More than 50,000 property investors report losses in 2023
More than 50,000 New Zealand property investors are struggling with losses on their rental properties, according to Inland Revenue data.
The recently released figures show that in the 2023 tax year, 53,350 taxpayers reported negative rental income, meaning their rental earnings failed to cover expenses. The average loss recorded was $9,020.
Deductible interest and rising costs
This figure might actually underestimate the financial strain on property investors, as it reflects losses after allowable deductions, RNZ reported.
In the 2023 tax year, investors could only claim 75% of their interest costs as a deductible expense. In the previous year, 51,740 taxpayers faced losses, with an average shortfall of $7450.
The situation is expected to worsen as rising interest rates and further reductions in deductible interest costs continue to challenge investors.
Losses ringfenced for future rental income
In New Zealand, rental property losses are ringfenced, meaning they can only be used to offset current or future rental profits. Unlike in some other countries, these losses cannot be applied to other income streams.
However, interest deductibility is being gradually reinstated, allowing investors to offset more of their interest expenses and potentially reduce their tax burdens over time.
Recent property investors hit hardest
CoreLogic’s chief property economist, Kelvin Davidson (pictured above), explained that recent buyers are the ones most likely to face losses.
“If you bought a rental property in the last 12 months or 24 months, it’s pretty unlikely you’re going to be making a profit,” Davidson said.
However, he also noted that most landlords have been in the game for a longer period and likely expect initial losses with the hope of future rental growth and capital gains.
Davidson pointed out that many investors focus on paying down their mortgages over time to eventually achieve cashflow-positive properties.
“Capital gains are nice, but for most people I speak to, it’s more about reducing the debt over time,” he said.
For investors, cashflow is a controllable factor, unlike unpredictable capital gains.
Negative gearing: Still viable for some
Sarina Gibbon, spokesperson for the Auckland Property Investors Association, remarked that negative gearing remains a common strategy for many investors, particularly those starting out.
“Over time, with paying down debt and growing their equity, investors can reverse the cash imbalance to their advantage,” Gibbon told RNZ.
However, current lending restrictions and rising interest rates have made this strategy less accessible to new investors than it once was.
Gibbon believes that the market is shifting toward wealthier investors, which has broader implications for the rental sector.
“We are moving towards a generation of investors who are likely to be more cash rich from their personal circumstances...and that demographic shift has implications across the rental sector,” she said.
Interest Deductibility and Housing Demand
ANZ economist Henry Russell suggested that reinstating interest deductibility could have a notable impact on housing demand. He explained that investors’ ability to claim losses against rental income tends to push property prices upward.
“The reinstatement of interest deductibility means all else equal, the net present value of a given housing investment increases, supporting housing demand,” Russell told RNZ. “That additional demand is likely to put upward pressure on prices.”
However, he acknowledged that other factors in the housing market could influence prices as well.
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
