The NZ Government has taken a gutsy approach to tackling the housing crisis - the days of highly leveraged property investment are likely over

Do not have any investments in New Zealand but totally agree with you. Same in Australia, they let the market and people leverage themselves when it serves the purpose of government to drive the economy through construction and them take the advantages away when it doesn't suit them anymore or some other economic replacement comes in to replace the construction. Will be something I think the Australian government will keep a close eye on. Inevitably it has always been a pretty bad idea and the houses should be sold on value based on rental returns. But bad returns based on expected capital gains and loses offset by tax incentives and then lately mixing with almost free money has made the market so unbalanced that it is almost impossible to rectify.

Agree 100%. I am Australian & I believe the Australian government is no more than the bankers friend or slave. They will do something dumb for sure.

One issue in Australia is that the costs (including mortgage payments) which are tax deductible may be applied to the investors salary.

Fictional numbers - So normally would pay say 40% of tax on taxable salary of $100,000, now tax on new taxable salary of $50,000 is 30% after house deductions (progressive marginal tax rates, too, squee!).

An owner occupier obviously cannot do this. An investor with the same before tax salary will always be able to outbid an owner occupier at a house sale. This is a clear distortion, and taxpayers in general are subsidising this circus.

There is a secondary and detrimental loop back into the rental market, on a couple levels - involves stocks and flows.

Ought the house be treated on its own, just as with any legitimate business, that would be much more logical.

If its not viable on that basis, hands up who wants the tax payers to bail them out each year, and then when they do eventually sell, be free (? complicated) of capital gains tax (another big distortion).

I often question the ability of politicians to understand micro economics. Get it wrong and macro won't work, either.

A shame that some countries ( USA, UK Australia etc) view houses as investment and not as homes for people to live in. Examples being France and Germany etc where houses are not viewed as investment vehicles despite attempts by foreign buyers ( English chasing Spanish property for example or local speculators trying to emulate overseas builder speculators) to impose their foreign system on a local market. Hence French and Spanish properties are still reasonably priced. Rents are also controlled to an extent.

It will not solve the housing crisis!
While immigration is going through the roof, with returnees wanting a safe haven from Covid, and supply side cannot build houses because land release is blocked by local body councils, and there is a shortage of many building supplies and skilled tradespeople (timber , hardware, qualified builders ....) it is just not going to happen.
When Labour came to power three years ago they election "promised" to build 10,000 houses in 3 years - they built 200 ( Kiwibuild)
Where house prices, on average have increased $74,000 in the last 4 months across all NZ, this new package offers an extra $5000 grant to new home buyers! - go figure.

it all comes back to economics and risk :
back in 1987 many Kiwis - myself included vowed to never go back into the stock market , ( for some obvious reasons ) and chose property as the safest investment vehicle.
under NZ conditions it still is the safest vehicle, and will continue to be so.

Renting out a property is will no longer allow tax deductibility of mortgage interest, effectively restricting many business activities that rely on equity release to support now struggling businesses in NZ

- the results will be :

rents will rise dramatically (to cover the increased holding cost and economic rate of return)
supply shortage for renters will increase.
Mum and Dad investors will hold on to their properties ( for at least 10 years) then pass them on to family.
available houses for sale will shrink ( immigration, appalling build record..etc)
it will be more economic to offer rentals for Air BNB and the tourist market - when it starts back up in 3-5 years.
in some cases it will be easier to leave a rental vacant ( as happened in London and Venice - from personal experience)

this will not end well for businesses, renters or new home buyers

..."it is so easy to be wrong and persist in being wrong -
when the costs of being wrong are paid for by others...." Thomas Sowell

ok , to explain, many small businesses rely on the mortgage equity released form rental properties to underpin capital costs of setting up business, in fact most of the ones i have dealt with as a Tax advocate have done things that way. the minute the deductibility of interest is removed - the cost of doing business gets a whole lot more expensive.
And for already struggling businesses weathering the pandemic downturn that is a double whammy.

Not gutsy, more likely stupid. This move will more than likely create a housing and rental shortage & if the 1st home buyers borrow at a very low interest rate & are ultimately faced with a 2% interest rate increase many will default. The government should have fixed this glaring problem years ago, it is to late now.

I don't understand what any of this means. What is this equity release that supports business?

Kinda important, as it is the entire basis upon which you go on to make some rather curious assertions.