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David Hargreaves assesses some of the more intemperate suggestions being made about what might be ahead in the wake of the Government's housing policy package

David Hargreaves assesses some of the more intemperate suggestions being made about what might be ahead in the wake of the Government's housing policy package

The key to what happens to the housing market over the next two or three years is what may or may not happen to rents, it appears to me.

If rents go up substantially then this would mitigate extra costs landlords may face in coming years. If landlords can't increase their rentals sufficiently to make it all worthwhile then they might sell. And this could start forcing house prices down if enough of them seek to exit the market.

There's been a lot said and a lot of huffing and puffing by various interested parties since the Government unleashed its housing policy changes last week.

I wasn't going to write on this subject again, for a little while anyway, but was moved to do so by some of the aforementioned huffing and puffing in the mainstream media over the weekend that, to put it bluntly, got up my nose.

And the annoyance is largely around rents and the assertion they will go up.

Okay, let's look at this.

Faced with the kind of increased costs landlords will face once the tax deductibility on interest payments is abolished, it's natural enough for said landlords to look at recouping some of their lost ground by increasing their rentals.

And they might well.

How high can they go?

But nobody can really tell at this stage by how much rents could go up and how widespread this might be.

The fact is the days of 'cost plus' being a viable pricing mechanism are long gone in New Zealand, as they are in the rest of the world.

Rents will only go up substantially if 'the market' can take it.

Most renters would probably feel that accommodation in this country is already pretty 'fully priced'. So, the question is what 'market' resistance would landlords face from widespread rent hikes?

I suppose the big question there would be the ability of peeved renters finding alternative living arrangements. But you can't get blood out of a stone. And to mix up my metaphors, landlords would risk killing the golden goose if they squeezed too hard.

So, okay, that's one aspect.

The other significant aspect is the prospect (very real I might have thought) that at least some landlords might see this as all too much bother and look to cut and run - IE sell their property or properties.

The shrinking rental market myth

A common thread I've seen in comments since the Government's announcement is that if landlords have to sell, this will itself force rentals up in price because there will be fewer of them and, well, supply and demand and all that.

Actually, as a piece of logic that doesn't work out. 

It's as if the landlords are suggesting that by them selling this actually removes their house from the existing housing stock. Well, it doesn't.

Consider for a moment.

If a landlord sells then the assumption is that the house will either be bought by another investor, or it will be taken on by an owner-occupier. I won't get into the ramifications of what if the property is bought by somebody who redevelops it, although that of course is eminently possible.

But if we assume for a moment that the property is bought by either an investor or a owner-occupier than one of two things will happen.

If it's bought by an investor then the investor will continue to rent the property out - so, there will be NO change to the rental market. Okay the investor might try to hike the rental but I divert you back to the earlier comments in this article about the market and resistance etc.

So, second scenario, if the house is bought by an owner-occupier it will be taken off the rental market. Yes. Correct. So, yes, there will be one fewer rental property on the market.

BUT, there will be one fewer renters as well. NO change to the market dynamics.

Oh, you might say, but what if the house is bought by someone who was already an owner-occupier? Well, it might be. But that owner-occupier will have sold their previous house to somebody. And they might have been a renter. Whether it be one or two links back in a chain the fact of the matter is that by the landlord selling his or her investment property they have, yes, reduced the rental stock by one, but they've also reduced the number of renters by one.

The supply and demand are the same

So, the reality is that neither the first scenario, the sale of the property to an investor, nor the second scenario, sale to an owner-occupier, actually make any difference to the supply and demand ratios. (There is, however, one potential outside influence that could affect that equation that I'll come to in a moment.)

In other words landlords selling properties would be no excuse for rent increases since there would be fewer potential renters along with the few rentals.

And of course if enough landlords do seek to sell that could push prices down and might give wannabe owner-occupiers a chance to buy that's been going begging during a time when investors have been ruling the roost.

Now, I did just mention an outside influence. I'm talking about immigration. 

What will the Government's approach be to inbound migration once we've all had our Covid shot in the arm and the borders are opened again?

Migrants need accommodation. And if the Government were to allow large numbers to flock in again after the borders re-open, and if the number of rental properties was reducing then THAT WOULD make a difference to the supply and demand equation.

Now that the Government has gone down this path with housing then it really does need to follow through and completely sort out the supply and demand equation. And it DOES NOT NEED to overcomplicate the equation by making migration open slather again.

The closed border opportunity

The closed border does give us an opportunity to really define the supply and demand situation in the housing market. It really does give us an opportunity to genuinely ask the question of what we want from a migration policy (and I would suggest most people don't want to see migration used as a cheap way of pumping our GDP the way National in particular so cynically did it during its last term in Government).

The Government has made its stand on housing. Let's see how it works out.

On rentals, I hope landlords are 'sensible' and do judge what the market is able to cope with, if they do want to try to recoup in some quantity the losses from the removal of the interest deductibility.

Personally I would not like to see the Government jumping in with rent controls. I well remember Muldoon's wage and price freeze from the eighties. That didn't work very well and I'm not sure that such controls ever do. They cause distortions and unintended consequences.

We shall see. There's a lot of talk bouncing around at the moment.

Whether it is backed up by actions remains to be seen.

If rents do go up and in a sustainable way, then maybe not much will happen to property prices.

But if a lot of landlords aren't able to pass on costs as they like and decide to sell, well, that could get interesting for house prices.

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202 Comments

22
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Before the inevitable afternoon rush of the comments section, can we take a moment to appreciate this amazing stock image?

One of the best yet...

I would have preferred if it said this "5318008"

Oh dear, always has to be one

It's simple. Can't afford the rent alone, share the rent with another family.

There are more families than houses and this won't change for a long time.

30
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Can’t afford your mortgage payments, simple: sell your investment property. I am sick and tired of these whinging investors. Time they felt the same as others waiting to buy their first homes. I can’t wait for removing the interest only loans next. Can’t wait. Orr better not disappoint yet again

Except they have been disincentivised to do so because the genius socialists also extended the bright line.

Much easier to markedly increase the rent over the next few years which will affect all renters apart from the few that are able to get out of the fire.

If one assumes that this is a good policy then an accompanying reduction in the bright line would help bring stock to market earlier.

16
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Lord Dowding,

I have chosen to live and enjoy it, but there are aspects of NZ that get right up my nose. One is the apparent inability to put a building that doesn't leak just a few years later. One is the standard of driving and one is this obsession with property allied to an unwilllingness to pay tax.

We all want and indeed demand first world services, but actully pay for them, well sod that.

We want to have our cake and eat it too: Scandinavian public services with Singapore taxes.

Is there a group of people who are keen to pay more tax than they have to? Investors have taken advantage of poor taxation policy and this has in part distorted the market (on top of a set of regulatory weaknesses) but that is not their fault as they do not set policy. Your angst is better aimed where the fault lies, in poor governance.

13
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Do you mean like how rents dropped as interest rates went through the floor???

Immediate 5yr rent freeze, will do to balance the ..yip sure understand; the accommodation subsidy freeze, the static salary/wages. Agree?

Dowding - have you not read this article? Market rent is already fully priced, and landlords' costs do not have a bearing on this price.

You have misread that: "Most renters would probably feel that accommodation in this country is already pretty 'fully priced'. So, the question is what 'market' resistance would landlords face from widespread rent hikes?"

