ANALYSIS: A few journalists contacted me over the weekend regarding tax changes bringing investors the ability to deduct 80% of their interest expenses from rent income for the financial year starting this April 1 and 100% a year later. I declined interviews because apart from a small tweak on the Government’s promise for the year ending there was nothing new.
The issue is what the impact of the ability to do what every other business does (deduct interest expenses) will be on landlord behaviour. Will they pass on the restoration of their after tax income to what it was a few years ago into lower rents? No they won’t. Why?
Because it is hard to find evidence that progressive removal of this deduction ability caused much extra upward pressure on rents. In the five years before investors started to progressively lose their deduction ability, average nationwide new rents in the dataset gathered up and reported by Statistics NZ rose on average 3.3% a year. Since then rent growth has averaged just over 4%. The increase is small. So, if there is any giving back it will also be small.
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But it pays to remember that there is a structural lift underway in the cost of owning a property – be it rented out or lived in by the owner. Council rates are soaring with increases casually bandied about of 15% - 25% and more. In a market where councils hold full monopoly power there is no restraint on them putting through whatever rises they want, and this problem is putting people owning their house on fixed incomes in a difficult situation. Rates are eating up an ever growing portion of their superannuation payments. Owning your own home mortgage free in retirement is not looking as beneficial as before.
Insurance costs are also soaring with increases this year of around 30% for most people. As the cost to NZ insurers of getting offshore reinsurance likely continues to rise (now they remember we are pluvial and shaky), these types of rises could easily continue.
Independent economist Tony Alexander: "Rents will keep rising, and once interest rates start solidly falling, house prices will follow." Photo / Fiona Goodall
Add in maintenance costs (plumbing, electrical etc.) and the problem for elderly homeowners is growing at a rapid pace. For landlords these cost escalations mean scope for cutting rents is minimal and pushing rents higher will inevitably continue.
One thing I think which may happen is some landlords will shift their properties away from property management companies to save costs. But the flow the other way into professional pooled management could be greater given the tendency for agencies to extract larger rent rises than individual landlords who often feel uncomfortable putting rises through on their tenants.
Is there an answer? With rising construction costs, rapidly falling consent issuance for multi-unit developments (they can’t get sufficient presales to advance), strong population growth, and ever-rising construction standards, intensification and consenting reform would have to be radical beyond belief to provide much offset.
Rents will keep rising, and once interest rates start solidly falling, house prices will follow.
Briefly, last week I discussed the results from my latest survey of real estate agents run with NZHL. They showed that we are firmly back in a buyer’s market again partly because many sellers are stepping forward to take advantage of upward house price momentum which for the moment has stalled.
This week I have most results in from my monthly survey of mortgage brokers sponsored by mortgages.co.nz and they also show some new housing market weakness though not to the same degree for investors. A net 21% are seeing more first-home buyers through their doors, down from 46% last month and 38% two months ago. A net 23% are seeing more investor clients, down from 28% in February and 29% in January.
Buyers are for now backing off while sellers step forward.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
