COMMENT: One of my pet hates around property market commentary is the use of inflammatory superlatives – big statements and words which are used to amplify a viewpoint by shocking the reader. Indeed, this was a secondary focus of my OneRoof article last week, in which I challenged the use of colourful language and claims that Aucklanders were “reeling” and “suffering” from “widespread pain” in reaction to a 2% drop in the average house price over the previous quarter.
That’s not to say that I’m completely innocent of using such superlatives myself, but I’d like to think that, when I do, my claims are backed up by logic or good data.
So when I use a term like “coming rental crisis” I’d invite you to take notice because it isn’t a phrase that I use lightly.
Of course, if you’ve been renting over the past few years you could reasonably argue that we’ve been in a rental crisis for a while. In contrast to the years between 2008 and 2017, when the increase in average weekly rent was just $12, the average weekly rent has jumped $40 since 2018, a situation which is almost entirely of the Government’s own making.
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However, there are four trends on the horizon which, in my view, could make the rental increases of the last few years look small, by comparison:
1. Property Investors have stopped buying
A number of credible surveys and sources are now confirming that property investors have stopped buying rental properties. In fact, most real estate agents are reporting that investors took a step back as long ago as March 2021, in response to changes in the tax treatment of investment property. Yes, there are some who have bought into the Government’s incredibly naïve claim that every home not purchased by an investor increases the availability of properties for owner occupiers, but this silly argument completely ignores the fact that around 35% of our population rents, that this percentage has been consistent for decades, and that our population is growing, which means we will need more rentals, over time, just to maintain that ratio. On current projections, we’ll need at least 62,000 more rentals over the next 10 to 15 years to avoid a rental shortage, something that isn’t going to happen on current policy settings.
Ashley Church: “A number of credible surveys are now confirming that investors have stopped buying rental properties.” Photo / Ted Baghurst
2. Lack of capital growth
Despite the “fat cat” characterisation of property investors, most of them 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. When capital growth is strong many investors will try and absorb some of these losses, in effect subsidising the rent of their tenants, but when the market flattens, they will look to maximise the income on their investment to reduce their losses, which means higher rents.
3. Big changes to the way property investment is taxed
Up until last year, the interest which was paid on a mortgage by an investor was a claimable expense, which meant 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. This means 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. This will inevitably lead to big rent increases for many tenants as investors struggle to try and make the numbers work.
4. 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 most reasonable landlords broadly support them. However, this doesn’t reduce the impact of the costs associated with compliance and, there is a limit to how much investors can absorb before these costs end up being passed on to tenants in the form of higher rents.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
