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Grant Robertson has walked a tightrope of compromise with new tax deductibility rules for landlords

Grant Robertson has walked a tightrope of compromise with new tax deductibility rules for landlords
taxDeduct

By Greg Ninness

Don’t expect a mass exodus of landlords from the property market now that the Government has finally announced details of changes to the rules on tax deductibility for residential investment properties.

As expected, landlords will no longer be able to claim mortgage interest as a tax deductible expense on existing properties, but will be able to claim the interest deduction if the property is a new build.

In making the distinction, Finance Minister Grant Robertson is walking a tightrope of compromise.

On the one hand, he is partially removing a tax advantage investors currently enjoy over owner-occupiers, particularly first home buyers, who often compete for properties in the same part of the market as investors.

It is hoped this could also help moderate some of the irrational exuberance that has helped to drive house prices up 26% over the last year.

On the other hand Robertson doesn’t want to push investors out of the market completely, which could reduce the supply of new homes and drive up rents.

So we have a compromise, where investors who purchase newly built properties will still be able to offset their mortgage interest against the rental income for tax purposes, encouraging them to stay in that part of the market, which should keep developers happy and the supply of new homes flowing.

On the flip side, older properties may become relatively less attractive to investors, clearing the way for first home buyers to have a crack at them.

Of course to have such a rule the government has to define what constitutes a new or existing property, and it has decided that properties completed on or after 27 March last year are regarded as new (and deductible) for tax purposes, while those completed before that date will be regarded as existing (and non-deductible).

So should we expect to see a rush of properties coming on to the market, as landlords with residential properties that are more than 18 months old decide to cash up and either exit the market completely or reinvest in new builds?

Probably not.

That’s because the ability to deduct mortgage interest will be phased out (for existing rental properties) gradually over four years, which means landlords who do decide to quit the market won’t be under immediate pressure to sell, allowing an orderly withdrawal from the market.

And those that do decide to sell are more likely to be those who have taken on so much debt that their investment is marginal anyway.

It’s more likely that the great majority of landlords will decide to hold on to their properties.

Consider the situation of an investor who purchased a residential property just two years ago.

Between August 2019 and August 2021 the Real Estate Institute of New Zealand’s national median selling price increased from $415,000 to $620,000. Over the same period the average of the two year fixed mortgage rates charged by the major banks declined from 3.70% to 2.82%.

And it's a fairly safe bet that the landlord’s rent would have increased over that period as well.

So unless the landlord has been recklessly increasing their debt over the last couple of years, they should have seen the value of their property increase, their equity improve, their rental income rise and their mortgage payments decline.

Those benefits will almost certainly outweigh the loss of mortgage deductibility, which in any case won’t fully disappear for another four years.

So while prudent landlords will no doubt review their position in light of the tax deductibility changes, a wave of panic selling seems extremely unlikely.

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92 Comments

For Auckland city apartments rents have declined but that is not what an investor will be worried about. Having prolonged periods between tenancies is the concern.  Expect investors to sell up in the city where both the quality of tenants and the rental income have declined and transfer their investments to new built apartment blocks in the suburbs.

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It's not just about the quality of the tenants. I recently viewed a few apartments in the SugarTree building at the top end of town. The building is fairly near the city mission. It was late afternoon and the streets were a pretty sketchy place. Why are they building a new city mission in what could be a great investment area (near Universities etc). I didnt buy the apartment in the end, it felt unsafe on the streets even though the apartment building was beautiful. I'm not surprised rents are dropping... it does not have the feel of a world class city anymore. I always rated Auckland CBD but the inequality is becoming very obvious. The government is losing the battle on this one.

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Doesn't matter where they build the mission, the inequality will still be there.

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I agree with you 100%. My comment maybe didn't convey that. What i was trying to say that the inequality is becoming more obvious in the city and it's getting worse.

Where the mission is located shines a spotlight on it, might be a positive thing moving forward. Address the underlying issues rather than moving people on.

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Tthe irony here of course is that rising inequality is being driven by the increasing accumulation of wealth and income in the accounts of the property-owning classes!  

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Thats for sure. A class that has been focused on rinsing income tax with property debt. Asset growth, and pay little or no tax - easy to see how th inequality has occurred. Incidentally just what this article is about.

