Key takeaways
In 2021, New Zealand's Labour government removed the ability for residential property investors to deduct mortgage interest as a tax expense - despite their own Inland Revenue Department advising against it.
Inland Revenue warned before the policy was introduced that it was unlikely to improve housing affordability and would instead push rents higher and reduce long-term rental supply. They were right on all counts.
New Zealand rents hit a record national average of $600 per week, with Wellington reaching $695 and Auckland's CBD at $620 - as landlords passed their increased tax costs on to tenants.
Many ordinary "mum and dad" investors were forced to pay tax on profits they never actually made, because their largest expense - mortgage interest - was no longer recognised by the tax system.
When interest rates climbed from 2% to over 6%, the policy became catastrophic for leveraged investors who had no way to offset their biggest cost, leading many to sell or exit the rental market entirely.
The National Party won the 2023 election partly on a promise to reverse the changes, with the new government explicitly acknowledging that removing deductibility had driven rents to all-time highs.
Full interest deductibility was restored from 1 April 2025 - the entire experiment lasted roughly three years before it was unwound.
The lesson for Australia is clear: punishing property investors doesn't build a single new home, and the people who ultimately pay the price are tenants, not landlords.
Before the federal budget lands, I think every Australian property investor needs to understand what happened across the Tasman over the last four years, because New Zealand didn't just debate whether to remove negative gearing and interest deductibility from property investors.
They actually did it!
And then, after watching rents hit record highs, investors bail out of the market, and tenants get squeezed harder than ever, a new government had to come in and quietly reverse the whole thing.
It's one of the most instructive policy experiments in recent memory, and yet I've noticed it barely rates a mention in the Australian media coverage of our upcoming budget.
So let me walk you through what actually happened, because the parallels for Australia are too important to ignore.
A Government That Thought It Had the Answer
In March 2021, New Zealand's Labour government, led by Jacinda Ardern, was under enormous political pressure over housing affordability.
Prices had surged, first-home buyers were being priced out, and the government needed to be seen to be acting.
Their solution was to remove the ability for residential property investors to deduct mortgage interest as a tax expense against their rental income.sc
It was part of a broader housing package designed to, as they framed it, "level the playing field" for first-home buyers and take the heat out of property speculation.
There was just one significant problem - New Zealand's own Inland Revenue Department ( the equivalent of our ATO) advised against it before the policy was even introduced.
Inland Revenue's assessment was that the change was unlikely to improve housing affordability.
While it might put some downward pressure on property prices, it was also likely to push rents higher and, over the longer term, reduce the supply of new housing.
The official tax authority of the country told the government: this will hurt tenants, bit the government pushed ahead anyway.
Why This Was Such an Unusual Tax Move
To understand why this caused so much damage, it helps to understand what interest deductibility actually means.
When you own a rental property, your mortgage interest payment is typically your single largest cost of ownership.
Under normal tax rules - the rules that apply to every other business in Australia and New Zealand - you deduct your costs from your income, and you pay tax on the profit that's left over.
NZ's Labour's change meant investors could no longer include that interest cost in the equation.
The effect was that investors were taxed as if they had no mortgage, even though they absolutely did.
While on paper, their properties appeared highly profitable. In reality, many were running at a loss or barely breaking even.
One landlord described it plainly:
"the normal thing with tax is that you make a profit and then share some of it with the government. But this tax required you to pay even if you were breaking even or making no money at all."
The policy was also introduced at the worst possible time, which is worth understanding.
When Labour announced the changes in March 2021, the official cash rate in New Zealand was sitting near historic lows and mortgage rates were around 2%. Very few people saw the interest rate environment that was about to follow.
By 2022 and into 2023, New Zealand mortgage rates had climbed to 6%, 7% and beyond.
Investors who had purchased properties under the assumption they could deduct their largest cost suddenly found themselves paying tax on fictional profits while absorbing very real losses.
What Happened to Rents?
Exactly what Inland Revenue said would happen.
New Zealand rents hit a record national average of $600 per week, with Wellington reaching $695 per week and Auckland's CBD sitting at $620.
Annual rental growth accelerated sharply at a time when households were already under severe cost-of-living pressure.
