NZHERALD PREMIUM ARTICLE 27 FEBRUARY 2023
Landlord Debbie Van Den Broek says if her long-term tenants ever decide to move out she will probably sell up.
She has been a Rotorua property investor for decades and has held on because ‘'I don't want to hurt them''.
Most of her tenants had dogs and were good people and she felt an obligation to provide them with a warm, safe, home for as long as they needed it.
‘'But if they decided to leave all bets are off the table. It's not easy (being a landlord) as you get a lot of flack that you are greedy. The people that I have, haven't been able to buy a house for their own reasons and there are always going to be people who want to rent.''
Van Den Broek said nowadays it was almost unviable to be a landlord. One of the biggest blows in her opinion was the Government's decision last year to introduce new rules which meant interest on loans was no longer tax deductible unless you were in commercial property She was not alone.
Fears are rife that the rental pool could shrink further due to high-interest rates, higher tax bills and increasing costs for insurance, rates and maintenance.
A mortgage of $600,000 at 6.79 per cent over 30 years is about $900 per week in principle and interest payments or $785 on interest only, while an income rental of $30,000 could face a tax bill of $7000 regardless of whether it had made a profit or not, insiders say.
Property investors have $47.8 billion of mortgages fixed for less than one year and leaders in the industry say those who are negatively geared will be ‘'feeling the pain''.
However, Minister for Housing and Building and Construction Megan Woods said the number of rented properties had increased and it was difficult to attribute any change in market rent to one factor.
Lindsay Richards has rental properties in Tauranga, Te Puke and Rotorua said those factors would be ‘'a killer'' for newbies to the game who were highly leveraged.
He had also been a landlord for decades and was better off than most due to his experience but his tax on rental income was about to increase by one-third.
In his view, the income rental tax was ‘'ethically wrong because it is a tax the business has to pay irrespective of if it is actually making a profit''.
‘'The normal thing with tax is you make a profit and give it to the Government... but with this tax you are obliged to pay even if you are breaking even or making no money at all.''
‘'So where are you supposed to find the money to pay tax, it's just wrong.''
Richards did not support the rules around tax deductibility either as he believed finance was a business expense.
He knew of a number of landlords who were forced out because they could not afford to put their hand in their pocket.
‘'That is sad because they are providing a home for people. We have all rented at some stage and it's not helping if there are way more people than houses.''
The last time Richards advertised a tenancy he received 60 applications.
‘‘Some will be applying for interest only to help with cash flow.''
A mortgage of $600,000 at 6.79% over 30 years is about $900 per week principle and interest or $785 on interest only, she said.
‘‘Costs for everyone have increased with inflation, for investors, insurance, rates and maintenance of properties have increased. With the increase in interest rates, many will be experiencing shortfalls, especially as the interest expense of the business is no longer deductible.''
A property that had a rental income of $30,000 a year after rates and insurance costs were deducted could cost the investor an annual tax bill of around $7,000 (depending on the individual tax bracket).
‘‘Sadly additional expenses for investors eventually transfer to the investor's clients, the tenants who rent the property.''
Copeland said there would always be investors buying and selling.
‘‘However, for some, the change to the ability to deduct interest is making people question if they can afford to hold on to their property especially as they face increases in the cost of living.''
Others were renting solely to family or had converted the property into short-term holiday lets.
It was always a good time to buy if the numbers stacked up but currently they weren't stacking up in Tauranga, she said.
The removal of interest deductibility had a big impact.
‘‘As a standard business expense, that change by the Government came out of left field segregating property investment businesses from others. It was completely unexpected and unaccounted for in financial projections when investors were purchasing in years leading up to 2021.
‘‘So as these costs come to fruition, we will see some pretty stressed situations arise and possibly forced sales. Those investors who have not done the impact assessment of these combined factors will be hardest hit, and yes, some will be forced to sell once they start getting the tax bills.''
Rents had increased because property investors had to add the possibility of higher costs due to poor-performing tenancies as part of their risk management while the 90-day notice was another issue.
‘‘Applicants have to be more thoroughly vetted and those who have had past poor renting history are getting no opportunities to show that they may have changed because investors can't take chances of getting tied into a tenancy they can't end.''
It really has been a ‘‘no-win situation,'' she said.
Minister Woods said it was difficult to attribute any change in market rent to one factor, such as rising interest rates, given other costs such as insurance and rates.
The number of rented properties had also increased by 3 per cent from March 2021 to December 2022.
Investors remain active in the market, with a share of 35 per cent of purchases in quarter four last year, she said.
‘‘Some landlords have low or no mortgages on their properties, so the removal of interest deduction is not a cost increase for them.''
‘‘As Ministers said in 2021 when the policy was brought in, the aim was to curb investor demand for existing residential homes and further level the playing field in favour of first-home buyers while stimulating investment in new housing. Alongside the changes to the bright line test, the interest deductibility changes were designed to dampen demand in property speculation, shift the balance back to first-home buyers and encourage new builds (which were excluded from the changes).''
The main factor affecting rent was supply and demand for housing.
‘‘We have overseen a record number of residential building consents and construction activity, after massive system changes we've made to encourage density in our urban areas where more people want to live and work.''
Woods said under Residential Tenancy Act changes rents can only be raised once per year.
Reserve Bank of New Zealand data shows property investors have loans worth $89.96b (about 26% of all mortgage lending of $343.7b). Of that $47.82b of was fixed for less than one year and $8.5b was floating.
The total value of all loans fully secured against a mortgage was $343.7 billion, most were owner-occupiers, at $248 billion.
Kiwibank senior product manager Richie McLay said it had slight decrease in the proportion of new mortgages to investors against other buyer types with estimations it had dropped from 26 per cent to 23 per cent last year.
The average loan size for customers purchasing a new property was about $550,000 in the past year.
It was common for borrowers to split their lending into multiple portions but, most opt to fix the majority of their lending many also chose to have some variable lending as well.
He said at Kiwibank's current 1-year interest rate of 6.49 per cent compared to the 1-year rate last year of 3.69 per cent, the weekly repayment amounts would increase from about $650 to $855 over a 25-year repayment term.
An ANZ spokeswoman said investors had been choosing interest-only loans for some time.
A BNZ spokesman said total home lending slowed compared to the previous year, which includes mortgages to investors, but that was not unexpected in the current interest rate environment.
It did not publicly disclose the proportion of its mortgage book held by property investors however it understands the current economic environment can be challenging.
Percentage of interest residential landlords can claim on interest on property loans