COMMENT: Last week I wrote about the recent threat by Housing Minister Poto Williams to impose rent controls and the squashing of those threats by the Prime Minister. The threat followed news that rents have increased sharply over the past 12 months – just as they have every year since 2018 - in stark contrast to increases of just $12, per week, in each of the 10 years between 2008 and 2017.
A cynic might suggest that the threats and subsequent backdown were a deliberate strategy. Threatening something and then appearing to relent and finally accepting a “compromise” solution (which was actually what was intended all along) is an old political trick and was used repeatedly, and effectively, by John Key during his eight years as Prime Minister. However, Key and his Government were far smarter operators than anyone in the current administration and I suspect that what happened with Williams was exactly what it appeared to be – a case of the left hand not knowing (or understanding) what the right hand was doing.
But just in case the Prime Minister and her Housing Minister did actually coordinate the announcements in the belief that the mere threat of rent controls would thwart further huge annual rent increases at the level we’ve had in recent years, let me spell out why rents will continue to rise sharply, for a very long time, despite any attempt to talk them down:
1. Big changes to the way property investment is taxed.
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I know that the eyes of most of my readers glaze over when I talk about tax changes but it’s important to understand what the Government did and why it will have such a devastating impact on the cost of renting over the next few years.
Up until recently, the interest which was paid on a mortgage, by an investor, was a claimable “expense” which meant that an investor could deduct it from their income before being assessed for tax. There was nothing unusual about this. Owners of any other form of business have always been able to claim interest as an expense, but recent changes to those rules mean that property investors in New Zealand now operate in a cowboy land that exists outside internationally recognised accounting procedures.
However, what’s much more serious is the effect of these changes. They mean that money that investors have already spent to run their property business is treated as income, and taxed. It’s difficult to know what this will cost individual investors as circumstances differ so widely, but it’s not unreasonable to suggest that it could cost the owner of just one investment property $10,000, or more, per year once the changes are fully implemented. Many will try to absorb some, or all of this extra cost, but it will inevitably lead to big rent increases for many tenants as investors struggle to try and make the numbers work.
Ashley Church: “Almost all property investors lose money on their property in the first few years.” Photo / Ted Baghurst
2. Limiting the use of tax losses
In addition to changing the treatment of interest, the Government has also changed the way losses are dealt with so that investors can’t use them until the property makes a profit. Again, I know this can be difficult stuff to get excited about, but the key thing to understand is that almost all property investors lose money on their property in the first few years, so being unable to offset their losses against other income means, again, that the property costs them more to own. Again, this affects rents because few investors can absorb the extra hit.
3. Increased compliance costs
Both this Government, and the previous one, have been progressively introducing new measures with which all landlords must comply. These include measures around making rental properties warmer and drier and, to be honest, most landlords broadly support them. However, this doesn’t reduce the impact of the costs associated with compliance and, inevitably, some of these costs are being passed on to tenants. You guessed it - higher rents.
4. Lack of capital growth
Most property investors are just mums and dads facing the same daily issues as the rest of us – and most of them lose money on their investment in the first few years of ownership because the cost of owning a property usually exceeds the rental income, sometimes by a big margin. When capital growth is strong many investors will try and absorb some of those losses – effectively subsidising rent - but when the market flattens, they will look to maximise the income on their investment to reduce their losses which, yet again, means higher rents.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
