Where to now for investors after residential property investing door slams shut? And more insights affecting investors in property news this week…
Our aim is to filter only the most relevant economic, investment and property news affecting investors from the torrent of information filling the newsfeeds each week so you don’t have to. We then publish them here so you can update yourself over morning tea.
Read on to find what’s next for investors after residential property investing door slams shut.
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Who’s saying what about the demise of residential property investing this week…
- Where to now for investors after rental property door slams shut?
- Landlords told: Planning to increase rent? You might be disappointed.
- Rent caps ‘almost inevitable’, property manager says.
- Government ‘will take action’ if rents spike, Grant Robertson says.
- Govt reforms put investors and first-home buyers on collision course.
- Woman forced to leave Auckland faces $5k bill for rented family home.
- Housing ‘whack-a-mole’.
- Housing – Jacinda Ardern’s divide-and-rule tactics.
Where to now for investors after rental property door slams shut?
Bleak times for investors trying to provide for their retirement or, heaven forbid, eke out an existence from the meagre income on their investments.
Low interest rates are great for your mortgage, but not so good for investors trying to survive on fixed interest income.
They’re not just the lowest we’ve seen in our lifetimes, interest rates are now at a 5,000 year low.
Up until last month’s shock announcement, residential property investment was a popular alternative.
It satisfied the dual social goods of providing rental accommodation for those not in a position to buy their own home, and reducing the burden on the state by providing for one’s future retirement.
The government has been gradually closing the door on that with changes to the Residential Tenancies Act, ring-fencing of rental property losses, and an extension of the bright-line test (a capital gains tax under another name).
That door has now slammed shut with the bright-line test doubled to 10 years and the removal of interest costs as a deductible expense for residential rental accommodation (and AirBnB) providers.
The removal of interest deductibility now makes residential property investment an unattractive alternative for all but a few professional, well-resourced investors.
What is an investor to do?
Interest rates on term deposits and bonds are too low. Rental property is stuffed. That leaves commercial property and the sharemarket.
The Reserve Bank of Australia (RBA) says, “Globally, the pandemic has accelerated structural change in the retail sector, including increasing online sales, leading to falling retail commercial property prices, while demand for office property is uncertain given changing work practices.”
New Zealand is no different.
The retail and office segments of the commercial property market have therefore become too risky for investors approaching or in retirement.
That leaves the safe haven of industrial property and the sharemarket – if you can stomach the volatility.
If your risk tolerance is not high enough for the sharemarket, there’s always high dividend shares. They generally offer lower volatility and higher dividends than the overall sharemarket.
The S&P/NZX 50 High Dividend Index is made up of 25 high yielding financial products listed on the NZX Main Board. It is down -8.43% YTD, i.e. investors have lost 8.4% of their capital YTD.
But over 12 months it’s a net gain, which goes to show that even the low-volatility High Dividend Index is volatile!
Most investors don’t invest in the S&P/NZX 50 High Dividend Index for capital gains, though. They’re more interested in the dividend yield which, according to their fact sheet, is 3.7% as of 31 March 2021. That’s better than term deposits but not much.
Smartshares promotes their NZ Dividend ETF that invests in financial products listed on the NZX Main Board and is designed to track the return on the S&P/NZX 50 High Dividend Index. The gross dividend yield is listed as 3.4% as at 7 April 2021.
Their NZ Property ETF invests in property assets listed on the NZX Main Board and is designed to track the return on the S&P/NZX Real Estate Select Index. Its dividend yield is even worse at 3.2% – and dividends are only paid once every 6 months.
Fisher Funds Income Fund 1-year performance is 2.0% as at 28 February 2021. The fund does not, however, pay any distributions.
Things look brighter for what the Financial Markets Authority (FMA) terms ‘eligible investors’ and ‘wholesale investors’. They are investors who have some experience and larger sums to invest – between $25k and $1 million, but the minimum investment required is usually $50k.
Provincia Property Fund is one such example.
Provincia sailed through the Covid-19 pandemic and is now in better shape than ever with more properties under management, a longer WALT (Weighted Average Lease Term) and a continuation of the 6% quarterly dividend.
Being a PIE fund, Provincia is very tax efficient too. Which is more than can be said for residential property investment!