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I've just glanced at the average sales prices. Pt Chev has increased by over 60% to an average over 2.5m.  That would be a good place to put the city mission.

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We own & live in SugarTree, glad you like our apartment complex! The City Mission is only temporarily located next door on Union St & is moving back to Hobson St soon as their new, state of the art building is completed. So the homeless folk won't be on our block so much anymore soon.

But I've been living in downtown Auckland (off K Rd before this) for almost 10 years & have never found the homeless people to be any kind of problem at all, they're actually really nice in general - treat them like people & they behave like normal people... only the odd example of crazies & that's usually between themselves rather than anything outwardly directed at the public.

If anything I've found my neighbours to be the annoying thing about apartment dwelling - same as any kind of home ownership, I imagine!

So I respectfully disagree with your take on the streets around here. Sure it's not like the suburbs but that's not what you want from your CBD is it?

 

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Respectfully, whilst they are mostly good people, most people living and working in the CBD would rather not encounter them whenever they leave their apartment.

It is unfortunate they are concentrated around the Hobson/Union Street area. It gets better however as you walk further down towards Midtown and then Downtown.  

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While I agree that most homeless people are actually fine to deal with if you just treat them like human beings, I do think (as someone who walks to work in the CBD every day) that the situation has been getting worse at an accelerating rate. The absolute number of homeless has been rising - and so have the number of homeless who have very obvious substance/mental health issues to the point where they are behaving threateningly. As a 'civilian' you're mostly safe, but I see a lot of anger and violence within that community and it is not at all relaxing to be around.

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Neighbours do your head it. I specifically wanted a house with as few neighbours as possible. As soon as a house had four or five it got crossed off the list no matter how nice the house was. The best you can hope for is two in the suburbs and I still advise knocking on their doors before you buy to ensure they are not nut jobs. Got lucky in the end and found a great place with two good neighbours.

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A very good point Carlos.  Checking out neighbours is a must as part of due diligence. But there is one problem and it is that those neighbours will tend to shift sooner or later and it's also likely that their house could be bought by an investor and you could get the uncivilised underclass as tenants.  This has happened to me over the last few decades even in the leafy suburbs.

I lived in Clover Park for 25 years, in the better part up near Redoubt Road.  It was a nice area until the demographic changed. I got burgled three times.  I was too busy running my small-sized business to shift.  The immigrant Fijian family at the rear were ok until they built what I thought was a garden shed until I heard an awful wailing issuing from it and was told it was their new temple and they were exorcising bad spirits. They used to leave food out in the open as offerings to their higher powers.  Such food offerings soon attracted rats.  Then they started burying their own food waste and empty cans in a pit dug against my back fence despite there being a weekly rubbish collection; this activity raised the soil level and held water to the extent that it rotted a fencepost so much that it had to be replaced.

So, when I eventually sold my business I had the time and money to move to a leafy suburb.  But the neighbour problems didn't go away.  I will describe them in a future post.

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Very bizarre and sad. I am sure you reported to the authorities and nothing was done. 

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My only apartment is close to city mission on Hobson st.  It's rental income has dropped by 20% and I'm guessing the selling price by far more - not that I can complain given the income it has delivered for over 10 years; can't expect a license to print money to last forever. The problem is not the people on the street but the ones in the building - a good building manager is worth their weight in gold.

If I was an investor I would sell my apartment and buy in the same area but an apartment block where every apartment has a car park.  I would do it today except that the difference in selling and buying price will be about $500k.

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Makes a lot of sense. I think there will be a flight to quality over time, and towards midtown and downtown where there are more big corporates and less homeless people. As the City Rail Link is completed, a car park may be less essential for most people. Buildings like Metropolis and Pacifica will stand the test of time and remain popular for investors.  

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Yep, at least pre-CRL the money is all down by Britomart. There are still the problematic Fort St crew re: Pacifica building, but generally that area has improved immensely.

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Yes agree Fort St around the liquor store is the worst. But long term I see this improving with more homeless people being housed in new Kainga Ora developments, and a return of international tourists and professionals to the CBD. 

Around the City Mission will probably remain a ghetto as unlikely to be relocated.  