You’re very confused millennial.

Landlords costs have a complete bearing on this as we are about to find out.

Most investors will try their best to afford the repayment, most tenants will try their best to afford their rent, otherwise investors lose their house and tenants lose their school zone, job, friends and pay to move and start over.
Some investors will lose and some tenants will lose too. Everyone suffers.

Better than some rolling in it and the rest suffering

Yes let's lower the bar for everyone comrade.

Yeah sick of all these landlord DGMs!!!
Landlord DGMs
DGMs....
Bunch of whingers
Haha

And then the wear & tear on the property goes up. But, this simple solution would also force rents down. And maintenance costs up.

Landlord restrictions often prevent families sharing the space or taking in any flatmates. Often those on the rental agreement can be the only ones who can live there and the landlord is seen as being within their rights to deny others staying on the property. Hence for many families having another family live in the garage is denied. Often only owner occupiers of homes can get or share the cost of housing by getting in extra flatmates without being turfed out. Guess what position most renters are in.

Tell that to the 15 indians living in the house across the road, when the landlord comes around magically all the cars in the street disappear....

thegic...the way we are going every second street in Auckland will have a house of this type in a few years.

Yep heading that way. Ghettos within ghettoes

Racist stereotyping isn't necessary.

I have seen plenty of examples where tenants have taken in other people, at least temporarily, and most likely without the landlord knowing. Pretty hard to monitor

10
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CWBW...It's simple. Get the tenancy to a big home then sub let the bedrooms, study, garage, laundry and even the walk-in wardrobe to 18 of your countrymen. I guess like property investment some people would call that a legitimate business as well? There are reality TV programmes (like Bad Tenants, Rogue Landlords) set in Bradford, Leister and Wolverhampton that can provide you with a "business model".
Might not be more families than houses for too much longer if we wake up to the folly of mass immigration. Don't count it out.

Accomodation subsidy
Higher minimum wage
Cheap credit
Immigration
Some will abandon NZ for “better opportunities” elsewhere, replacing by people coming in with cash from other countries.

Yet they are not building enough houses, just talking.

One thing in common among property investors, renters, homeowners and FHB is the current uncertainty and what the nest six months or so will bring . . . and you could probably add Government, RBNZ, banks and economists to that.
The other thing in common is that all know what they would like to happen . . . . and they are very, very different things.

Well 2 things become certain.

Cashed up investors are now well in the driving seat for buying the properties they want and those with little to no interest costs now have the advantage of being able to undercut the leveraged investors to get the best tenants.

And lets face it thats the type of investor that we should be encouraging as they dont add risk to the financial sector.

True but it also means that aspiring investors will not get started. Is that really a good thing?

They won't not get started, they will just be slowed. Which is a good thing. Or they will buy off exiting cashed up investors at a price that reflects the new reality.

An 800K house now costs 6k a year extra to hold, if multiply by 5 if banks work on unoffical DTI of 5 - means banks will lend 30k less for this property.

But, leverage ...

So, if ther seller gets 30k less, and if the seller is an owner occupier and then the bank no longer lends 5x this extra 30k amount (150k) if going on 20% LVR (if they are wanting to upgrade to second home) . etc etc etc. So a 1.2m house becomes a 1.05m house.

If the seller was an investor, working on LVR of 30k, the bank will let them leverage by 100k less for the next property.

Crude maths, aside. Seems to me this will effect entry level property the less?

Yes

Kind of the point. Aspire to invest in something else or ,God forbid, start a productive business with your illl gotten gains.

Cashed up investors may not even know this is happening as it does not affect them. Having said that, it would be good for the country if they added to supply without adding to our debt risk.

The problem with this opinion is that it looks at price dynamics in isolation as behavioral responses in the housing market. Some points to consider:

- H'hold incomes are relatively fixed. More h'hold income spent on shelter means less spent into the consumer economy. Less spent into the consumer economy means less revenue and profits for businesses (consumer spending is related to approx 65% of GDP). Less revenue and profits means less wages and incomes for people across retail, supply chain, and supporting services. Less wages and income means less money to spend in the consumer economy AND / OR specu-punt / buy houses.

It's circular. Rents are constrained if you think a little wider.

- Recent data suggests that 50% of h'holds have <$1000 in savings. If we assume that these 50% of h'holds are renters, we then have to rely on income growth to pay higher rents. Fat chance of the lower SEC getting income increases that enable to pay higher rents.

Once again, it's circular.

we then have to rely on income growth to pay higher rents.

Luckily Labour has increased the weekly minimum wage for someone working 40 hours a week by $44 before tax, as of 1st April. So plenty of scope to increase rent by ~$30 per week for any tenants on the minimum wage.

Jacinda has committed to increasing the minimum wage next year, and basically every year they're in government. So, barring people being made unemployed because of minimum wage increase (which for the most part, simply doesn't happen, although less hours is a genuine risk), if your tenants are on minimum wage you've got built-in potential for rent increases over the next few years, not to mention the huge increase in minimum wages that have just gone under the bridge.

You generally expect 2 Occupants or more per dwelling so $40 x2 = $80 extra per week to pay in rent.

Rents can come at the cost of spending obviously, yes it's bad for the economy, but no, that doesn't mean rent is constrined.

22
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I'm with you David - tired of the huffing and puffing by speculators. They have had it pretty good for too long and it's time for them to adapt.

Maybe they could lower their expectations and look further out?

12
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Love to hear your definition of what a speculator is. I’m guessing almost any landlord is a speculator in your book.

17
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Let's start with "people who want to claim they're running a business, but the business is never cashflow-positive until the only substantial underlying asset is sold out of it" and go from there.

10
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You mean like a startup selling itself via a IPO or a private placement ?

No, clearly not.

clearly ? .. fits perfectly within your "definition" .. you need to try harder.

OK. Use the definitions in the Brightline test around what is captured and what isn't. Easy. You were saying?

.. that your "definition" is hare-brained .. and your reference to BL test has no relevance to the topic at all - BL test makes no attempt to distinguish between "speculators" and the rest.

Weak.

It's time to buy now for you if I may suggest.. be bold, govt. will ensure the housing cost never going to go down for sure.. err.

Yea, OK internet tough guy. Your boner for contrarianism is noted. Meanwhile, 99% of people can understand that *a rental property* that never makes a profit until the underlying asset is sold (and is easily identified as such through existing tax law definitions designed to pick up on what is a rental and what isn't) is different to an IPO, and designing rules to capture one specifically is pretty simple.

Got any more bright ideas? Maybe keep them to yourself next time.

" we are 99% " - heard this one before .

Out of interest - do you own rentals paashaas? And if so, how many?

none - why ?

yes it does? For me investment is holding an asset until death/retirement. Including my rental portfolio, shares, bitcoin (lol only kidding, who buys bitcoin LMFAO!) but no but seriously speculation in my book is anyone who buys an asset expecting cap gains to be the primary method of seeking return.

Soo kinda like derivative trading, only with houses.

So you can't do this anymore with houses, without now attracting tax if sold inside 10 years. At after 10 years is getting closer to the death part for a lot of people (well at least retirement anyhow).

So by its very nature it does.

Go back and try harder!

Completely wrong, a loss-making IPO has a clear theoretical path to profit and can easily pass a profit test, a loss-making rental that doesn't see a profit in 30 years is a farce and isn't able to deduct costs of any sort, this is established tax law. You are only a business if you genuinely intend to make a profit.