If you’re looking for somewhere secure to park your money and earn 6% p.a. pre-tax PLUS capital gains, find out why Provincia industrial property fund is rated so highly by investors… |
Landlords told: Planning to increase rent? You might be disappointed
Property investors who are planning to increase rents to cover the extra cost of looming tax changes could be disappointed, economists warn.
A survey conducted by the New Zealand Property Investors Federation showed that property owners expected their costs to increase by an average of $3,140 per year per rental property.
About 20% said they would sell some or all of their properties. Good news for first-home buyers; bad news for renters.
But economist Shamubeel Eaqub said investors could find it harder to raise rent than they expected. Rents were not usually set according to investors’ costs, but instead driven by the limit of what tenants could afford to pay.
Highly indebted investors could be the “collateral damage”, he said.
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Rent caps ‘almost inevitable’, property manager says
It is inevitable that rents will rise in response to the tax changes for landlords and that means rent caps may be on the way, one commentator says.
The changes, which remove property investors’ ability to offset home loan interest costs against their rental income, prompted many commentators to predict they would lead to rent increases.
This has not pleased the Government and Finance Minister Grant Robertson said it would “take action if necessary” should rents be raised to offset the effect of tax rule changes.
While Robertson would not comment on whether that could mean national or targeted rental increase caps, property management consultant David Faulkner, of Real-iQ, said some sort of rent controls were now “almost inevitable”.
The benefits of owning a rental property were set to take a massive hit due to what was a “discrimination tax” around the deductibility of interest payments, he said.
Government ‘will take action’ if rents spike, Grant Robertson says
The Government “will take action if necessary” should investors hike rents to offset the effect of tax rule changes.
Finance Minister Grant Robertson issued the warning after introducing interest deductibility rule changes on March 23, which take away investors’ ability to offset home loan interest costs against rental income.
ASB economist Mark Smith said investors would have to charge 30% more in rent or pay 30% less for a property to get the same return compared to pre-rule change.
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Govt reforms put investors and first-home buyers on collision course
Property investors aren’t the most popular people in New Zealand right now, and the Government’s housing market reforms this week confirmed that, writes Daniel Dunkley in an opinion piece for Stuff.
“Ministers unveiled an unprecedented crackdown on investors in an effort to keep a lid on the housing market, with landlords blamed for runaway property prices over the past year.”
“Under the proposals, investors will need to own a house for at least 10 years to avoid paying income tax on their gains when they sell. The rules won’t change for new builds; investors will need to hold on to new homes for 5 years to avoid paying the tax.”
“Many people, especially younger generations, will cheer the announced reforms. After all, they’ve spent years being squeezed by landlords, nitpicked over deposit deductions, and beaten by them at auctions.
“While young people might rub their hands with glee that things have been made more difficult for investors, they shouldn’t celebrate just yet.
“For many young people, turnkey and fixed-price house and land packages offer the best chance of acquiring a first property. They aren’t bound by LVR restrictions and can be purchased with a small deposit of 10%. A perfect option for younger buyers in expensive cities.”
“With fresh incentives to buy new builds, investors will be pitched on a battleground with first-home buyers looking to get on the ladder.”
“Turnkey properties and fixed-price house and land packages will become the new gold in New Zealand.
“The only problem is, there aren’t enough of them.”
“If the new build battle comes to pass, we could be left with a distorted market. Wealthy investors, armed with capital, snapping up new stock and outmuscling first-home buyers, leaving them with NZ’s leaky, low-quality older properties”
Woman forced to leave Auckland faces $5k bill for rented family home
Two years ago, Kylie* had to move out of her Auckland family home, and to another city, because of ongoing harassment by her ex-husband, writes Miriam Bell in Stuff.
Kylie, whom Stuff has agreed not to identify, had bought him out of the family home but could only afford to service the home loan by making it interest-only, in which the principal is not paid off.
When she and her children left Auckland, she didn’t want to sell the property.
She was concerned that if she was no longer working for her current employer, there might be limited work opportunities in her new town.
“I want to keep my house in Auckland in case my work situation does change and necessitate me moving back to Auckland. I am happy to be renting a property here that is the same rent I charge for my Auckland house but now that’s all up in the air.”
Kylie said the government’s crackdown on investors would mean she would now be paying 39% tax on her rental income and she had calculated that with $8,000 worth of tax-deductible expenses, she would now be over $5,000 per year out of pocket once the change took full effect.