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The CBD will recover over the next 5 years, and know multiple investors currently buying up apartments up to 20% under value because: 

1- Council is investing $133m into midtown to make it more liveable

https://www.newshub.co.nz/home/new-zealand/2021/09/five-year-133m-revam… 

2- With the amount of construction being done by Kainga Ora across Auckland, more homeless will be moved out of the CBD

3- Return of international travellers and students

4- Central Auckland is becoming too expensive to buy anything (2 br units going for $1m+!?), so professionals will have to choose between living in CBD/city fringe or over an hour away.  

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Something to also consider is that working from home is something that has far reaching effects on cbd's.

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Agree but most companies will still require at least a few days in the office each week, this won't change. Long term, many people will still want to live and play in the CBD. Just as long as it's not full of homeless people like around Hobson/Union Street

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It will be cheaper to house more homeless in shoebox CBD apartments than in the new blocks outside CBD. Some apartment buildings are getting bad reputations and usually it is much easier to lose a reputation than gain one.  

My daughter very recently bought in CBD for under $500k whereas new apartments in Takapuna, Birkenhead, Glenfield are over $800. The big difference for my happy first time buyer daughter is not needing a car. That is saving her money and also commuting time.

It reminds me of when I worked in Manhatten 40 years ago where wealth and poverty were side by side and the workers commuted in from the suburbs.

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Where/what did she buy for under $500k? These days $500k doesn't get you much in the city, probably a 1 br 40-50sqm without carpark? 

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very small 3 bed no car park of course but in my opinion a great location.  She is happy living on her own but with 3-bed it has potential.

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at that price, surely leasehold?

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I was just thinking that.

I have seen some student apartments which are 3 bedrooms freehold around that price and the rooms are tiny. Total floor area can't be more than 50-60 sqm at that price? 

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Freehold. 45sm. She is not tall. I'm guessing 2 years ago it would have been 4 tenants all foreign.  When you crowd in foreign students you just need space for beds and a location near place of study. As a owner occupier she appreciates the security, the top floor for peace, quiet, natural light, local shops, local public transport service. Happy daughter. She earns enough to afford any reasonable increases in future interest rates. 

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A 3 bed apartment that is 45sm you have got to be joking? 

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There are plenty of those around the student district (Grafton, Uni precinct). They are a cash flow play but I wouldn't want to live in one of these bedrooms. For 500k that is a reasonable price to have a place to live, and in the future she can rent out the bedrooms. 

I expect international students to return in the next 2-3 years. 

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Agree, there is no such thing as a 3 bdm apartment at 45m2 in first world housing. Even that size for a two-bedroom is pushing it. It's really a one bedroom with large storage rooms.

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Pathetic... so for FHB's there will be no more stock to the market. They'll need 20% deposit to buy old stock. If they have less than 20% deposit, they can look to new builds. However they won't have a chance to buy new builds as the will have to scrap it out with investors. 

Let's not forget about FHBs trying to build savings that will be hit hard by rent increases and fall further behind.

What's the govt trying to achieve here? Just abit more tax.

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They're not hoping to achieve anything other than being able to tell us before the elections that "Look, we've done this and this and this, you can't say we haven't done anything!".

They are either really stupid and actually think it's a supply issue, or they're just trying to look good without upsetting the asset owner class. Take your pick.

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"Mass exodus of landlords from the residential property market unlikely"

 

We know :

1 : Tantrum thrown by Landlord / RE Lobbyist

2 : End Result will be dilution by Government - Three step forward and two step backward. Jacinda Arden - True Politician - She can take it as a compliment or ...... 

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Wait until the RBNZ is forced to raise interest rates, and significantly so; this is going to happen sooner rather than later. And wait until borders reopen and the young and skilled Kiwis give the finger to this ridiculously inflated housing Ponzi and go overseas for much better opportunities and a saner housing market. This is when the fun will start for many housing specuvestors.

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I can see owners of all the new 2 bed no garage townhouses in CHCH  that are sold around 700 to 800k getting stuck with them for decades if we did see a  prolonged high OCR and price drops, on the other hand though, they will provide cheap rent and supply as tenants dont stay long in these shoebox's. And should an exodus occur of young Nz'er, with our aging population the goverment will have no choice to open up record immigration again.

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You do know that the NZ borders are open for anyone to leave right now (and have been the whole pandemic)? It is just returning that is difficult. Or are you talking about other countries opening borders?

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You do know some of other countries are only accepting people who holds resident visa or citizens at the moment? There are also other factors like avoiding virus infections and MIQ issues. I believe this is why we haven't seen much activities moving out of New Zealand.