I think you lost that argument paashass.

Something like 9 out of 10 new businesses fail within the first 3 years, made a net loss whilst trading and may only ever be cash flow positive in the year they sell down their capital assets. Why discourage business startups so strongly?

Quite a few of these are due to under capitalisation. Why ? Cause all that cash is in houses.

Under current tax theory that business would not meet the profit test and it thus should not be able to claim its costs as deductions. The issue here is tax policy is not enforced, and to me, it doesn't seem anyone wants to have it enforced.

It needs a connection to income, not profit.

Thats not the case, a business must have a clear intention to make a profit or it's obviously a tax dodge.

New home owners are investors too. Once onboard most wouldn’t want to go back in the cold water again...

11
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They appear to be turning into the thing they judged others of being - doom, gloom merchants.

They will always be the cheerful, bright glitter merchants. - C'mon have you seen any car/house salesman, BTC participants being DGM about their products?

11
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Another somewhat more long-term factor will be the a) retirement and b) death of the baby boomers. The boomers hold, I presume, a large % of the rental stock in NZ. They are retiring en masse and the eldest boomers are coming to the end of average life expectancy. What is the nett effect of a) and b)? We know that retirees spend a lot less as they have mostly fixed income with little scope to increase incomes. We know that interest rates are at record lows, so there is no point having retirement capital in the bank. But what happens when they need to draw on that capital and/or eventually die? That is, possibly, a supply wave gathering momentum in the next 5+ years. I am thinking aloud here and apologies to the baby boomers for the framing of this comment, but food for thought.

Don't worry, they can always donate it to the Gates and Melinda Foundation which enables them to build a better world rather than leaving it to their ungrateful children to squander their wealth while they rests in their graves.

10
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......enables them to build a better world rather than leaving it to their ungrateful children to squander their wealth while they rests in their graves.

That's right. Boomers deserve their wealth from monetary debasement and young people need to suck it up because of iPhones and social media.

These attitudes are boring as they are tiring.

Agree - bought a section in 1969 for $1,100, now worth $770k plus and while they are not making any more of these (beach) sections the price rise is a direct result of monetary debasement not an increase in value.

Not so sure about that because your loaf of bread has increased nowhere near as much in the same timeframe

11
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Wow - nice piece of history. 1969 is my favourite year - was so much goin' on, man.
According to this;
https://www.inflationtool.com/new-zealand-dollar/1969-to-present-value
...your $1100 in 69 would have inflated to $19,492.
So your section did about 40 times better than inflation.
So what is that, 1 part CPI, 39 parts land speculation?

Most of that was due to debt growth. The debasement part comes next (now). See FED money supply. You ain't seen crazy yet.

JRSNZ
Sorry, I am a boomer and I aren't planning on going any time soon.
As to a wave of investment properties being freed up your assumption that a large % of investment properties are owned by boomers is probably being just stereotypical.
Yes, a number of boomers do own investment properties but quite probably the percentage is much lower than your post implies.
From my experience a lot of people investing in property for retirement purposes hold them for around five years or so after retirement and then get out: the reality is that many retirees get to an age when they either look to more passive investments or simply tire of having an investment property.
There has been much talk of recent purchases by investors. It would be interesting to know what age they are; are they retirees/boomers looking for alternative investments in reaction to low TD rates, or are they younger middle aged leveraging of the increase in the value of their property. Probably both, but it is the later, then it could be some time before these come onto the market.
As previously posted I got out of investment properties back in 2016 for lifestyle reasons (especially freedom to travel), my wife bought a rental in 2019 due to low TD rates, and my son late thirties leveraged off his property about a year ago to buy an investment property.
And here we are talking about small investors having one of two investment properties where as there are some very large investors / companies owning something like 20% of all rentals.
Being interesting to see a local PI association meeting to see the cross section - in my days (before I became disillusioned with PI meetings) during the boom of 2002-8 there was a very good cross-section from what was then young yuppies up to dinosaurs.
So thinking that investment properties are just in the hands of boomers is questionable.

P8..Are there stats on investors age? Probably not as many investors hold their rentals in a trust. I would guess well over 50% of NZ rental stock is owned by the over 50s.

karl
To my knowledge there are no stats. I agree that any estimate would be a guess and to research it would be difficult and complicated by ownership through trusts.
I didn't mention in my post that my wife's son - just gone 40 - owned five rentals (and got rid of three) last year. So from my immediate family experience of the seven rentals - six are owned by those under 50 and only one is owned by someone over 50 (and she is a lot older than that). However that's just based on a sample size such that I am not going to defend the wider validity.
However, as owning an investment property requires the accumulation of some wealth, I agree that the average age of investors would be on the older side although there are surprisingly some young investors about.
Cheers
Note: In addition to the two sons owning rentals, all of our four sons own their own homes and none have been assisted financially in any way by the bank of mum and dad.

P8..Thanks. Yes, I am sure there are quite a few young people with big rental portfolios. I had a few rental before I was 30 and a number of mates did as well but I do think the majority would be owned by older people (but who knows). Good on your sons for managing to buy their own homes without your help. I doubt my son will be able to do the same but he might surprise me. Just out of interest, do you know why your son in law sold three of his rentals last year? I sold all of mine 6 years ago. Should have kept one, mainly in case (for some unfathomable reason) one of my kids want to live in Auckland when they get older.

Karl
This won’t be a popular reply. He sold them for two reasons; firstly and probably most importantly to realise assured capital gains (due to BLT paid tax on one) and, although in full time employment, to look at business/commercial opportunities as thought decade of price increases were unsustainable. The later does go to show he listen to some of the things we discuss - but all his call.

P8...not sure why that wouldn't be a popular reply. Pretty much the same reason I sold my properties. Better to get out too early than too late, especially when you have made enough to be comfortable.

I did the same as P8 son however I am probably around the age of P8. There is nothing wrong with taking a profit and diversifying. I am sure the P8 family will not be a burden on the country’s resources when they are in retirement. Something this government does not appear to appreciate.

P8, I'm a younger middle aged (late 30s) white-collar worker who (mostly) owns my own home. I am a striking minority. Maybe 10% of my friends are in their own home? And they have at least 20-30 years of mortgage repayments in front of them with very little equity to leverage off.
If my example is anything to go by (and generally speaking all conversations about wider groups of people my age suggests that it is), then I think 50% of landlords being boomers is the least of it.
Ask your son straight how many friends his age he knows own an investment property. I would be totally shocked if it is any more than 1-2 people.

I’m the same age Amigo and all my friends and myself own their own home.

Thats quite understandable for persons with titles in front of their name though.

Solve_it, how did you own a home and yet your friends were not able? If only 1 in 10 owns a home was it due to priorities or was it just affordability? I assume they wanted to own houses?

I got an inheritance of 140k when I was 25 (nearly 15 years ago) and which half paid for a 300k unit in Auckland. I am on my fourth home now. No one else got the leg up or started that early (before prices went nuts).

I think it is a pretty reasonable assumption that boomers hold a disproportionately large amount of total investment properties. Firstly, because they are a disproportionately large part of the population. And secondly, they had very favourable conditions for buying up property through the period 1990 - 2015.