She would also no longer be in a position to purchase a property to live in as lending criteria was likely to tighten further.
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Housing ‘whack-a-mole’
New Zealand runs the risk of playing a game of housing “whack-a-mole”, ASB chief economist Nick Tuffley says, as the Government tries to find the right lever to bring the market into balance.
Tuffley said ASB had revised its house price forecasts in response to the Government’s announcement last month of new rules for the property market.
“To whack the house price ‘mole’ in the interim, the Government has materially increased the cost structure of private-sector landlords – collectively the biggest rental provider.”
He said investor appetite for rental property was likely to fall and there was a risk rents would rise at a time when rental properties were in hot demand and waiting lists growing.
“The next housing ‘mole’ that is popping up is rents.”
“Rent controls do give a benefit to the incumbent renters, regardless of their financial circumstances. But pretty much everyone else bears costs.”
He said the bank had “essentially flat-lined” its house price outlook for the rest of the year.
“From this month onwards, we expect house prices will be roughly flat through the middle half of 2021. Beyond that we see 3% to 5% annual growth.”
“Essentially, we expect the heat to sharply come out of the housing market over the next six months, rather than the gradual moderation we previously expected.”
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Housing – Jacinda Ardern’s divide-and-rule tactics
The Government has cleverly shifted blame for its own failings onto landlords. That’s the argument of Graham Adams, who says the demonising of landlords is simply about political management rather than actually fixing the housing crisis.
South Auckland councillor Efeso Collins remarked early this month that Jacinda Ardern had abandoned the collegiality of “the team of five million” and entered her “post-kindness phase” after she blamed South Aucklanders for sparking an unpopular week-long lockdown.
Unfortunately for Ardern, her punching down backfired. It was interpreted in many quarters as an attempt to shift the blame for the Government’s lack of effective contact-tracing onto people who were mostly doing their best to follow sometimes confusing instructions.
Now, faced with relentless criticism over a housing market spiralling out of control, Ardern has again used the strategy of blaming others, but this time the deplorables are “property investors and speculators”.
On March 23, Ardern announced an extension of the bright-line test on the purchase of any rental property from five to 10 years as well as the removal of the ability to deduct mortgage interest as an expense in an effort to “tilt the balance towards first-home buyers”.
The rules allowing a tax deduction on mortgage interest were deemed to be a “loophole”.
The official press release – put out under the names of Ardern, Grant Robertson, Megan Woods and David Parker – began: “The Government has announced a housing package that will increase the supply of houses and remove incentives for speculators, to deliver a more sustainable housing market.”
It is obvious the term “speculator” – with its connotations of self-interest, recklessness and greed – was used with the intention to tar everyone who buys a rental property with the same brush because there is very little in the package that would affect most speculators.
In a laughable attempt to deny this obvious fact, Grant Robertson claimed in a newspaper op-ed published this weekend: “Doubling the bright-line test reduces the attractiveness of flipping homes to speculators.”
“Flipping”, of course, means to resell a property at a higher price within a few months – not five or 10 years.
Furthermore, asserting that using a standard tax deduction is exploiting a “loophole” unfairly implies a house buyer is not acting in the spirit of the law. (Robertson used the word “loophole” five times in his op-ed.)
In interviews, Robertson, Megan Woods and David Parker have echoed the Prime Minister’s phrasing in what is clearly an agreed Cabinet line aimed at demonising landlords.
Attacking “speculators” is, of course, a reliable divide-and-rule tactic.
It is difficult not to view the housing package as a cynical attempt to shift blame for the Government’s own failures to make housing more affordable – as Ardern promised in 2017 – onto landlords.
Read Graham Adams’ full opinion piece
That’s it for this week, thanks for hanging in there.
Cheers, Brandon 🙂
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This content is provided for general information only and should not be relied upon or used as a basis for making any investment or financial decision. To the extent that any information or recommendations in this content constitute financial advice, they do not take into account any person’s particular financial situation or goals. As individual circumstances differ, we strongly recommend you seek independent legal and/or financial advice prior to acting in relation to any of the matters discussed herein. Neither Provincia Property Fund Ltd nor Provincia Property Management Ltd nor Provincia Property Fund Management Ltd nor any person involved in this content accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this content.
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