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FHB and others are also moving out of Auckland to much cheaper places, like Christchurch. That way they also skip the worst of the lockdowns. 

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Not a bad plan if you can tolerate small city NZ. I think I would struggle.

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"On the one hand, he is partially removing a tax advantage investors currently enjoy over owner-occupiers"

Could read

On the one hand, he is partially removing a tax advantage business owners currently enjoy over wage earners"

 

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If people dont have to look like they are taking a loss they usually won't, to save face. If I get margin called on my bad futures call, my position is immediately and automatically liquidated to bring equity within policy; with rentals, the lender doesn't care how much you lose as long as you can and will pay the loan.

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There seems to be a pattern here.

1. Gov't announces policy relating to real estate speculation;

2. Wild outcry that investors will be *forced* to sell up, but also that renters will suffer most, really;

3. Policy is enacted and nothing happens at all.

Labour is wasting time trying to find 'acceptable compromises' in a market that doesn't give a s***. When prices have gone bananas NO ONE CARES about the details of tax policy.

The only thing I'm certain of is that when this all falls apart, the government will find billions to shovel at real estate speculators, whether that government be Labour or National.

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It’s not really accurate to say nothing happens. Rents increased in the year since the 2020 RTA Amendment was passed by the largest amount on record.

The state housing list quadrupled in size since Labour took office and hit a new all-time record for 17 straight months up until the government stopped releasing the data on the size of the list earlier this year.

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It's been repeatedly shown that rents in NZ track disposable incomes, and have little to do with landlords costs as supply is so limited. Economists often talk about needing 4-5% unemployment to have a "functioning" labour market, I see a corollary of that being you need a 4-5% vacancy rate in the housing stock to have a functioning housing market. If that were the case I imagine we'd see rents track landlords costs a bit more closely, it would no longer be a question of what can tenants afford, but where do I have to set the rent to ensure I actually get tenants.

 

In terms of the state housing waitlist, that's in large part because the Labour government loosened the criteria around being eligible for state housing, it's unlikely to have gone up so much under the old criteria. The merits of loosening the criteria when there aren't enough state houses for the people you're making eligible is a separate question.

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"loosened the criteria"?  Guess they loosened it, then they loosened it again, and then they loosened it a few more times in the last year.  Its currently 24,500 - up 32% in the last 12 months alone.  Thats an awful lot of "loosening".

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Rents increased 10% in the last year. Incomes increased 3%. What are you talking about? 

Also Labour haven't made any changes to criteria for state houses, about the only thing they did do was stop state housing tests for parents with school age children - so if you needed a state house in 2012 when your first born was 4 years old and you were on a benefit you can keep subsidised rent until 2036 when you're earning 120k and your youngest turns 18.

Meanwhile those single mothers on benefits in the same position you were get sent to the back of the list and wait months or years for a rental that will probably put their kids in hospital with chronic illness. The entire policy is a disaster.

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Over time, though, rents track quite closely to incomes.

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I think you'll find a significant increase in the accomodation supplement is partly to blame for rents rising faster than incomes. The government loves to ensure landlords make a good return.

So the Labour government did loosen the criteria for state housing then.

 

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It's currently over 20k

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"There were 24,474 applicants on the Housing Register as at 30 June 2021, an increase of 32.1 percent compared with the same time last year (i.e. June 2020)."  From the MSD website.

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Can someone please explain to me how the interest deductibility works. 

Does it mean the following:

If an investor is paying $20K per year in interest, they are exempt from paying tax on the $20K as an expense. That is they don't need to pay circa 7K in tax.

Is that right?

So with the rule changes, if that $20K per year in interest is on an older property, they will need to pay circa 7K in tax???

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Yes, so would need to increase rent by $140/week to break even……but then they have to pay tax on that additional 7k so another $2100 in tax or another $40/week increase in rent

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Thanks. 

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and then of course, tenants will vote with their feet.

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Yeah there will be all sorts of behavioural shifts, more people cramming in to flats, people staying  with parents longer etc. 

So there will be a feedback loop that might limit how much landlords can realistically increase rents.

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If an investor is paying $20K per year in interest, they are exempt from paying tax on the $20K as an expense. That is they don't need to pay circa 7K in tax.

