There’s a reason why I’ve stayed out of the residential real estate investment sector, other than not having the money for a deposit. I’ve long since thought that runaway capital gains would result in a bright red target being painted on investors’ backs, which would eventually translate into policy and specifically what has resulted in NZ is the elimination of the ability to claim an interest expense as a deduction for real estate investment.
While they failed to implement the capital gains tax, the government has put into law a cancellation of deductions on interest for residential investment property purchased after 27 March 2021, excluding the family home and new builds, which came into effect on 1 October 2021.
My main concern for this is that in an environment of rising inflation, and hence, eventually, rising interest rates, eliminating the right for investors to claim interest deductibility may have a compound effect which is hard for the markets to price.
As significant as it is to remove interest deductibility in the current low interest rate environment, it will be significantly more punishing once interest rates start to go up. To have a growing, non-deductible expense attached to marginally profitable asset could easily add velocity to an asset price downturn. And if a downturn does occur on the back of this, it could dampen the chances of a swift recovery for so long as interest rates remain high.
This is particularly a problem when we have no way of knowing where interest rates will sit in five years’ time.
As it stands, I just can’t see how investment properties can be valued.
