Investors hanging tough
A mounting pipeline of tax and law changes, new regulations and other requirements is weighing on landlords, but buyer demand for rental properties remains strong.
From this month, new legislation from last year’s budget comes into play, restricting the ring-fencing of rental property losses. Meanwhile, in February, housing minister Phil Twyford unveiled new minimum requirements for heating and insulation in rental properties, requiring landlords to install heaters in all living areas by July 2021.
This is on top of last year’s extension of the bright-line test – which taxes gains on investment properties bought and sold within a five-year period – and the recommendations of Sir Michael Cullen’s tax working group which include the prospect of a capital gains tax.
Despite these headwinds, the numbers suggest that investors’ interest in rental property is holding firm. In fact, over the past year mortgaged multiple property owners have slowly grown their share of the market despite the extra rules, according to data from CoreLogic.
They are now responsible for nearly one in four (24%) of purchases so far in 2019. When combined with those buying with cash, nationally, multiple property owners make up 37 percent of the market.
Andrew King, executive officer of the NZ Property Investors Federation, cautions against reading too much into data he says would include owners of second homes which are not rented.
“It doesn’t tell the whole story. And there definitely is pessimism in the market for investors,” he says.
King’s concerns are reflected in the Reserve Bank’s mortgage borrowing figures for January. While overall mortgage borrowing was up 10 percent year-on-year to $4.1 billion, new lending to investors fell 7 percent to $726 million. This figure represents a fall of 14 percent in the two years since January 2017 when it stood at $844 million.
King says new regulations are a mixed bag, but overall are making life more difficult for landlords.
“The new insulation and heating regulations are not the end of the world, and could be quite good – because it means there will be better properties for tenants.
“Our two major concerns are the end of ring-fencing and the capital gains tax.
“In the early years of providing a rental property, it’s usually a cashflow negative situation, so not being able to claim losses is going to have a dramatic effect. Then to possibly lose a third of your capital gains (to a new tax), it’s going to slow the number of new investors coming in and the market as a whole,” says King.
Should a capital gains tax come to pass, King sees a “huge swing” away from property investment in the short term – though, in the longer term, he predicts the economics of supply and demand will prevail.
“Initially, it’s going to stop people being able to invest in property and will push up rental prices but, eventually, rental yields will go up enough to allow investors back into the market.”
Faced with such uncertainty, King’s advice for investors is to do their homework, look at all the data and invest wisely.
“We tell people not to buy the average home, for the average price and get an average rent,” he says. “You’ve got to take a close look at the figures, and switch to places with higher rental yields.”
King points to centres such as Rotorua, Palmerston North, Dunedin, and Invercargill, as locations where investors can find some of the most rewarding yields.
Regardless of changing governments, new taxes and stricter landlord legislation, the basic housing landscape remains fundamentally unchanged: people will always require somewhere to live, and there will always be a demand for rental properties.
“For those who are serious and treat it as a business, there are always opportunities for property investment,” says King.