It’s no secret the cost of living is starting to bite, and whether you’re a landlord or a tenant both sides are feeling the pinch.

Until recently, landlords had the ability to claim back all the interest cost of a home loan against the rental income received on a property. The deduction scheme was removed by the previous government in 2021, and reinstating it was part of the coalition agreement between National and Act. From the beginning of April, landlords were able to start writing off 80 percent of their mortgage interest, with that due to rise to 100 percent from April next year. It’s hoped the move will increase the supply of rental properties, and ease the financial pressures being experienced by both landlords and tenants. But can renters expect a reprieve, and will more people be enticed to invest?

WHAT’S THE SHORTFALL?

Rental prices have been on an upwards trajectory in recent years, with Auckland being one of the hardest hit centres.

“Last year the average rent in Auckland was about $685 per week. With inflationary pressures, we now expect average rents this year to hit the early seven hundreds which is a big figure” says Bayleys Auckland Residential Property Management Director Will Alexander.

The national average was $585 per week last year, with expectations that it will surpass $600. “Rents are growing because of supply and demand. That's fundamentally what's underpinning all of this.” Alexander says in February last year 404,863 bonds were lodged, just a year later it was just 412,000.

“That’s a difference of roughly 11,500 properties, and at the same time you have roughly 129,000 people coming into the country through migration.”

“So the rental pool has grown by 11,500 properties, but we’ve got an even bigger amount of people coming into the country.”

University and international student numbers are putting even more pressure on an already slowing market.

“So rents are getting more expensive, and that’s just simply because of supply and demand."

WILL INTEREST DEDUCTIBILITY PROVIDE ME WITH RENT RELIEF?

While many tenants will be hoping any savings might get passed onto them, Will Alexander believes it’s unlikely interest deductibility will mean reductions in rent.

“Look, rent reductions are really uncommon. My career spans almost 17 years, and I haven't really seen any reductions as commonplace.”

However, he does believe the bigger picture will still bring a lot of benefits to the market.

“It encourages investors to come back into the market. We need more of them because they’re doing a massive service for New Zealand by providing housing accommodation to people that either choose to rent or otherwise have to rent.”

“I think the pressure on landlords to increase the rent because they're getting squeezed will also reduce. So while rents might not come down, they may not necessarily continue to trend up either.”

Alexander also says interest deductibility rules don’t just apply to servicing a home loan, they also apply to improvements made to a property as well.

“That's a key piece, because we want to encourage landlords to improve their properties. We've got the healthy homes standards, and everything has to be finished by July 2025.”

“You can spend the best part of up to $20,000 putting in a good heat pump, extractors and insulation. That’s more appealing when you can deduct interest on those improvements”

With more people now choosing to rent for longer, incentivising improvements means tenants can benefit from living in a much healthier home.

WILL THERE BE A BOOST IN RENTAL SUPPLY?

'With some commentators estimating around $6000 - $8000 will go back into the pockets of landlords with interest deductibility, Will Alexander says it's a significant saving. "Once you pay all your expenses and everything is deducted, you're probably sitting between minus 3% and 0% or 1%, so relevantly your break even is quite substantial."

“When many landlords were making a loss, that will probably swing back around to cost neutral. You know, you're not losing, but you're not necessarily making in terms of cash flow.”

It’s pretty good news for existing landlords, but is that enough to entice new investors to dip a toe into the rental market?

Bayleys Head of Insights and Data Chris Farhi says agents reported a bump in activity but says we’re yet to see a full-on surge.

“I think the actual activity has been a little bit more muted. I think that's because investors have been hit with the same thing that everyone else has been hit with, which is interest rates, and difficulty getting finance.”

But as interest rates start to come down, it’s expected there’ll be a lot more activity from investors.

“Right now, the market is bouncing around a little bit, and the sentiment is switching every three months. You could see how if you're an investor who was making discretionary purchases, you might view the market at the moment as riskier, so you might just hold for a little bit of time.”

Farhi says in the long run however, with lower interest rates coupled with the tax changes, that’ll likely mean more growth in the supply of rental properties.

WHAT ARE THE OTHER FACTORS PUTTING PRESSURE ON RENTS?

While many are putting the onus on a landlord’s personal circumstance and things like interest deductibility, Will Alexander says rents are mainly determined by market factors. “It’s a supply and demand issue. And you'll find that a vast majority of owners don't want to increase the rents. A huge percentage want to provide rental accommodation at market rent.”

He says a problem arises when you’ve got 40 people wanting the same property.

“That’s got nothing to do with the landlord, that is supply and demand.”

“‘I think that people expecting rents will come down because of interest deductibility is quite naive.”