Residential landlords are up against opposing forces in 2023, says Peter Lewis, vice president of the New Zealand Property Investors’ Federation.
One is the big jump in costs for landlords; higher interest rates, higher council rates, higher insurances and also increases in the tax liability landlords are being compelled to pay.
Another is the drop in the number of people who traditionally rent, such as international students, immigrants and short-term workers from overseas.
While 2022 saw rents either static or slightly dropping because of this, Lewis says what happens in 2023 depends on whether those groups return to the market.
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If they do, rents might go up: “Obviously, that provides a group who are willing and prepared to pay a bit more in which case we will see increases in rents coming through – provided that happens.”
Another difficulty for landlords has been a drop in suitable applicants for rental properties, he says.
People are under more financial pressure so credit checks may reveal areas where they have gotten into trouble, such as unpaid bills.
Combined with the difficulty landlords have in being able to remove tenants, some have become more risk averse, Lewis says.
Good tenants are looked after, he says, but the fact significant parts of the market have been lost (students and overseas workers) has caused pain for landlords.
“Like any business if your demand declines that puts pressure on your margins and how much you can charge for the services you are selling – we’re selling an accommodation service.”
Another factor becoming problematic is how hard it is for new players to enter the rental provider industry, Lewis says.
Finance Minister Grant Robertson made changes to the tax rules governing property investments. Photo / Getty Images
Landlords retire, die or otherwise drop out of the industry so there needs to be an influx of others ready to enter but market and bank restrictions are making it harder for new entrants.
“Some years ago if you owned a property in which you had equity you could use that as a security to borrow 100 per cent and buy a rental income property effectively with no cash deposit.
“But, of course, banks are now not doing that. They're demanding, I think it's something like a 40% deposit before you can buy a rental property which is a big hurdle obviously for a lot of people to come up with.”
That, in combination with rising interest rates and the removal of the interest on mortgages as a tax-deductible expense, has made it less attractive to be a landlord.
Lewis says landlords are the only businesses excluded from the ability to deduct the interest of a loan from pre-tax profit and he says you have to wonder why.
There are only two reasons for having a tax, he says. One is to raise money to fund services, such as education and healthcare, and the other is to “punish” or dissuade people from doing something, like smoking or drinking.
He says a sizeable group of people have a philosophical belief there should be no private landlords: “One can only assume the Government is trying to dissuade people from becoming landlords on a philosophical basis.”
Lewis also says the tax system means if a landlord’s costs go up $100 a week, putting the rent up $100 does not cover the landlord’s costs so the rent increase has to be higher.
“The rent increase is in itself taxable so really you've got to put the rent up by $150 a week because a third of that increase is going to go in your extra tax.
“There are not many rentals where you put up the rent by $150 a week and still find a willing and reliable tenant.”
A change of Government could see some “anti-landlord” measures introduced over the last couple of years reversed, Lewis says, saying he knows investors who have already sold up: “People are just saying ‘I’ve had enough.”
He also says the collapse of the rental market in Ireland should be a warning to New Zealand, saying a number of “draconian anti-landlord” measures have had to be reversed because Ireland ended up with so few rentals.
The opening of New Zealand’s borders has lifted demand for rentals, especially in Auckland. Photo / Getty Images
“They are now trying to entice people to become landlords… There’s the old saying ‘if you keep bashing landlords eventually you'll have no landlords and what do you do then?’”
Helen O’Sullivan, chief executive officer for Crockers, one of Auckland’s largest property management companies, says over the last few months the level of activity in the Auckland rental market has steadily increased.
New arrivals from offshore are starting to return, including some international students, she says.
“We are seeing a good supply of quality new stock entering the rental pool and fewer rentals leaving the market as the sales market slows.”
That trend is likely to continue and while not likely to reach pre-Covid levels, the company is expecting to be busier early 2023 than for the same time in 2021 and 2022.
O’Sullivan says the company has not seen any trend of landlords pulling out of the sector but says more are deciding to use a professional manager rather than trying to navigate the complexities of self-management.
This trend, in combination with the regulation of property managers, which is foreshadowed for next year, should be good for both tenants and landlords, she says.
O’Sullivan expects landlords to take a “steady as she goes” stance in 2023 when it comes to ownership.
“Hold and maintain existing stock, keep one eye open for bargains and/or gems, but not actively look to acquire until interest rates change their trajectory.”
Asked if rents are likely to rise with increasing interest rates, O’Sullivan says their property managers don’t tend to see much correlation between interest rates and rent rises, and she points out many landlords do not have a mortgage.
“Rents didn’t fall as interest rates fell so we wouldn’t expect them to do the reverse.”
O’Sullivan says rents are set with regard to market conditions and the amenity of the property: “We find the market is very price sensitive – as little as $20 per week can make the difference between a property renting quickly and sitting vacant for a long time.”