Bugger paywalled, looks a good article. Headline, before it vanished, was Chancellor may regret creating a housing bubble in the middle of a recession.
Pretty relevant to NZ.

It'll just be more dysfunctional thinking from the Telegraph, Fritz - DGM propaganda bringing down the vibe.

The logic around the number of tenants vs rental accommodation is flawed. Fundamentally demand currently outstrips supply by some way and that is how ultra low quality accommodation can be rented at a premium so rebalancing the scales is a long way off. Many potential FHB's are living with parents or flatting in crowded rentals to reduce costs - neither of these are going to liberate much in the way of rental accommodation as they become home owners.
I would have liked to seen instead an article written about the effect that a declining OCR has had on the balance sheets of Landlords with some cost speculation. The interest on home loans has reduced by ~40% in two years so there is some serious headroom in terms of absorbing tax changes and rate hikes before costs "need to be passed on". That's the elephant in the room during last weeks commentary on soaring rents. It's also a reason that I think there will not be a mass exodus of investors. Migration could come back on line within 12 months and that might be worth waiting for if the OCR remains low and stable for many.

11
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Precisely.
As other commentators have noted" How much did rent fall when the cost of mortgages fell?'
Answer: Nothing.

I, for one, will be amused to see what Jacinda, Grant and Adrian do if rents are ramped up as a result of these changes.
Between them, they have an arsenal of fire-power, and one shot at a time; having now fired the first shots, they will use it.

"Don't poke it, and it won't bite you"

"Between them, they have an arsenal of fire-power, and one shot at a time; having now fired the first shots, they will use it."
- much like they have successfully used their firepower and collective genius to make KiwiBuild such a brilliant achievement.

In the same way that there were periods of low rental growth with increasing costs - I've had rents go down in these times.
Rents needed to catch up markedly and this can happen when the market allows.
Remember that long-term, non-speculative investors will want to go through the loss-making period (which the loss-ring-fencing Government and many commentators don't like) into a fair market driven increase in profitability. And of course, the Government said this is ok so it can offset previous year's ring-fenced losses.
Rents don't go up and down with mortgage rates and there are other costs which keep going up, rates, Insurance, Maintenance, Regulatiuons.

Large numbers of rentals have required somewhere in the ballpark of $15,000-$20,000 spent on them to meet Healthy Homes standards. This has happened over about the same period of time that interest rates came down, somewhat offsetting those savings. Most investors who already owned property were coming down from 9-10% rates and are still on maybe 3-4% rates locked in, and haven't been able to lock in a 2.4% rate yet. As usual rates and insurance have also gone up significantly.

This strongly implies the supposedly uber philanthropic landlords out of the kindness of their hearts chose to keep renting out houses that were not healthy or insulated, or that it was not reflected in some form of rent discount? Surely that can't be the case.

Sure a few slumlords give all landlords a bad name. I know of several cases where the home was what you might call "unhealthy" but was actually perfectly adequate and the tenant was being charged under market rent and was happy with the arrangement. But significant new regulations were imposed so insulation, heat pumps, ventilation etc was supplied, and the only option was to increase the rent to cover the cost of financing these (let alone cover the full cost which won't happen for *years*. Interest rates came down as well but the effect of that is quite a bit slower because many owners are locked into higher rates from previous years. Meanwhile all the usual costs keep going up and new hurdles piled on.

Yet these 'significant' new regulations, would still make almost all our housing illegal by most first world country standards.

And most of the things you mention like heat pumps etc. are fully deductable chattels.

If the right policies were in place, just like getting new tires to get a warrant doesn't make your car more valuable, it only stops it from becoming less valuable, so too should installing heat pumps, insulation etc.

It's only a shortage of decent supply that is holding up the value of poorly quality housing.

Still no mention of Interest Only Loan when discussing Housing Crisis.

Why ?

Because they won't touch it... it would be game over.

Game over for those playing that game. And as far the RBNZ is concerned, the volume of interest-only as a percentage of all residential mortgages is a worry. No skin off his nose in instructing the banks to pull that back via regulation. The bankers then do all the work in rebalancing their lending.

And the government would welcome it.

It will happen, I suspect.

And yes, it will be a game changer but there will be a timeframe associated with the banks needing to meet the regulatory requirement - so potentially a slow burn, but a necessary one!

Many banks already have rules around I/O terms. If RBNZ do tackle I/O I think it would just be firming up the rules that banks already self impose, therefore be nothing that meaningful. If they fully axe I/O loans it would stop the game and potentially collapse the market... can't see that happening.

It seems like #rentcontrolnow is more likely...

Rent controls coupled to the new taxation of both profits and losses would amount to a nationalisation of the rental market.

Banks will do that, on a case-by-case basis as IO loans come up for renewal, and if they still offer them for new clients, then it will be teamed with cross collateral and low LVR's.

“ if the house is bought by an owner-occupier it will be taken off the rental market. Yes. Correct. So, yes, there will be one fewer rental property on the market.
BUT, there will be one fewer renters as well. NO change to the market dynamics.”

Nonsense. It’s well documented that a rental stock house more people per property than an OO.

12
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Really?
Do you have adult children who have been forced to return home as a result of the cost of shelter?
We do, and I'll suggest we aren't alone.
And then, of course, there's the elderly, who always used to live with one of their children in times past.
Like as not, that trend will now resume as costs displace our ageing. Not all of them can afford MetLifeCare accommodation, and that number will likely increase.

Reword it then to, "rental stock houses more people per property than *new* OO"

Agreed, Lord Dowding. Not only that, but also while we have to keep going round in circles with these arguments, people keep reproducing. Look at births vs deaths data over the last 70 years. Natural increase of more than 20,000 people every year. https://www.stats.govt.nz/tereo/information-releases/births-and-deaths-y...

I think you and the good Lord are making the mistake of assuming things don't change. Here's a good example:

"Fertility rate: 'Jaw-dropping' global crash in children being born"
(And perhaps a little over-alarmist) - "Falling sperm counts 'threaten human survival'"

All markets are dynamic; ever-changing, and those who don't see that change is upon us today (in these subtle property taxation changes) are choosing not to look.
Fair enough. But you won't be able to say you weren't warned.
https://www.bbc.com/news/health-53409521
https://www.theguardian.com/us-news/2021/feb/26/falling-sperm-counts-hum...

Whoa, that second link is a doozy: "following current projections, sperm counts are set to reach zero in 2045".
Oh dear, how sad, never mind.

LD... When a renter who rents one house purchases one house and moves into it with anyone he resides with it is zero sum. The statistic you quote in your last sentence is correct but it does not make what David said incorrect. He is right. Have a good think about why.

Maybe that is true Lord Dowdy but I have yet to see the numbers regarding the occupancy rate of rental households versus owner-occupier housing. Your argument would be more convincing if you could quantify it.

Brendon.. it is true, rentals house more people than OO on average but it does not refute what David stated.

It does yes, some of the renters who move out to buy their first home move out of one bedroom and into two or three bedrooms. This reduces the relative occupant density.

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Hopefully the government has learnt its lesson on the consequences of a mass immigration policy and never returns to it ever again.

Hahaha, tui billboard

Personally I don't see Rent Controls in the near term. There's much more that can and will be done before that act of desperation. But you never know!

Changes to the tax treatment of landlords mean that rent controls are now “almost inevitable”, a property management consultant is warning. 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.

https://www.stuff.co.nz/life-style/homed/renting/124687179/rent-caps-alm...

