors get involved in larger developments. And so we initially agreed that there would be a period for which they would have this interest-free. There was a view expressed by the Minister of Housing that we discussed at Cabinet that we needed to have absolute clarity around that, that we were really trying to stimulate that part of the rental market for the large landlords, if you like, that type of long-term professional landlord rather than a short-term landlord. We wanted to make it absolutely clear that we were not trying to discourage that sort of investment, because we do need that additional rental stock. So that was the reason why the extension of interest deductibility for that type of investor was agreed. And that’s also the reason why we didn’t think that it should necessarily flow through to all other rental investors. We are trying to stimulate that section of the market.

Thank you, Madam Chair. Sorry for hiding behind the Minister here. On that point about wanting to increase the bill to rent land and the rental market for those long-term durations, leases, and also these bigger developers, can you comment on what will be the new section 58A of the Residential Tenancies Act—which is found almost at the back of the bill on the second to last page—whereby this applies to a tenancy of at least 10 years in respect to having build-to-rent land, and why the decision is there for 10 years. Thank you.

Madam Chair, thank you. For the reason that we’re trying to create a long-term rental market where people who—and there are people in society who will always need to rent; we want them to have security of tenure so that they can put down roots, they can become involved in their local communities, they can have assurance that their kids can go to the local school, and so that we can encourage security amongst that group of people. Now, one of the ways we can do that is to confer this additional tax advantage to the investors who are backing that sort of relationship with their tenant where they have a long-term lease that gives them security to live there as their kids go through primary school, for example. And we thought that was a reasonable quid pro quo. The cost of it to the Crown is actually not very high because the difference between the existing 10-year period for which deductions are—is it 10 or 20 years before? [Interruption.] Twenty years, sorry. So already the law allowed a 20-year interest deductibility period for a landlord. The net present value to a landlord of the extra deductibility and interests in years 21 and beyond, when discounted to the value today, 20 years earlier, is actually not very high. So in dollar terms, the cost to the Crown of this move is not high. And in dollar terms, the benefit to the long-term landlord is not very high. But it does signal an interest in us that we are trying to create this long-term rental class for the benefit of society by enabling people to have a 10-year-plus lease.

Now, this is very common in a lot of overseas jurisdictions. Indeed, in a lot of overseas jurisdictions you essentially—so long as you pay your rent and you don’t knock the property around, if you get a long-term rental you can essentially stay there for life. And, indeed, in some countries you can keep it in your family, so long as you’re still paying the rent. Now, we’re not going that far in this legislation, but you can see that we’re trying to weight the market for existing homes in favour of owner-occupiers, including first-home buyers, but in respect of rental stock we’re trying to create a longer-term opportunity for renters and investors alike.

Did any consideration—going into Cabinet—discuss the benefit to the renters who will bear this cost, and, with this exemption and distortion in the market from the industry-adopted building limitations, why is building around residential properties the Government’s focus solely?

I’m not sure I caught the gist of that question. Could I ask the member to repeat that.

Yes. Did anybody in the Cabinet consider the benefits and costs to renters who will bear this cost of this distortion?

Well, there is no direct correlation between landlords’ costs and rents charged to tenants, as was proven by the fact that during the period when interest rates were—and interest is one of the biggest, if not the biggest, costs to landlords. In the five or 10 years post the global financial crisis, when interest rates were consistently coming down, rents didn’t follow. So it proved the point that there is no direct correlation between those costs and rents—which is not to say that those costs don’t influence rents; of course they do. We believe that the changes that we have made to tax rules in the last few years have improved the outcomes in New Zealand. They’ve improved the ability of an owner-occupier to compete against a landlord for the purchase of an existing property—that’s undoubtedly true, it’s arithmetically easily proven—and it seems to be also shown by the correlation with the proportion of homes that are being purchased by occupiers rather than landlords. Since we’ve introduced this rule, the percentage of existing homes that have been sold to people who actually live in them rather than own them to rent them out—that percentage going to owner-occupiers has increased. We see that as evidence that what we have done has worked there.

