Landlords were taken aback earlier this week when the Government announced they would no longer be able to deduct interest payments from rental incomes to reduce their tax liability.
But it's not a policy that's come right out of the blue, having been phased in over the past four years in the UK.
"We drew on the experience of the United Kingdom - they've done the same thing, they applied it retrospectively, they did that over a few years," Prime Minister Jacinda Ardern said on Tuesday, answering questions about the policy.
"We chose the four-year period.. in part because that's the way in which the United Kingdom government did exactly the same thing," Revenue Minister David Parker added.
But considering all the things New Zealand does better than the UK - our COVID-19 response perhaps being the most notable example - why would we copy something the Brits did?
The truth is, we're not exactly.
"What the UK did is equivalent to going halfway to doing what New Zealand did," Westpac chief economist Michael Gordon told Newshub.
The UK's policy was introduced six years ago by then-Chancellor of the Exchequer George Osborne (the UK's equivalent of our Finance Minister). It kicked in 2017, after he left office. That year, investors could only deduct 75 percent of their interest; from 2018, half; 2019, a quarter; and from last year, none at all.
"They will have to wear the higher tax bill or sell out, maybe to another investor, at a loss," said Gordon.
Analysis published on the UK government's website in early 2017 estimated only one-in-five landlords would be affected, mostly those with "above-average incomes".
Effect on house prices
The effect on house prices was almost instantaneous. In the previous four years, the average price of a house in the UK had gone up an average 6.5 percent annually, according to propertydata.co.uk - from £174,592 to £224,719. The annual price change in mid-2016 was 8.2 percent; by June 2017 it was 4.9 percent, and in mid-2019 it had fallen to 0.6 percent - below inflation.
From mid-2017 to 2020 (before the effects of COVID-19 started wreaking havoc on markets worldwide) the average price inched up to £232,865 - just 1.4 percent a year, below inflation. Over that same time period, the median New Zealand price increased an average 6.9 percent a year, according to REINZ data.
Recent CoreLogic data - which the Government uses in formulating housing policy - showed more than a quarter of all New Zealand residential property sales are currently going to investors who've borrowed money from the bank. When the UK began its crackdown, Gordon says they were at only about 15 percent.
"In New Zealand investor lending is more prevalent than it was in the UK, and we've seen a more dramatic ramp-up in prices than they did. We've seen 11 percent price gains in the last four months."
Effect on rents
The policy didn't have the same effect on rents - but nor did they spike upwards, as landlords here have threatened. Similar fearmongering in the UK turned out to be unfounded.
"There are the usual suspects who bleated about how rents would surge higher and so on, that didn't really happen," said Gordon.
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"There were some rent increases, but not really worth writing home about. In fact, rent inflation probably had already peaked by the time this policy was announced."
That's because, he says, rents are "constrained by renters' ability to pay". In other words, if renters can't afford hikes, the hikes won't happen - otherwise landlords will find themselves without anyone to rent to.
"They will have to wear the higher tax bill or sell out, maybe to another investor, at a loss," said Gordon.
This echoes Finance Minister Grant Robertson's comments this week that rents were determined by supply and demand, not necessarily landlords' tax obligations, which Gordon said was "essentially true".
Gordon said he expects an immediate drop in house prices - but isn't ruling out a UK-style stagnation instead.
UK statistics show aside from a brief blip in the wake of the global financial crisis, average rents nationwide have steadily increased over the last decade-and-a-half - the tax changes in 2017 appear to have had no effect whatsoever.
But if you exclude the UK's biggest city London, rents have stagnated since 2017 - rising just a single pound in three years, to £159 ($313).
Differences between the NZ and UK policies
There was one area where the UK policy had the potential to hurt first-home buyers - new builds kept up through 2017 and 2018, perhaps due to contracts already being in place, but fell sharply in 2019. Less supply without a corresponding drop in demand would mean higher prices - and that's what happened in 2020 (though it could be hard to separate the effects of the drop in construction from those of the pandemic, which drove prices up here faster than ever before).
Here's where the New Zealand Government's policy might be an improvement on what the UK came up with - new builds are exempt from the tax changes. Ardern said this would "create clear advantages for those who are going to invest in new builds" rather than those who just buy up existing property, outbidding would-be first-home buyers and doing nothing to solve the housing crisis.
Another difference is that the UK still allows investors to claim some of their costs back - but it's progressive, so the more money you make, the smaller share you can use to reduce your tax obligations.
"It's equivalent to making it partially deductible, rather than removing it altogether," said Gordon.
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While our new tax rules apply to any homes which change hands from Saturday, the exact way they'll work hasn't been decided. There will be public consultation between now and October, when the changes are expected to become law - backdated in what law firm Duncan Cotterill called a "significant departure from previous practice".
What effect might the changes have?
Gordon said he expects an immediate drop in house prices - but isn't ruling out a UK-style stagnation instead.
"House prices tend to be quite sticky, especially on the downside. So it may end up looking like a prolonged period of slower growth, rather than a one-off drop."
A drop in prices would help not just first-home buyers but future investors, who won't need to charge as much rent - but those who've already taken out massive loans might have to sell if they don't think the lowered returns are worth it.
Recent changes to the Residential Tenancies Act mean rents can only go up a maximum of once a year, and many landlords already put their latest hikes in after the COVID rent freeze lifted in September. And if a landlord tries to increase the rent outside of what similar properties in the same area cost, the tenant can ask the Tenancy Tribunal to step in and order a reduction.
"If property investors are facing a higher tax bill, they need a higher rental yield to make it worth their while. That could come through higher rents, but that tends to be constrained by renters' ability to pay," said Gordon.
"The other way it could happen is the price that investors are paying for property needs to fall. It's the price that's the more flexible of the two."