Rent controls, the most efficient technique presently known to destroy a city - except for bombing. Someone once famously quoted.

Delboy...that wasn't the fluffer from One Roof who (in)famously quotes "the evidence of the last 40 years" at every opportunity, was it?

is he a sex offender ?

Nope it was a Swedish economist and socialist called Assar Lindbeck.

No, you just apply them universally - in other words, all properties rented are subject to the price control.

I've developed a universal formula, with the variable adjusted to make the lower third of rental properties (as per the tenancy.govt.nz categorisation of lower, middle and upper) equate to 30% of the average gross household income stat for the district.

Rent maxima = (GV/1000) +/- x%

the variable (x) reflects the year of the 3-yearly GV revaluations and the average gross household income in the relevant area.

For the Hutt (where GVs are 2019 at the moment) - my modelling shows x=0 in order to get the lower third of rental properties back in line with that affordability measure. When GVs are next revalued in the Hutt, depending on house price movements - x might be a plus or a minus number - or perhaps if prices stablise and GVs don't move much, x would remain 0.

From my modeling, only the lower third of prices are way, way out of whack (highly unaffordable) at the moment. For example, a 2 bedroom flat was advertised at $520/week. The tenancy.govt.nz Market Rent for that price bracket was $420/week, and under the formula (based on its 2019 GV and 'x' being zero), the weekly rent maxima would be $390/week.

Are GV's not highly inaccurate & outdated at the moment? If these GV's are all increased in line with current market value for properties, how would your formula look then for rents?

Yes, on revaluation, the expectation (based on todays market prices) would be for a large jump in the (GV/1000) part of the equation. Hence the variable 'x' comes into play. Once every three years, the variable is reassessed in order to bring the lower third of rental properties back to a 30% of household income rent maxima. So, for example, the Hutt equation might change to:

(GV/1000) - 5% = weekly rent maxima on revaluation ('x' depends on house price growth and wage/income growth). Tenancy.govt.nz would set these (using existing stats they have, combined with StatsNZ data for average household incomes). The point being that the rent maxima keeps a constant rate of 30% of the average household income in the district.

Kate do you think there is any risk that the rent max would also become the rent min? In other words anyone charging below rent max would relatively quickly bring it up to rent max? There can also be quite a big difference in the quality of two houses with identical CV, not sure how you get around that if the poorer quality house is rented at rent max?

It's a really good point, T-Bone. When I think of how we shop for other big ticket items, we compare prices and buy wherever we get the best buy. So it could be good to have a rent maxima - as people might think, I'll keep looking around for a cheaper place. But, with the shortage of supply - it's unlikely that would be the early response in the introduction of a rent maxima. Once competition is restored, that question of everyone moving to the maximum would disappear.

And as long as the rent maximum is set to equate to an affordable rent (i.e., maximum of 30% of average household income), then at least rents generally won't be as punishing on overall household budgets as they are now.

And yes, I realise there are anomalies with CVs. But bear in mind that much of the dollar proportion of CVs is in land value - and land value is normally high the closer you are to a CBD, or a good public transport link. So it makes sense that a lower quality house (an old dwelling) closer to good amenities and jobs might have the same CV as a new build further out from the main centre. In that case it would make sense that both properties (if they have the same CV) should also have the same rent maximum. One is a better location, and the other a better dwelling.

If the government is considering freezing rents, it might be a good idea at the same time to freeze local body rates ( Environment Canterbury + 24.5%, Otago Regional Council +47.5 %, plus Wellington City and New Plymouth City to name some of the worst culprits).

There is little merit in freezing rents that are already unaffordable (witness our growing emergency housing requirement).

Any rent control policy needs to bring weekly rents at the lower end of the rental market DOWN.

What I have found is that many of these lower-cost rental properties have been held by their owners for many years. Rent reductions will not affect those who purchased years ago (i.e., their ROI will still be significant).

They may have purchased them many years ago but recycled the equity into more properties. You don't have enough information to state that their ROI would still be significant.

Oh absolutely I understand they may have borrowed against the unrealised capital gain to purchase other properties (in other words, I understand leverage). But that doesn't change the ROI on the asset itself - i.e., the fixed price paid for the initial purchase of the original investment determines the ROI.

You are confusing ROI and yield.

Fine, but either way it means that this will often not be true: "Rent reductions will not affect those who purchased years ago"

Agreed. And of course when you bring rental costs down - there will be those property owners/landlords worse off.

It would probably collapse the market, costs up and income down is a recipe for disaster. Not long after that, you'd see employment drop and unconventional monetary policy kick into hyperdrive, god only knows what lies on the other side of that but it won't be prosperity. The answer, as it has always been, is to increase supply, tax capital gains and pump more money into poverty traps.

Yes, well I wouldn't have changed the tax deductibility issue - then there would have been no 'costs up'.

On the answer, I get the first two but what do you mean pump more money into poverty traps?

Setting aside costs up you may be okay, trying to reduce rents makes some sense to me.
Poverty trap to me means poverty cycle. Poor people both struggle to save for obvious reasons but also don't have much education on how to make the most of what little money they have. Give them more, perhaps via KiwiSaver, so they can buy homes and couple that to something like teaching financial literacy in school etc.

The assumption is very far off the mark. I grew up a low-income, single parent household but there was no one better than my mother at budgeting/spending wisely and making what little we had go as far as possible. As a nurse she would cut off the leg of a pair of white pantyhose that had a run in it and save it until the next pair got a run in one leg - and then wear the two single-legged pairs. I have tremendous respect for her - just as I have tremendous respect for any parents struggling on low-incomes. I find your comment above about "poor people" offensive, but then maybe you have never finished your pay week with 10c in the bank. My mother did that regularly.

You're only proving my point, poor people struggle to save for the obvious reason that they don't earn much, and your mother is clear evidence of this, she struggled very hard to save, to the point she would cut off the leg of a pair of white pantyhose. As to financial literacy levels, do some homework, but don't go slinging absurd claims like it's offensive to point out why poverty cycles exist.

Yes, I just hope that Tenancy Services are resourced accordingly as I am sure there is going to be quite a bit of action around the setting of "market" rents. rent setting does not seem to be an action that makes into the disputes process often looking at the latest stats:

https://www.tenancy.govt.nz/about-tenancy-services/data-and-statistics/

An education programme around tenants rights might be a good idea as well... for both tenants and landlords..

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Well written article David. As you say it has been pretty disturbing reading the property lobby groups responses especially the face book post attempting to get landlords to evict their tenants on the coldest day of the year. Sick, even by their standards.
I received a survey from NZPIF today asking all sorts of leading questions like, "Would the new rules change the party you vote for"?, "Will they encourage you to raise rents"? No doubt they intend to use the results of these toxic surveys to place undue pressure on our politicians. They really are pieces or work with no conscience, but then we knew that already.
And I think you are right. A lot hinges on immigration. There might be a couple more surprise announcements in the coming months. We can always hope.

I'm going into negotiations to extended two fixed term agreements next month, let's see. My inclination is that housing supply is so tight they'll probably just throw money at me to not have to compete for another rental.

As for immigration it's off governments radar this year. ImmigrationNZ are still using the rubber stamp but until the Government reopen the border we won't know the full impact of the immigration surge building up behind our closed border. Personally I think government will delay reopening as long as possible using health related excuses.