In respect of the point that the member made—that this is distortionary—well, I can see the member’s argument in that regard, but property is a very unusual asset class, and because banks love the security of a first mortgage over land, it’s much easier to leverage a property transaction than it is any other business transaction. Indeed, many other business transactions are leveraged over property. Does that create a distortion? Well, we think that the status quo ante created a distortion whereby there are increasing proportions of existing homes that’ve been purchased by landlords, relative to owner-occupiers, compared with earlier years in New Zealand. So you could argue that that set of events was distortionary. Does it create other distortions in the economy? Not in a meaningful way, I don’t think. The ability to deduct interest, for example, if you’re a small business, or if you’re a person who borrows money to buy a small business, or to expand a small business or a medium-sized business or a large business—that borrowing is secured over land and that interest remains fully tax deductible.

Thank you, Madam Chair. I noted the Minister in the chair there talking about distortions and how the changes by this Government has made it easier for owner-occupiers to get into housing. But I’d just like to test a little bit around that. We heard interest deductibility come up as well. I remember, at the time, your officials, Minister, were saying that that would be passed on to the renter, and we saw some stats out today saying that rents are up $175 a week since Labour came into power. So you’ve got your aspiring person out there wanting to get into the housing market, to become an owner-occupier; it is more than likely they are renting. They are now facing $175 a week more in rental costs. What distortions have you seen, or has your ministry seen, about how that is potentially keeping these renters from entering a housing market to become owner-occupiers, given that it is now so much harder for them to save up a deposit?

A market that is growing generally clears at the marginal price of the increment to supply—it’s a pretty common economic principle. So the increment to supply in housing is a new house on land that didn’t previously have a house on it, generally. So if you want to have a more affordable house market, going forward, relative to incomes, you need to ensure that the supply of land and new houses on the land is efficient and competitive. The answer to that does not lie primarily in tax policy; the answer to that lies mainly in the planning system.

I think it’s interesting that in this House there’s widespread agreement—across both sides of the House, actually—that one of the reasons why house prices went so high in New Zealand, in the last decade or so, was that land prices went so high, and there were many reasons for that, including a drop in interest rates, and the advantages that landlords had competing against a first-home buyer. But one of the other ingredients—and it was overly strict rules that prevented people subdividing their land within an existing city boundary, or subdividing land on the edge of a city, and that drove up land prices which flowed through not just to the cost of the new house, which was, of course, more expensive because there were so few opportunities just to build a new house; land prices went up really high for the new house—that flowed through to the price of all other housing, because the market price was set by the marginal cost of the new increment to supply that was held falsely high, and that flowed through to existing house prices as well.

So I’m actually very pleased that, as a country, we’re in the process of overcoming that. I think this Parliament’s been quite brave in respect of some of those planning decisions, and we’ve reached across the political divide and we’ve actually freed up the rules that were so constraining the building opportunities, both to intensify in existing cities—we’ve removed a lot of the rules or are in the process of removing a lot of the rules that stopped people doing what they wanted to do. We’re not forcing anyone to do it; we’re just removing some of the inhibitions that stop them doing it. As a consequence, I think that, over the decades to come, you’re going to see land prices slowly readjust backwards to where they were.

Now, the cost of building a house, in general, tracks inflation. As the cost of building goes up, the house content of a new house increases. But we’re also doing things to try and remove some of the competitive constraints there—for example, some of the work that, again, the Minister of Housing has done to enable competitive products to be imported to compete against Gib products, which have been in short supply and prices have been driven up there. So all of these ingredients flow into house prices, and I think it’s simplistic to say that tax is the primary driver.

Thank you, Madam Chair. Thank you for your comments there, Minister. I’m not sure the question that I put forward, though, was addressed because it was around what the Government has done around interest deductibility and any inequities or distortions that has caused by denying want-to-be homeowners—aspiring homeowners—from entering the market, given that most of those costs have been passed on from the landlord to the tenant. And partially as a result of that, we have seen rents go up $175 a week and a lot of those aspiring people, they won’t be living at home. Some of them maybe live with their parents, which is very fortunate if they are, but a lot of them will be renting and bearing $8,000-$9,000 additional a year in rent that they won’t be able to save up for their deposit.

I’d also note some of the Minister’s comments that were made there around planning. And we do have two new planning bills currently. We spoke on the first reading late last year and there’ll be another one coming up soon from this Minister, I would assume. And some of the commentary around those has been that that will make it more difficult to get consents and to get things done. If the Minister has any opinions to the contrary on that, I would be very keen to hear them about how that will speed up the consenting and the delivery of more affordable housing. And I’m sure we can both agree, on both sides of this House, that we do have a real housing crisis. We do have what could end up being a generational divide where we have people—you know, probably a lot of people in this House are fortunate and they have been able to get on that ladder, but for a lot of people coming up to 20, 30 years and below, unless they’ve got the bank of mum and dad behind them, they are going to really struggle. So I would like to see how those planning rules are going to further that.

