The Government finally released information on its policy around interest deductibility with an exemption to social housing tenanted properties. We look at the potential issues with such a decision.

If you are a property investor, you are now likely to be impacted by the Government’s new policy that limits the ability to deduct interest against rental income. The highly controversial policy was announced back in March this year, yet, we have had to wait until now to see what this may look like.

The Government has a major issue as the Social Housing Register has increased rapidly over the last five years. In June 2016, there were only 3,876 applicants on the social housing register and when Labour came to power after the September 2017 election, the register had 5,844 applicants on the list. In just five years, this has ballooned to 24,474. Since Ardern has been Prime Minister, the register has increased by 18,630 or a staggering 318.8%. This is the Government whose key election promises back in 2017 was to eradicate child poverty and fix the housing crisis. So far, things are not going according to plan. In September 2017, the median weekly rent in New Zealand was $400 whilst the median house price was only $525,000. Since then, the national median rent in New Zealand has increased to $478.00, an increase of 19.5%, however house prices, as we all know, have skyrocketed. In June 2021, the median house price in New Zealand had increased to $820,000. That’s jumped by $295,000 since Ardern has been Prime Minister. This is an increase of 56.2%. House price inflation has been out of control.

The Social Housing Register: June 2016 to June 2021

The Social Housing Register waitlist from June 2016 to June 2021. When Labour came to power, the number of applicants on the register was at 5,844. It has since more than quadrupled. Sourced Ministry of Social Development
In the election campaign in 2017, Jacinda Ardern stated that she wanted to build a country were every child grew up free from poverty. There is still a lot of work required.

As rents and house prices have increased, the waitlist has also ballooned in size. People and families on lower incomes have been priced out of the private rental market and have been forced onto the social housing register. Many more renters need accommodation supplements to help bridge the gap. The need for social housing is apparent and obvious.

Looking back at the Government’s announcement on tax changes for property investors, they announced what properties would be exempt from the controversial interest deductibility rule. Amongst the announcement around what properties were to be exempt, we were surprised to find out that property used for emergency, transition, social or council housing will be exempt from the interest deductibility rule meaning that you will still be able to offset interest against income. This is significant because landlords may be paying as much as an extra $50 to $100 per week in tax as the phasing out of interest deductions takes effect. As of April 2025, you will not be able to claim any interest on a standard residential rental property that isn’t a new build.

Then you can do the calculation around savings if you go out and buy an investment property and use it for social housing. Let’s look at the following example.

I decide to buy an investment property at the June median house price of $820,000. I take a loan at 4% over 20 years. I will be paying over $370,000 in interest. Doing a rough calculation of 30% tax, I will be saving myself $110,000 by being able to offset interest against income over the duration of the loan. When you look at numbers, it’s a very tempting proposition.

What this means is that investors may decide to lease their investment property to the likes of Kainga Ora or agencies such as Link People who will then use the property for transitional or social housing. There are obvious risks associated with transitional housing. However, those risks can be offset with agencies agreeing to reinstate the property to its original condition (minus fair wear and tear) and guaranteeing market rent. The state is not going to default on rent payments. When you work out the maths, if a landlord is going to save themselves anywhere in the region of $5,000 in tax per year, the risks look more and more appealing.

What has happened to house prices since Labour have been in charge?


September 2017 September 2021 Difference

% Change

Median House Price New Zealand

$525,000 $795,000 $270,000


Median house price in New Zealand whilst Labour have been in Government. Sourced REINZ.

The question we are asking ourselves is whether we will savvy investors turn to older stock that will no longer appeal to more streamlined investors. You may find yourselves competing with fewer buyers and if successful, you can simply then rent out the property to a social housing provider. The state pays your rent whilst you offset the interest reducing your tax bill.

It could lead to issues in neighbouring properties if the occupant of a social house is not someone who is focused on positive relationships within the community. We do not want to stereotype the occupants of transitional housing, but the reality is that you will have a higher percentage of risk regarding having an antisocial and problematic occupant who causes issues within the community.

It can become a dilemma for a property management company if an owner instructs the property manager to lease the property to a provider of social housing. You have no say as to who goes into the property, and this will in some cases lead to issues in the communities that we look to build. Does a property manager refuse and risk losing the business, or do they accept and try to work proactively with the provider to ensure that the community is not being exposed to unnecessary risk as well as antisocial behaviour? Then you may find issues in unit title developments and in strata management blocks. Put the wrong occupant in an apartment block and could have dire consequences for the occupants and owners of neighbouring apartments.

The other issue that may arise due to the nature of this policy is that we may see a further reduction of stock from the private rental pool. If landlords decide en masse to move away from the private to the social sector, you could see further issues around the shortage of rental stock. This could lead to rents increasing at even higher rates which will then lead to more people turning to the state to seek assistance. We are in a vicious circle that may not be broken until sufficient housing stock becomes available.

Then you get a situation where young families renting give up in trying to get ahead. Why should I battle in the private rental market when I can apply for a brand-new state house? I end up on an income-related rent subsidy and my rent is capped at 25% of my income. This is not the attitude we want to encourage whilst our economy is freefall due to lockdown and annual inflation surged to 4.9%, the biggest annual movement in more than a decade.

To further exasperate the issues, one local council is in dire straits as it haemorrhages money as it tries to provide affordable rentals from its own housing stock. Wellington City Council’s social housing arm City Housing is scheduled to become insolvent by June 2023. The council does not qualify for Income Related Rent Subsidy (IRRS) and therefore ratepayers are subsidising rents. This may lead to the council outsourcing its housing portfolio to community housing providers in order to be able to claim the IRRS.

Potential tax saving over 20 years by renting to a social housing provider

Your purchase a standard property and rent it to a social housing provider, you could be saving in excess of $100,000 in tax over 20 years.

Everywhere you look, there are major issues in the social housing space. The only real solution to the problem is to increase supply drastically. A surprise announcement that there will be a collaboration between Labour and National in developing a housing policy that aims to increase housing supply by over 100,000 new homes in less than a decade is a good place to start. A greater intensification of our cities and reforming of the Resource Management Act is a step in the right direction.

The social housing tax policy could be another Government decision that has unforeseen consequences that can negatively affect our communities. On the flip side, everyone in New Zealanders deserves the right to have a roof over their heads in a warm, safe, and dry home.