"I suppose the big question there would be the ability of peeved renters finding alternative living arrangements" alot of renters are already quite crowded unless prepared to move to why-kick-a-moo-cow. The low interest rates and IO terms have encouraged an environment where its cheap to keep an unoccupied Bach, weekend house, part airbnb/part holiday home, unoccupied or under-rented rental. This is strangling supply. If raising OCR is not an option, losing interest-only will help with this aspect

dago... it is absolutely essential that as much pressure as possible is applied to the RBNZ to remove the interest only option in May and with immediate effect. Orr should be providing a public warning to banks and people who hold interest only loans so they have time to prepare for the change. As an added bonus it will solidify the whole banking industry as well, something they have been saying is important for a long time.

You guys are dreaming interest only loans are not about to be banned any time soon, it's just wishful thinking on your part

Yvil...first why do you think they will not ban them? And secondly do you think they should be banned and why or why not? The way I see it, like claiming depreciation on an appreciating asset and claiming interest, interest only loans should never have been allowed in the first place. Interest only loans weaken the strength of the whole banking system so why should investors be allowed to increase the risk of loss to people like TD holders?

our 2 rentals were brought 5 years ago, now both outside any brightline, capital gain has been 50% and each year they washed their face and some.... with a $600k mortgage across both.
So going forward, as long the net profit after tax is still more than the $400k in equity we put down can earn in a Term Deposit and the capital keeps growing, who cares....
But once the market turns, time to crystallise....

When was it not about income and yield... oh yeah not applicable during the interest only debt speculation model. Saw it referred to as the moron bubble the other day.

It won't be rents. It will be interest rates.

With around 40,000 AirBnBs and god knows how many vacant properties that could potentially enter the market there is plenty of scope for a price fall AND an increase in rentals...even without there should be a more affordable (though still expensive) stock for FHB

Well according to the World Economic Forum by 2030 we'll all own nothing but be happy...so chin up team of 5 million...

Rent price "IMO" is set by... rentals available v amount of renters. Unless they ease up on immigration and allow the balance to tip the other way, residential rents will continue to be overinflated.

They are also constrained by ability to pay. And because so many do not have that ability to pay - we have the Accommodation Supplement (a subsidy). More than $2b per annum. Unsustainable.

Tony Alexander at his cringeworthy best on his One Roof Podcast yesterday. Tony and his partners in crime pretending how upset they are that renters will have to pay more. Sounded suspiciously like the "renter" who called in, worried about rent increases, was a One Roof ring in.

I heard 2 PIs on talkback saying how they might have to sell a property and that would be bought by an owner occupier leaving their tenants living on the street.

I mean, give me a break

1. "Rents will only go up substantially if 'the market' can take it"
Wrong. There is a substantial housing deficient. Rents will continue to go up until the market is balanced. The need for accommodation is almost inelastic. There are a limited number of ways out of renting if you cant afford to buy a house (e.g. move in with parents/others, get additional accommodation supplement, move city) so there is a long way it can move. There will not be balance again until the remaining investors can make a return. I live somewhere where rents went astronomical due to a housing shortage so I've seen it in action.

2.The shrinking rental market myth
Wrong. Yes when someone moves from renting to owner occupier the net change is zero. The issue is distributional. Those that move to being owner occupiers are the "richer" renters leaving "poorer renters facing relatively higher (unchanged) rents.

The only way out of this mess now is for government to pull the levers harder:
a) Build more state houses even faster
b) Bring forward the NPS on Urban Development requirements in time
c) Speed up the NBEA & SPA, or simply make interim changes to the RMA to further remove density and zoning restrictions
d) Keep the immigration rate low once the borders have opened again until we are on top of this mess.

The other option you forgot to mention in 1. above is that those unable to afford rent seek out emergency accommodation and then go on the state-house waiting list. State-house rents are set at 25% of household income. Yes, we need more state-houses but as more and more households end up in emergency accommodation, it exacerbates the state-house waitlist - to a point (if rents continue at the same level, or rise) we find ourselves on an un-ending treadmill.

Objectionable as it sounds, universal rent controls are the only way out of the mess - as the mess getting worse/is spiraling out-of-control by the day/week.

Yes, in the current NZ context short term rent controls could work for awhile as long as government is working on fixing the supply. However capping rents would drive more investors out of the market as they wouldn't be able to make the needed return.
This distributional problem would be compounded - more richer renters becoming owner occupiers leaving more poorer renters facing higher relative rents.

I live somewhere where there were rent control limited to 5% per year for many years. Of course the landlords all raised their rents by 5% a year, well above income changes.

It’s interesting how your rent control experience meant to be a ceiling became a floor.

However capping rents would drive more investors out of the market as they wouldn't be able to make the needed return.

It depends. Yes, yields (based on current market pricing of the housing asset) would in many cases be negative - but you'd be surpised how many rental properties, particularly at the low end of the market, have been owned for years. If you calculate "needed return" on those - based on ROI - they're making a killing (which is why they are held assets). Of course, many of those properties have been leveraged for subsequent purchases, and I suspect this sort of portfolio holder will sell off the properties with the smallest ROIs first.

I live somewhere where there were rent control limited to 5% per year for many years. Of course the landlords all raised their rents by 5% a year, well above income changes.

I think you are describing a capped rent review (capped at 5% per annum). My idea is instead a weekly rent maxima formula, applying to all rented properties (i.e., universally applied) based on GV. The formula being: (GV/1000) +/- x%

the variable ('x') being set to align the lower-end of the rent market to a weekly rent maxima of 30% of average household incomes in the district/area. The variable would be reviewed and re-set every three years following the GV revaluations.

In the interim years, maximum rent increases would be linked to CPI.

Rent controls require a wise all knowing controller. Otherwise bizarre things will happen.
Nobody is that wise or all knowing. So it will be bizarre.

That's the first time I've had that objection! Very unique! The wise controller is called an Algorithm;

"Algorithms are always unambiguous and are used as specifications for performing calculations, data processing, automated reasoning, and other tasks."

https://en.wikipedia.org/wiki/Algorithm

lol. Algorithims are always wise. Not convinced.

There's lots of documented evidence of algorithms being racist. And algorithms doing exactly the wrong thing, in the judgement of the humans making a judgement.

Algorithms are the opposite of wise. Pretty much by definition, actually - a set of rules that you apply unthinkingly to transform one piece of information into another. Works well if your rule set is big enough such that there are never unhandled corner cases, and all cases are handled in a 'sensible' way.

In other words, you're just back to the wise controller you invoked the need for. Any algorithm that is truly up to doing the job without error would be a wise controller, that's pretty much a tautology. But that statement of fact doesn't make it any easier to invent such an algorithm.

Yes, the 'benevolent dictator' theory.

Ok, I'll do it. But remember, you were warned.

Yes, you are correct on the amount of equity that different investors will hold, but the yield is always based on present value, that's just the rules of the formula. So if the yield is not high enough, there are only two ways to improve that, eg increase the rental price, or lower the present value.

This is where Govt. are hoping their new measures will cause people that are not now going to be making a sufficient yield to exist the market, and if enough of them exist at the same time, supply might be greater than demand and they sell for less, which would make the property more affordable for an FHB or give a better yield for the next investor buying in.

