Prime Minister Jacinda Ardern has no regrets removing tax deductions on interest costs for rental properties, which she describes as a "tax loophole".  

Property investors have been threatening to increase rents after the Government announced on Tuesday they will phase out the "tax loophole" over four years, among a range of other measures to help bring house prices down. 

But the Prime Minister is standing by the policy, despite it taking many in the industry by surprise. She said it was necessary because property investors now make up the biggest share of buyers in the housing market.

When asked on Thursday if the Government went too far, Ardern said "no". 

"I think what we were responding to was incredible need in the space of 12 months seeing house price growth over 20 percent. That was unsustainable. It presented a risk to existing homeowners to potentially a housing bubble. That was a risk for our economy and it was also locking people out of the housing market." 

Ardern said it wasn't a panic-move.

"Absolutely not, in fact, we took our time," she said. "We looked at the evidence about what was happening in the housing market. If you look at the December quarter from the end of last year, we saw a significant proportion of the market that was made up of investors - particularly a large number of investors who have multiple properties."

Ardern said the "tax loophole" that was "encouraging potentially speculative behaviour", and the Government acted to remove it. 

The Government is also increasing the bright-line test from five years to 10. It requires income tax to be paid on any gains from residential property. The family home has always been exempt and new-builds will now also be exempt. 

NZ Property Investors Federation president Andrew King told The AM Show on Wednesday it's not "scaremongering" to suggest the measures could push up rents, as landlords seek to recoup the lost income from their tenants.

According to Stats NZ's recent rental price data, rental prices were up 3.1 percent in December 2020 compared to the same time in 2019. Stats NZ said the rise was likely caused by strong demand as well as new rental standards for landlords.

Ardern said the Government has tried to protect renters by limiting the number of times a landlord can make increases.  

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"We have put in protections for renters. One of those includes really limiting the number of rent increases - they can only have one per 12 months," she said. 

"What also makes a difference to rents is building more houses, which is why all of the changes we've announced won't apply to new-builds, to encourage people if they do want to be a property investor to invest in new-builds.

"Ultimately, what we've tried to do here with this package is acknowledge the fact that actually, the problem we face in New Zealand is complex - there isn't one single thing that is going to be a solution."

Ardern said the housing package isn't just about tax loopholes. 

"It's also about, for instance, building the infrastructure that we need to get land for housing ready," she said, referring to the $3.8 billion fund to pay for necessary services, like roads and pipes to homes, which are currently holding up development.

Also included in the Government's announcement were changes to the First Home Grant and First Home Loan schemes, mainly in the form of higher caps on incomes and property values that qualify.