I did also note the Minister talked around what the housing Minister had done with building products. And the Minister is correct in that some of the upward pressure on that has come from building suppliers. I believe our colleague Andrew Bayly did suggest at some point last year that we look at approving what the Australians have approved. We have a pretty closed-up system here in New Zealand, and if we have a comparable jurisdiction like Australia approving building products, then why not, Minister, just allow those to be brought into the New Zealand market? As in the case with Gib, that would certainly make life a lot easier. It would enable the supply, it would help reduce some of that upward price pressure, and I’m sure there’s many other aspects of building materials where that could be extended to as well.

I can confirm that nothing in this part of the bill either affects the public house build or the private house build, which is going very well in New Zealand, but this legislation doesn’t impact upon it.

I move, That the question be now put.

The question is—no, actually, I’m going to go to Brooke van Velden, because Brooke’s just arrived, in fairness.

Thank you, Madam Chair. I’m rising on behalf of ACT and mum and dad landlords and tenants up and down New Zealand to talk about the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (No 2). This is an unusual bill to talk about—

💬 Hon Members: Part 5.

Yes, I do recognise this is on Part 5, but this is an unusual bill to be talking about residential tenancies Acts and interest deductibility changes and landlords, but that’s what we have in front of us because we’ve seen some shoddy lawmaking by this Government and we’ve seen some shoddy policy situations come from this Government. And I’m talking about the interest deductibility limitation changes that the Government put through a couple of years back. It applies to this bill because when they changed the build-to-rent criteria and said, in fact, “We don’t want to have large-scale developments subject to our Government’s changes for interest deductibility changes.”, they’ve now had to go, through this bill, and make changes to the Residential Tenancies Act to allow for the exemption for big build-to-rent developments—and you’ll find it all on the last page of this bill.

This goes to show why the Government should never have put in place interest deductibility limitation for landlords, because they then, last year, decided they got it wrong. But they didn’t get it wrong for landlords who are mums and dads, for people who have one or two rental properties. They said that they got it wrong for large-scale build-to-rent investment. And so because they thought that their interest deductibility limitation changes would negatively impact on investment and development in New Zealand for big developers, they’ve sought a change in this bill just for large-scale developers.

The ACT Party says if we’re going to have an exemption to our interest deductibility changes, we should make an exemption for all mum and dad landlords, because the problem that affects the big developers also affects the little guys too. And so that’s why the ACT Party is calling for the Government to extend the exemption for interest deductibility changes and extend it to all mum and dad landlords up and down New Zealand.

We welcome the fact that the Government made a mistake and they decided to rectify the issue, and they’ve made an exemption for the interest deductibility limitations for large-scale developers. But they should make that exemption for all landlords and all tenants, because we’re living in a cost of living crisis. People are seeing that rents are going up, and all of their costs: all their food, their petrol, childcare costs—everything you can think of feels like it’s getting more expensive. But they have made an exemption just for the big guys and not for the mum and dad landlords, who will now be passing on the interest costs to their tenants, increasing the cost of living for renters up and down New Zealand. That’s not fair, it’s not right, and the Minister should listen to Kiwis. He should do the right thing, take this exemption further, and support ACT’s call to get rid of the interest deductibility limitation changes that have only imposed more costs on landlords and more costs on tenants while we’re living in a cost of living crisis.

The fact that we now have to have a whole change and an amendment to the Residential Tenancies Act because we now need it to define a whole bunch of stuff around what it is to be build-to-rent land so that these developers could be exempt from interest deductibility changes shows why it never should have happened in the first place. Thank you, Madam Chair.

I’ve already addressed those issues on a couple of occasions, but I will, in a summary form, readdress them. There’s already, for a new build, a 20-year interest deductibility period. This extends it in perpetuity in return for a 10-year-plus lease.

I move, That the question be now put.

Motion agreed to.

Brooke van Velden’s amendment deleting clauses 195 to 198 set out on Supplementary Order Paper 321 is out of order as it was not lodged with 24 hours’ notice.