If this doesn't happen, and it sounds like rent increases are on the cards, then the Govt. still has a few cards of their own still to play, one of which I'm sure would be rent controls.

The Govt. problem is, it has let the chasm widen so far from where we should be to where we are, that we can't possibly get there in one simple leap. And you can't really jump a chasm in more than one leap. A lot of these measures are really jumping into the abyss and hoping. They still don't address the basic underlying problem.

The application of yield is one of the problems on the way we view housing. I know what it is but I'm saying it is not a metric that serves the greater good/wider society. As many economists are now saying - we need to see housing/shelter as a human right.

More or less the same argument about why cost-recovery is an accepted norm with respect to the supply of reticulated water to our communities.

Ooh I like this but I bet there will be a range of people on this website who fall out of their chair when they read this comment!

Thanks for the support!

Yes, but having shelter as a human right and making an acceptable yield are not mutually exclusive and in fact you want yield and rent to be inclusive, and it is capital growth that you not only want to be exclusive but nonexistent except for minimal CPI inflation.

For example in jurisdictions with stable 3x median income multiplies, since there is no money to be made on non-value-added capital growth then it's only made on the yield.

What this means as compared to say Auckland is this:

Auckland house at $1,000,000 ie 8x median multiple, the 3x median multiple house would cost $375,000. Remember that up to 1993 historically all housing in NZ had been approx. 3x median multiple.

Rent yields on Auckland Property are about cash flow neutral, so all return is on capital gain, say 10% capital growth equals 100,000 gives a total return of 10% net. At least half of this $100,000 is due to rentier behaviour due to Govt. policy, so say 5% is an acceptable return.

So for a 3x multiple houses at a 5% net based on yield alone, this would be $18, 750. plus say $10,000 costs equals $26,750.00 (7.1% Gross) or $514 weekly rent.

Thus property price is lower, rents are lower, but the yield is higher to compensate for no non-value-added capital growth. 3x mutiple policies result in a more stable less risky investment hence total long term cash on cash return can be lower. And of course you could leverage this return to give a higher ROI - all without having high capital growth inflation.

However the real point in all this, is it has to happen on the Net yield side to work, which you can greatly effect by the likes of allowing depriciation, correct chattel definitions, interest deductability etc, along with correct LVR settings, loan type etc.

Without having non restrictive land supply, this only leaves the Govt. to attack the yield side mechanisms, which without, where does the return come from?

It can only come off a lower priced rental proerty, but properties are not being built any cheaper, in fact they are costing more to build, and the land price is locked it, the Govt. are still actively paying rentier prices, which they are trying to counteract by still allowing interest depreciation etc, which savings put more pressure on new build land, and keeps the price high and so the cycle repeats.

All because they, and previous Govts., for the last 25 years could not sort the supply of land to equal demand.

Yes, but having shelter as a human right and making an acceptable yield are not mutually exclusive and in fact you want yield and rent to be inclusive, and it is capital growth that you not only want to be exclusive but nonexistent except for minimal CPI inflation.

I'm absolutely with you on that. The rest, I've heard it all before: land supply and infrastructure - the latter taking time and money.

And I'm definitely with you on needing to move toward that median multiple - which is why I've targeted the weekly rent maxima to be no more than 30# of average household incomes for the lower price rental market in each particular district.

So, yes, yield will have to be sacrificed by some, and with that property owners may exit the business partially, or even fully depending on the leverage on their portfolios.

Think of rent controls as an immediate circuit breaker on over-priced urban land.

That's good to hear that, but I don't think most people and obviously the Govt. have worked through what prices must have to come down, or rents must go up by if you remove capital growth, and the main determinants of achieving net yield, ie removing depreciation, chattel redefinition, interest rate deductibility, and maybe in IO loans, and tighter LYRs etc.

I agree rental prices cannot be allowed to go up, but that would mean prices would have to reduce at least 30% plus to even look like getting a basic yield to make it worthwhile, and Govt. reaction is to prop up land banking prices.

Interesting to see what happens in the next few weeks/months.

Looks that on average, a 30% price drop in the Hutt area would only take us back to the 2019 GVs. That is so not that long ago!

That's my point. I'm saying we aren't too far from yield (R) revaluing properties back to somewhere 30 to 50% less than the present value to get the I/V balance right.

They are saying that highly leveraged rental investors need to sell. Well, even those with plenty of equity might want to sell while they still have some.

Is there much emergency housing left? How quickly can we build state homes? The Government has already proven that it is inefficient and ineffective at building many homes quickly.

How quickly can we build a new house? If you have a building consent in your hand & are ready to start? Factoring in the constraints on the supply of materials & labour allow 7 months to complete a single level 150/220m2 house & external work on a reasonably level section PROVIDED THAT you can get council inspections when needed & the supply chain doesnt (further) break down . If its a complex design or on more than one level - add up to 50% more time

Ha ha the inevitable for NZ already started to happen now.. high housing cost, high rent, low worker wages... soon now.. no teacher, no police, no engineer, no mechanic, no doctor, no nurses, no physiotherapist, no dentist, no pharmacist.. it's just getting exciting that country. The effect of wealth subsidy. Instead of 80% down? correction? NZ said, it's 20% potential growth...to be paid by future workers or magical easy money from overseas seek shelter and residency. Soon the NZ wealthy, will queue to pick up their rubbish, self diagnosed/google doctor for their health issue & order the medication online via Aliexpress. Sweet Kiwis.

I would not classify renting properties as a business. As until ring-fencing of property losses, the residential rental sector did not pay any net taxes. Any tax paid by those making a profit was more than offset by those who received tax refunds from property losses, deducted from other income. Given prior to the ring-fencing of losses, the value of residential rentals in NZ was approximately $20 trillion, this is a lot of money tied up in assets to make a net sector loss. This is even more marked, when you consider that this sector receives subsidies via the accommodation supplement.

Obviously the accommodation supplement is needed for better social outcomes. But, this does not take away from the fact, that if the supplement was axed, rents in general would fall. And landlords would be spending more time in the tenancy tribunal, chasing missed rent payments.

Regarding the comparing of renting property to tech IPOs and profitability. IPO tech companies would be classified as a business by my above definition, as the tech sector would be a net payer of taxes, via mature companies in this sector.

Agreed.

NZ has simply spent the last 40 years bidding up land prices (of which there is only an artificial scarcity) when the money could have been used much more productively.

See https://www.greaterauckland.org.nz/2016/07/11/remember-the-last-time-hou...

There will have been some real increases through adding GST, higher building standards, and larger house sizes but the majority is simply land price inflation.

Yes. We need that policy of a stable population. Not that hard to achieve and commonly discussed here on interest.co
But all our political parties ignore the demand side solutions. It's weird. Have they made a secret agreement to ignore demand side? Actually I think that unlikely, but explain the weird.

Fundamentally, politicians' jobs are easier with a growing population, and the growing pains of the growing population always appear years down the road, hopefully when you're out of office.

Agree Lanthanide. But it seems the population explosion and fire is sure scorching their bits

Market rents will probably not increase by much more than their usual annual uptick, however many properties will move up to the currently advertised market rent.

Can't wait for the shit to hit the fan when the first people who were $200 pw under market get their annual rent reviews.

Yes and there’s plenty of those with mum and dad landlords happy to take below market rent but now they have no choice but to jack it up.

Labour once again with a sweeping policy that benefits a select minority and yet burns the masses at the bottom.

