The Government considered capping rents to stop landlords passing on increased costs from new housing policies, official documents show.
The swathe of documents dumped on Thursday related to the Government's big housing policies also illustrates how the proposal to remove tax deductions on interest costs for rental properties raised alarm bells.
"We expect most landlords may consider increasing rents," the Ministry of Housing and Urban Development (HUD) advised the Government, adding that some landlords are "likely to sell" with potentially significant consequences for renters.
"There is a risk that for some renters in the lower-priced parts of the rental market, that they will not be able to find a new rental property at a price they can afford. This could lead to either further pressure on emergency special needs grants, transitional and public housing, or to overcrowding to enable rent to be affordable."
The Government announced plans to phase out the "tax loophole" over four years, among a raft of other measures, to help first-home buyers and bring down ballooning house prices.
Property investors immediately threatened to increase rents to make up for the increased costs. But Prime Minister Jacinda Ardern stood by the policy, because investors now make up the biggest share of buyers in the housing market.
The documents reveal how the Government considered temporarily capping rents to thwart the negative consequences of the policy. But international data showed landlords would simply "increase rents as soon as the period of rent control ends".
ACT's housing spokesperson Brooke van Velden described the policy as a "renter's tax" because landlords will be forced to pass on the costs to their tenants.
"This divisive policy targets residential property investors, but it will actually hurt some of the most vulnerable people in New Zealand."
National leader Judith Collins wrote on social media that Labour is "forging ahead" despite official advice warning of landlords potentially increasing rents.
"Their own Ministry of Housing and Urban Development told them their recently announced changes will just send rents even higher. Labour needs to understand you can't pile more costs on to Kiwis and expect that to make housing more affordable."
Ardern told reporters on Thursday the Government is keeping watch.
"What's been key for us is keeping an eye on whether or not those rent increases are outstripping, for instance, what we'd see in people's income increases."
Another aspect of the housing policy called into question was the increase to income caps and house price caps for first-home buyers eligible for Government deposit assistance. HUD recommended against both changes multiple times.
"We do not recommend increasing the price caps for existing properties, as this would inflate prices further, and only provide temporary relief for first home buyers," the advice says.
"We do not recommend increasing the income caps for First Home Grants as this would primarily assist households who are already close to being able to buy and may result in prices being bid up higher."
The official advice shows that HUD wasn't as critical of the Government's decision to extend the bright-line test - income tax on profit made from investment properties - from five years to 10 years.
"HUD recommends that extending the bright-line test will have the fewest consequences on tenants, as it focuses on disincentivising future short term speculation, rather than causing potential churn in the existing rental market."
The Government came under fire for extending the bright-line test because Finance Minister Grant Robertson promised not to during the election campaign. It also drew comparisons to a capital gains tax, which the Government ruled out.
Robertson conceded last month that he was "too definitive" in ruling out extending the bright-line test during the campaign.
The Government considered a range of options to moderate house price growth after record increases, defying expectations of a housing crash due to COVID-19.
The national average asking price in New Zealand hit a new milestone in March, according to Trade Me data, cracking the $800,000 mark for the first time.
The official advice to the Government shows just how bad the housing crisis is, with Rotorua used as a case study. There, house prices have risen 137 percent in the last six years, and only 2.2 consents were issued per 1000 people compared to 9.5 in Auckland.
It also notes that at least 75 percent of current tenants cannot afford to buy a home "and an increasing number of people will likely rent for life".