There seems little point in arguing about the outcome if we are not prepared to look at the potential causes.
1: From February 11, 2021, the Residential Tenancies Act was changed so a fixed-term tenancy automatically becomes a periodic tenancy at the end of the fixed term.
The landlord’s ability to end the tenancy is limited, meaning the landlord has no automatic right to have the property returned.
This change was introduced to give tenants more certainty of their ongoing right to reside in a property.
However, in the Central Otago market, some owners of holiday homes have historically been happy to rent them out for the majority of the year (10 or 11 months) and occupy them at the end of the tenancy. However the change in the Act has meant some properties have been removed from the rental pool.
Those houses now sit empty, awaiting the landowner’s use.
The law changes to the Residential Tenancies Act were well-intentioned but have had a significant impact on these types of properties.
The risk to the landowner that they cannot gain the use of their own property for holiday purposes has meant some have chosen to forego the rental to guarantee they can use the property when they want.
While this law change does allow a landlord to end the tenancy if they intend to occupy the property themselves, they must occupy it for a least 90 days.
These property owners are then faced with the holding costs of the property, and some have looked to use Airbnb income to supplement this.
These properties were never going to go into the rental pool given the changes to the Residential Tenancies Act and the criticism of Airbnb in this area is inappropriate.
2: Another legislative change that has lessened the housing pool is the Government’s healthy homes standards.
Rental properties, other than the short-term rentals, must now comply with various insulation and dampness standards.
For some older holiday homes, the practicality of complying has simply meant it is easier to simply not rent the property.
3: The final legislative change and maybe the most significant in relation to these types of properties was the Government’s move to limit interest deductibility on residential rental properties.
Crudely, what this meant is that for taxpayers with debt on their property, it was suddenly 33% less attractive to rent out their properties. This has swung some properties out of the rental pool.
The best way to understand this is by way of example. For someone who was historically renting a property out at say $700 a week and paying $470 a week of interest this gave them a $230 profit and with tax of $76 being paid at 33% they were left with $154. Under the new tax rules which came into effect on October 1, 2021 (there is phasing for existing property owners) for the same property the tax to pay is now $231 (they are now being taxed on the income with no deduction for the interest).
This means there is no surplus cash from renting, and they are $154 worse off per week than they were previously. A taxpayer in this position now has a reduced incentive to rent the property out.
I have no doubt the unintended consequences of these changes have driven in part the removal of houses from the rental pool in Central Otago.
Blaming property owners for making quite logical decisions about the use of their property will not change the outcome.
If government policy is driving behaviour people don’t like, the solution is to change government policy, not criticise the property owner for making a valid decision based on the policy.
I would encourage people to focus debate on what is causing the behaviour (fewer houses in the rental pool) rather than the outcome of the behaviour.
• Michael Turner is a tax partner at Dunedin firm Polson Higgs.