How do you mean 'no choice'. If I were running a business and it was no longer profitable - I close the business down and find something else to do. I don't push my product prices higher and expect the government/tax payers to fill the gap.

You understand this is phased in over 4 years ? You are typing scaremongering butthurt bollocks.

My understanding is that the number of people housed in a rental is often a greater number housed in a owner occupied house thus a basic one for one substitution doesn’t apply and actually we will reduced rental stock if rentals are sold on to FHBs

I rent. 5 brm house. 2 people.

If an investor wishes to sell their investment property, it is now less likely to go to another investor. The new tax laws are to tilt towards first home buyers. So it's more likely to be an owner-occupier buying it. At current prices, even the current tenants may not be able to buy their rental unit. They will need to move, perhaps unwillingly, and into a property with a different, possibly higher, rent. Moreover, if the rental unit contains flatmates, they may be after separate new homes or another large home that will take all of them.

Existing properties should have kept the existing tax rules, even for new purchasers.
But if existing tax rules stayed with the existing owners (and not the new purchasers) that is still better since the current owner investor will be less likely to want to sell.

Overall the new situation sounds like a mess.

They will need to move, perhaps unwillingly, and into a property with a different, possibly higher, rent.

Yes, which is why rent controls are needed as a complementary policy.

Actually, I'd have gone for universal rent controls first (i.e., I would lower the cost of renting via regulation), and left the tax treatment of interest deductibility out.

Their new abode may be a nicer place which simply attracts a higher rent.
I like the way they do rent controls in New York as we saw on the breakfast show - there is a process where all parties talk with each other so all sides are considered.

Also we were all after stability in the rental market so that renters have secure tenure. The new one-sided initiatives from the Government go against this and they are ok for existing rental properties to be tilted towards first home buyers which will de-stabilise existing tenants.

With lowering rents, the upcoming huge rates increases in Wellington and ongoing insurance hikes are also not going to help anyone.

I wonder if there is much scope to increase rentals over the coming year. There appears to be no shortage of rentals in Auckland at the moment. There are heaps to choose from and lots are ‘available now’ on Trademe. Not surprising, as there has been lots of an investors entering the market recently! Also our closed borders has reduced demand ( eg few students are coming in, and there has been next to no net immigration since April 2020). Supply is increasing as the unitary plan has incentivised development of large sections and there are lots and lots of new houses going up. I suspect a few Airbnb’s are also being turned into longer term rentals.

And its getting to the point now where we won't see international students back until next year now as they will miss the bus for semester 2 study at universities. So can all these rentals hold out until Feb/Mar next year at the earliest until we've sorted out vaccinations?

Anyone looked at how the changes in interest deductions influences the price of a rental based upon the free cash flow method? Say if purchased with a 40% LVR. No deductions and try a few different discount rates (given its likely interest rates rise over the term of the investment).

Be interesting to see if anyone has run the numbers before and after to see how dramatically it impacts the theoretical price. It must be quite substantial given just how large an expense interest is for a residential property investor.

Here's a comment from another website from an investor with a 43% LVR across his 6 properties;

Like you I have done the sums. 43% LVR so that’s good but not enough rent to cover paying tax and repaying the balance of the loans as well as upgrade the houses. 4 now in need and two are done. Not enough cash flow to do that and pay tax and pay the principle as well.

People should really stop making blanket assumptions about home buyers vacating a rental property so there is no change in the supply. Its simply not true.
- a first home buyer living with their parents does not vacate a rental property
- a buyer purchasing a holiday home does not vacate a rental property
- a recent immigrant buying a home does not vacate a rental property
- a divorcing couple who sell their home but buys two more does not vacate a rental property (and in fact, 3 houses are now likely to be removed from the potential rental pool - the one they sell, and the two they buy).
- a first home buyer currently sharing a flat does not vacate a rental property, they vacate a bedroom. But thats hardly any condolence to the family with 3 kids who have to vacate the property that they just got evicted from.
So perhaps someone should go out and do some actual research as to how many home buyers are actually renting entire properties vs how many are not, and then work out how quickly the supply of rental properties will be absorbed by home occupiers.

Countered by a first home buyer (currently in rental accomodation) purchasing a new build, a deceased estate, a developer conversion to townhouses, an ex-holiday home, or from an exiting emmigrant all increase the rental supply.

You example moved beyond FHBs to divircing couples. But counter scenarios like that with formerly divorced families becoming new blended families on second marriages, or retiree moving into a rest home or retirement village freeing up a 4 bedroom home. etc etc

First home buyer taking in flatmates for first few years. As they stillw ant that social flatting life, or need help with the bills.

Too many variables for the dumb argument that David was responding to.

But mostly: The typical FHB buyer profile is probably a childless youngish couple in a small rental with no flatmates completely exiting that market to buy a first home of similar size or to a buy a new build.

I agree with this analysis.

Does anybody really believe landlords have been holding back in terms of what the market will stand in terms of rent increases?

From my recent analysis, I'd answer no. The envelope of what the market can stand/afford is being pushed out rapidly. This is the Wellington area, though and I think our increases have now taken the region to one of the highest rental costs nationwide.

Speculative but important question - what happens when the bubble pops and prices drop at least 20%, taking the economy with them?
Downward rental spiral ie. More people unemployed, more over crowding, living with family etc. Plus less immigration

Savvy cashed up buyers (not the ones you see on here trumping it up) will swoop in and buy all the bargains to be had. But prices will keep falling because nobody can time the bottom.

The key metric is if it causes unemployment.

At what price point would this kick in, eg could handle a 5%, 10% etc. without it causing enough unemployment to put us into a downward spiral.

Taking 20% off at present would only put us at a price point 18 months ago.

I'm starting to think what a lazy and inhumane change this new rule with the tax deductibility of interest is.

The government is confiscating a considerable amount of money off landlords effectively telling them to make their tenants work harder or eat less if they want to make any money.

It's like one of those medieval situations where the King is demanding more taxes from the lords for the crusades who then have to work the peasants harder but the peasants are already maxed out.

It would have been far more moral to have banned interest only loans. Landlords would have reduced cashflow but would have been paying off their mortgages and saving money for the future. They couldn't really complain about this too vociferously.

I think the government has mostly been driven by the increased revenue and being seen to have done something rather than stopping house price inflation.

Also the UK have already done something similar so not much thinking required. The UK system seems a bit fairer with minor, accidental, landlords being far less impacted than the professional landlords with many properties.

https://www.axa.co.uk/landlord-insurance/landlord-tax-relief-changes-exp...

Change is coming. Investors will act to protect their own (self) interest on the back of that which in turn will drive more change from the Tooth Fairy and the Fat Controller. And on and on. Fun times.

The structuring of property to continually lose money, to pay no tax so that loss can be pushed towards minimizing tax in an associated party, while never paying of debt and supporting ever increasing profits for overseas debt owners, while leading us to pay more and more for the asset to achieve this miracle state of increasing debt/tax avoidance.... is simply the greatest cancer in NZ. It is destroying the fabric of NZ - not that the Specuvestor's care.

Anyone that thinks this is great for society is a narcissistic sociopath.

Megan Woods Minister of housing Studied and graduated in Gendering Maori urbanisation and integration, 1942–1969. no timber or nails now
And we all wonder how the housing situation got better after Twyford

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