Labour promised to tax landlords harder then the rent data changed everything

What Labour just conceded

After months of describing full interest deductibility for residential landlords as a “tax cut for landlords”, Labour leader Chris Hipkins has confirmed a Labour government would leave the settings alone. He ruled out any changes on 21 September, tying the call directly to the party’s proposed capital gains tax.

“We’ve made a decision to introduce a simple targeted capital gains tax instead,” Hipkins said, noting that when deductibility was originally removed Labour had ruled out a CGT, and “clearly, that’s changed”. He was blunt about the reason: he did not want to give landlords “the excuse of increasing rents” while tenants are already stretched.

That is a notable admission. It concedes the exact argument critics made when Labour removed the deduction in 2021 – that a cost imposed on landlords eventually shows up in rents.

How the policy pinballed

Labour scrapped interest deductibility for residential investment property in 2021, pitching it as a way to cool the market and tilt it towards first-home buyers. The National-led coalition then reinstated the deduction from 2024, phasing it back to full deductibility by 2025 at a forecast cost of $2.8 billion over four years.

The original policy was contested on economic grounds from day one. Treasury’s own 2024 Regulatory Impact Statement found the main drivers of rents over two decades were household income growth and the physical supply of rental housing, not tax settings. Restoring deductibility, it concluded, would not move rents much in the short run but could support new supply over time.

The market that killed the case

What really eroded Labour’s position was the rental data. By early 2026 the market had turned soft. According to the Ministry of Housing and Urban Development’s March 2026 update, rents for new tenancies fell 0.4% year-on-year and rents for existing tenancies rose just 0.7%, the smallest annual increase since the series began in 2006. Wellington rents fell 2.4% and Auckland 1.3%, with landlords facing longer vacancies as supply lifted and demand dropped.

Reimposing a fresh cost on landlords in that environment, with tenants under pressure, was politically indefensible. Stats NZ’s 2025 housing report found a quarter of renting households spend more than 40% of their disposable income on housing, with average annual housing costs hitting $23,182 in the year to June 2024, up 31% since 2020. Nobody wanting to win an election adds to that.

Relief on one side, revolt on the other

Property investors are pleased. Matt Ball, advocacy manager at the NZ Property Investors Federation, told RNZ that when you impose such a tax, landlords have only bad options – “put up rents, cut their costs, cut maintenance, cut investment in their property or sell”. On the Mike Hosking Breakfast he said every renter should “breathe a sigh of relief”.

Opes Partners economist Ed McKnight offered the sharpest technical point. Interest deductibility, he told Heather du Plessis-Allan Drive, “was not ever a new tax” in the sense of a higher rate – it was “a change to how they calculated our profits as landlords”. In other words, the original policy was a stealth increase applied through profit calculation.

Not everyone in Labour is happy. Former housing minister Megan Woods told The Post the party was choosing to “give a $2.9 billion tax cut to landlords” while pleading poverty on homelessness. That her figure differs slightly from the official $2.8 billion, and her framing at all, shows the internal tension the call has exposed.

Entry cost stable, exit cost the new fight

For property investors the message is clear. The cost of holding a rental is now settled, but the exit is the live risk. Labour’s proposed 28% capital gains tax on investment property sales excludes the family home, farms, KiwiSaver and business assets, and Hipkins has made it the primary tax lever on property. Keeping deductibility in place is precisely what makes that CGT more defensible.

The interesting part is not the u-turn. It is that a policy built on a contested premise unravelled once the evidence and the market both pointed the other way. Investors should treat the holding cost as durable and focus their attention squarely on how a capital gains tax would reshape the sell decision.

Sources

• Property investors relieved at Labour’s landlord tax deduction promise (2026-09-22)
• Labour rules out interest deductibility changes for landlords (2026-09-21)
• Hipkins confirms Labour will leave interest deductibility alone (2026-09-21)
• Property investors relieved at Labour’s call to keep ‘tax-cut for landlords’ (2026-09-22)
• Reintroducing Interest Deductibility for Residential Investment Property – Regulatory Impact Statement (2024-03-14)
• Housing Market Update – March Quarter 2026 (2026-03)
• Housing in Aotearoa New Zealand: 2025 (2025-06)
• Ed McKnight on Labour ruling out interest deductibility changes (2026-09-21)
• Matt Ball on Labour deciding to keep landlord interest deductibility (2026-09-22)
• Labour will not reverse ‘landlord tax cut’ interest deductibility change (2026-09-21)