Is that right?

Technically they aren't "exempt" from paying tax. The interest is an expense that can be deducted against income. But the effect is the same: they don't need to pay circa 7K in tax.

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Agree. Interesting that there has been an increase of 19 k mobile homes registered in past 18 months. Oh to be young and fearless.

https://www.stuff.co.nz/life-style/homed/housing-affordability/12650155…

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Yep. Landlords are both arrogant and wrong if they think they can unilaterally increase rents by a large amount.

Still, rents will probably increase more than they might of.

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And what happens if supply ever overtakes demand (it isn't looking too far away at the current rate of building). Renters will be in the position to bargain with their landlords, they won't have to just accept rent increases. 

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That is happening especially in countries with declining birth rates and in our rural areas.  Given a rate of legal immigration in NZ similar to most OECD countries our population would soon decline.  What will happen?  Location will become ever more important.

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Of course they’re not going to sell right now while their properties are increasing in value.

The first real impact will be felt when payments are due for the 2023 tax year in May 2024 (8 months after the election).

RBNZ projects interest rates to increase by 1% over the next 12 months so the increased tax liability at that stage is likely to be in excess of 10k/property or around $200/week. Depending on how much rents have increased by then and what additional brightline tax liability is incurred by selling will determine what decisions are made. One thing is for sure though, rents will be under even more pressure now and they are going to keep increasing. I expect the record increase we have seen in the last year is about to be shattered by what’s to come over 2022-2023.

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I guess the logic is that an incentive towards new builds will increase supply and therefore limit the extent to which existing rents can be increased.

Sound in theory, but in practice?

Also, it will take time for supply in response to investor demand to be realised.

So yeah potentially significant upward pressure on rents in the next 2 years.

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except that  the only predictable thing with this government is that there will be further regulation  tax changes put in place either as a pre election goodies for her key voters or just after with a green coalition who will insist of CGT --   so in reality i can see that the investment even in new builds may slow down considerably - especially when interest rates hit 5% 

 

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Yeah, and see my comment below. I am skeptical to what extent investors will flock to new builds.

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The proviso here is that the economy doesnt implode and life 2 years from now will be largely the same as it is now.

Personally Im picking a long overdue implosion. The next government will be passed the poison chalice.

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It will kick in earlier than that as most landlords will have to pay provisional tax now.

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I thought the whole point was to make a loss and bank that glorious paper gain ?  Unfortunately the loss is ringfenced so maybe i missed a memo ?

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Generally when the costs to a business increase, one of these happens:

a) The business can pass on the increased costs to their customers which has no net effect on the business

b) The business can't pass on the increased costs as customers will go elsewhere. The business takes the hit (and becomes worth less as a result)

While housing supply is less than demand, (a) will probably occur. But we are building a lot of houses (and not growing our population by as much), so it is quite possible that (b) occurs by 2023. This will also reduce house prices as they will not make sense as a rental at current prices. 

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Or quite likely a bit of both.

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I really question how good new build townhouses will be as an investment.

Someone posted an article yesterday that suggested capital gains have historically been similar for townhouses as detached houses, but I am not sure if that will be replicated going forward. I think far more capital gain potential will accrue to property with land, especially as we move more and more towards high density living.

Also think of the importance of scarcity. Townhouses will become a dime a dozen, land will be increasingly scarce.

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Assuming deposits of 20-30%, most investments in  new build townhouses will be cashflow negative, neutral or ever so slightly positive.

So totally relying on capital gain to stack up. But that is par for the course right?

Question - do banks meaningfully scrutinise this, or do they care little about cashflow? I imagine stress testing at higher interest rates can create barriers to approving loans where there is a  cashflow negative scenario?

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HM

You are not quite looking at property investment correctly.

Firstly, PI as opposed to speculating or flipping is long term and any capital gain is not realised until the property is sold (which due to new brightline test tax implications is likely to mean 10 or more years). So in the short term capital gain or loss is only on paper and short term fluctuations in the market are irrelevant. You say going ahead CG are unlikely - are you calling that for two or 10 years? The long term is so difficult to call and even RBNZ have difficulty with short term but I think most would expect that 10 years is likely to see some CG. PI really do need to forget CG; as an example I bought a property in 2007 to see its RV in 2010 plunge below purchase price,however I sold in 2016 for a significant CG - the capital loss in 2010 was irrelevant as it was the same house, same rent and same yield. 