The logic behind this is not complicated - when you make an investment more expensive to hold through additional tax, the investor either sells the asset, finds a way to reduce their exposure, or passes the increased cost on to the person who is renting the property from them.
Tenants, who generally have far fewer options than investors, ended up bearing most of the burden.
Landlords also began converting properties to short-term accommodation on platforms like Airbnb, thereby removing them entirely from the long-term rental pool.
Others who had mortgaged their properties were simply forced to sell, further reducing the pool of available rental stock at a time when tenant demand was only growing.
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Industry experts at the time warned this was coming.
The concern was that while investor exits might technically free up properties for potential buyers, the reality was that not every tenant could become a buyer overnight.
Overall affordability remained a serious barrier, and reducing rental supply without meaningfully increasing ownership just made the rental crisis worse.
The Double Blow for "Mum and Dad" Investors
It's worth being clear about who was hardest hit, because the popular narrative tends to paint property investors as wealthy speculators.
The reality in New Zealand, as it is in Australia, is that the vast majority of residential property investors are ordinary working people - teachers, nurses, tradespeople, small business owners - who bought one or two properties as a long-term retirement strategy.
These were the investors who got hammered.
Many found themselves in a situation where their property was generating just enough rental income to cover interest costs, but they were still receiving tax bills based on the full gross rent, with no ability to deduct the mortgage. They were being taxed on money they never actually made.
To meet those bills, they had to dip into their personal savings or income.
Many were employees who couldn't simply give themselves a pay rise to cover the shortfall. And with interest rates tripling from where they'd been when they bought, those shortfalls were growing fast.
A mortgage of $600,000 at roughly 6.5% per year represents around $39,000 in annual interest.
Under Labour's rules, none of that was deductible if the property was purchased after March 2021. Investors were paying tax as though that $39,000 expense simply didn't exist.
The Policy Unravels
New Zealand went to a general election in late 2023, and the issue of interest deductibility became a clear battleground.
The National Party, led by Christopher Luxon, made reinstating interest deductibility an explicit election promise. They won the election and formed a coalition government with the ACT Party.
Almost immediately, the new government moved to reverse Labour's changes.
Associate Finance Minister David Seymour was direct about why, saying that landlords had been hit with a double blow of rising mortgage interest rates and increasing deductibility limitations during a cost-of-living crisis, and that those costs were inevitably passed on to tenants, which was one of the main reasons New Zealand had reached all-time high rental costs.
The reinstatement was phased to avoid market disruption.
Investors could claim 80% of interest costs from 1 April 2024, rising to full 100% deductibility from 1 April 2025. As of now, New Zealand property investors are back to where they were before Labour's experiment began.
The Lesson Is Staring Us in the Face
The New Zealand experiment ran for roughly three years, and the results were unambiguous.
Removing interest deductibility didn't make housing more affordable. It didn't deliver a wave of first-home buyers into the market.
What it did was make renting more expensive, push some investors out of the market, reduce the supply of long-term rental housing, and ultimately get reversed by the next government that had to deal with the consequences.
And here's the thing that I think gets lost in these policy debates...the housing supply problem in Australia - and it was the same in New Zealand - is fundamentally a supply problem.
There are not enough properties being built fast enough to meet the demand created by strong population growth.
Note: Punishing existing investors doesn't build a single new home. It just reshuffles who bears the cost, and tenants almost always end up bearing more of it.
New Zealand's own tax authority understood this before the policy was introduced. They put it in writing. The government chose to ignore it.
If Australian policymakers are looking at similar changes ahead of the federal budget, the New Zealand experience should be the first document they read.
Not as a political argument, but as a straightforward case study in what happens when you treat property investors as a problem to be solved rather than a significant part of the solution to Australia's housing challenges.
Private investors own the overwhelming majority of rental properties in this country and provide homes to millions of Australians who either can't or don't want to buy.
When you make it structurally unviable for those investors to hold property, the people who suffer most are not the investors, who have options. The people who suffer most are the tenants.
New Zealand found that out the hard way. We don't have to repeat the same mistake.
If you're concerned about how potential tax changes could affect your property portfolio, speaking to one of our Metropole Wealth Strategists is a good starting point.
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