What NZ's Negative Gearing Experiment Warns Australia

New Zealand scrapped investor interest deductibility in 2021 and reversed it four years later after rents hit records. Here's the lesson for Australia.

With Australia's federal budget landing on Tuesday 12 May, the question of negative gearing and investor tax treatment is front and centre in the national debate. Before that debate plays out here, it is worth examining what happened when our closest neighbour actually pulled the trigger on similar changes — and then had to quietly reverse them four years later.

[Property Update](https://propertyupdate.com.au/new-zealand-tried-to-kill-negative-gearing-heres-what-happened-next/) reports that in March 2021, New Zealand's Labour government, led by Jacinda Ardern, removed the ability for residential property investors to deduct mortgage interest as a tax expense against their rental income. The stated goal was to cool the housing market and improve affordability for first-home buyers.

New Zealand's own Inland Revenue Department — the equivalent of Australia's ATO — advised against the policy before it was even introduced, warning it was unlikely to improve housing affordability and would instead push rents higher and reduce the long-term supply of rental properties.

They were right on every count.

What Actually Happened to Rents

The consequences were immediate. New Zealand rents hit a record national average of $600 per week. Wellington reached $695 per week. Auckland's CBD averaged $620. Annual rental growth accelerated sharply at a time when households were already under severe cost-of-living pressure.

The mechanics are not complicated. When investment property becomes more expensive to hold — through a tax that eliminates the ability to deduct the investor's single largest cost — the investor either sells the asset, removes it from the long-term rental pool, or passes the additional cost on to tenants. In New Zealand, all three happened simultaneously.

Timing compounded the damage considerably. When Labour announced the changes in March 2021, New Zealand mortgage rates were around 2 per cent. By 2022 and into 2023, rates had climbed to 6 and 7 per cent and beyond. Investors who had purchased property counting on the ability to deduct interest costs found themselves paying tax on fictional profits while absorbing very real losses.

Property Update illustrates the scale with a concrete example: a mortgage of $600,000 at roughly 6.5 per cent per year represents around $39,000 in annual interest. Under Labour's rules, none of that was deductible for residential investment properties purchased after March 2021. The investor was effectively taxed as if the mortgage did not exist.

The hardest-hit were not large-scale property developers. They were the ordinary working people — teachers, tradespeople, nurses and small business owners — who had bought one or two investment properties as a long-term retirement strategy. With mortgage rates tripling from where they were at purchase and no ability to deduct the largest holding cost, many faced tax bills on money they had never actually made. Many sold up. Many converted to short-term accommodation platforms, removing their properties from the long-term rental pool at exactly the moment tenant demand was rising.

The Reversal — and the Lesson for Australia

The National Party, led by Christopher Luxon, made reinstating interest deductibility an explicit election promise and won the 2023 New Zealand election. Associate Finance Minister David Seymour was direct about the reason for reversal: landlords had been hit with a "double blow" of rising mortgage rates and restricted deductibility during a cost-of-living crisis, and those costs had been passed directly to tenants — which was one of the main reasons New Zealand reached all-time high rental costs.

The reinstatement was phased to avoid market disruption. Investors could claim 80 per cent of interest costs from 1 April 2024, rising to full 100 per cent deductibility from 1 April 2025. The entire experiment lasted roughly three years before it was unwound.

ABC News reports that Australia's upcoming federal budget is expected to include significant changes to the capital gains tax discount and negative gearing arrangements. New Zealand's experience offers a direct precedent. Removing the ability for investors to deduct real costs against real income does not redirect capital into new housing supply. It makes existing rental properties more expensive to hold — and those additional holding costs are typically passed on to tenants, not absorbed by investors.

This is not an argument that Australia's current tax settings are beyond scrutiny. There are legitimate questions on both sides of that debate. But the New Zealand evidence is documented and unambiguous: poorly designed changes that hit holding costs without meaningfully improving supply tend to hurt the very people they were designed to help.

For Australian property investors watching Tuesday's budget carefully, the key questions are whether proposed changes will apply to existing holdings, what the phase-in timeline looks like, and whether current financing structures remain viable under altered tax conditions. Those are conversations worth having now, before the announcements land.

Our [investor home loans hub](/home-loans/investor) compares the market for investment borrowers across both fixed and variable options. If you're considering refinancing an existing investment loan before conditions shift, our [refinance savings calculator](/calculators/refinance-savings) can show you what a lower rate means for your cash flow position.