As CG is not realised until sold and is not guaranteed yield should be the only consideration. Most serious PI considered CG as simply a windfall on selling. 

All properties I have purchased have been cash flow positive and while not involved in PI in the past five years, given the low and falling mortgage interest rates that would not have been difficult to achieve. The reality is the biggest concern for PI going ahead is not the market but rather the likely rising interest rates and other outgoings (rates and insurances) - factors you don’t seem to consider. 

Yes there are some PI who may invest negatively geared but this needs to be only short term and there is a need to be able to determine when they expect it to be cash flow positive - that is considering likely rent increases but also considering the likely increases in the other outgoings. Much like those who buy shares with an eye to the longer term return. I know of a coupe of people who have done this and after a couple of years are now strongly cash flow positive and as the rent pays down the mortgage will have a good income for when they retire. 

A tip for PI regarding CG; forget trying to guess the future of the market and think about the features of the individual property which could affect its likely CG (e.g. closeness to CBD, future development potential etc)

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P8 I think the reality is that many if not most property investors these days are relying to a large extent on capital gain.

From what I see, and some back of the envelope calls, many will  be cashflow negative.

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I dont know what many means but certainly 'most' property investors are not relying on capital gains. Instead most investors rely on maths. $1,000 rent, $200 costs, $900 interest. grow rent by 3.5%, costs by 2% and hold interest static. You go from -$100 a week to break even in four or five years, thats a great deal. Many investors are willing to wait much longer than 4 or 5 years if it gets them a house. Not because they are greedy, but because they are patient. Interest changes will complicate that but the basic principle is you should discount future cash flows to today when calculating the profitability of a rental. One thing that tends to separate investors from non-investors is the understanding of time.

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How about principal payments?

'If' you get to break even after 4-5 years, then that's only break even. Might take another 4-5 years to get significantly positive cashflow. 

So that's close to a 10 year timeframe.

And as you say, within that context interest rate changes are a big elephant in the room in terms of getting to positive cashflow. 

So in that context, would a scenario of a lack of capital gains really be appealing for an investor?

I guess there's still the benefit of an asset that you are paying off over time, and will have mortgage-free at a certain point in time. But it's arguable whether that (assuming limited or no capital gains) is any better than shares, or term deposits (once interest rates rise significantly)  

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They don't repay principal.  It's all interest only.

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Brock

"They don't repay principal.  It's all interest only". 

RBNZ data (hc32) shows percentage of PI new (note “new”) lending that is IO this year around 40% . . . so yes significant, but by no means "all interest only".

For comparison, OO (RBNZ doesn't separate out FHB) is about half the rate for PI. 

Note that banks don't tend to let PI or OO borrowers keep rolling over IO; from what I hear, for PI they normally expect this be no more than two or three years and certainly expect to see repayment of principal when a property is comfortably cash flow positive. 

So certainly far from “all IO”.

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HM

I don't think you are . . . but don't feel sorry for PI.

Lets put paying down the mortgage / principal aside (i.e. consider a long term IO situation).

One of the positives in terms of PI is that the size of the mortgage (principal) is fixed, but over time (say 5 to 10 years) rents rise with inflation so effectively that mortgage (which tends to be the big cost) becomes more affordable in terms of rent income . . . and that happens exponentially.  

As said, yield and being cash flow positive should be considered more important than CG . . . PI should not be about a loss-making negative cash flow investment. If it is, then its what is commonly referred to as "a lemon" and it needs to be sold, and even many successful investors have experienced that. 

As an aside, there is of course a further considerable advantage in the size of the mortgage being fixed. With property prices generally increasing over the long term (forget short term fluctuations) one's equity is leverage and even an annual modest 3 or 4% increase in property prices means an increase in one's equity of 9 to 12% if one's equity is 30%. It is for this reason that some PI look to be continually highly leveraged with IO (which many on this site complain about) but this of course has inherent risk and is all fine provide there is no significant fall in the market with one's equity falling below what the bank is prepared to accept as security.  

Don't feel for PI. Very, very few PI go bust unless they overextend themselves or are inept at being a landlord . . . there are however many, many who do considerably well (which may simply mean having a rental income to supplement their pension). 

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P8, I just want to understand the investment side of things more, how it works. And how investors view things. 

I guess what I am saying is that I struggle to see how an 'investment' that has negative cashflow, moving to mildly positive maybe after a certain number of years, and with a yield of say 4%, is a great investment WITHOUT good capital gain. 

So let's forget about capital gain, since you are saying that shouldn't be a central consideration for an investor. Is a property with 4% yield, cashflow negative but possibly moving into minor positive after 5 years, a good sounding investment? Or not? In general.  

 

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I agree that townhouses are overvalued -- I mean all RE in NZ is overvalued, but townhouses are overvalued relative to stand-alone homes.

My argument for this: look at overseas markets. Standalone houses are expensive almost everywhere, but where there's decent population density townhouse equivalents are much cheaper. Here, there's much less of a differential. I think this has been driven by the FOMO of FHBs, who are paying 3/4 of what a standalone costs and getting 1/4 of the land area; but they haven't had a lot of choice in the matter in this overheated market. 

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If Robertson believes older properties are unattractive, I'd tell him this. Older places are quite often in better more established locations. Leafy neighborhoods, with better access to everything. Bigger sections, on and off street parking. Bigger buildings, larger rooms, greater privacy. Walking distance to services, shops, schools and public transport. These properties still are a great bet regardless of the latest IRD diktats.

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I dont really understand why anyone would want to live in a new townhouse that is so tiny you trip over the couch while standing in the kitchen, with no back yard or garage, when for the same rent you can live in an older more spacious home with a back yard and garage.  Even the older "ownership flats" usually come with garages and gardens and are only 2 or 3 flats per section instead of 6-8 townhouses crammed in on top of one another.  Get one bad neighbour in those complexes and your quality of life is ruined). 

If I were still renting I would expect these new townhouses to rent for less than the older flats that have amenities, but they are twice the price.  Even worse if these townhouses are not located as infill developments but are on the outskirts of town. Capital gain will be limited because there are always going to be developers knocking down old homes and building more of them, so why would an investor (or home owner) buy a "used" townhouse, when they can buy the brand new one off the plan that still looks nice and has the full 20 year tax concession?  My prediction is that the rents (and values) on these townhouses will fall over time as they compensate for their lack of amenity and reflect the increased wear and tear from being occupied by tenants who dont look after the place. Entire subdivisions and developments will end up looking like social housing slums because there won't be any house proud owner occupiers keeping up the standards.

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FHB now only have to mostly face the self-exempt Kāinga Ora for existing properties built before the ruling date. Without doubt, it would be in the interest of Kāinga Ora to bring down the escalating demand numbers that had been haunting the government.

Looks like a boost on prices even on older builds.

Be quick.

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Would you buy a new 2 bedroom townhouse as an investment?

Would be interested in the view of other investors too.

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In Christchurch, most older homes seem to be sold to developers for the value of the land, which is a lot more than the value of the actual house.  This is one reason why the lower quartile homes have jumped in price so much.  Houses that would have sold 2 years ago in the $400's range to someone who will do it up and live in it, are now selling in the $600-$800k range - they will be knocked down and 6-8 townhouses will go in. If a FHB wants to compete in this market, they are also going to have to pay developer prices, and Kainga Ora have an unlimited budget so they happily pay it as well. 

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That's been happening BIG TIME in Auckland too.

And it will happen a lot more from mid to late next year when a lot of new high density zoning is introduced. 

This will raise the median price.

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Zoning doesnt even seem to matter, the Council and developers basically ignore the District Plan.  A section on my residential suburban street was sold as consented for subdivision for 2 homes to be built (being a 905 sqm section, and zoned Residential Suburban which requires a minimum section size of 450 sqm).  However it was bought by a developer for over $1M and now 7 townhouses are being built there. Who else can afford to pay $1M for a section to build a normal family home?

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https://thekaka.substack.com/p/a-housing-travel-plan-without-a-destinat…

Government has no intent and by announcing such policy are further screwing FHB. If this is help, would be better if Jacinda Arden government does not try to help FHB.

Boost for new build and price will jump further- Thanks to brain - Robertson

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While I agree that there will not be a mass exodus of Landlords, there is a good chance that things will change in the next couple of years.  

Here is my logic.

1. We have the most expensive housing in the world, so it is right that most of the pain is felt by First Home Buys, so they have limited capacity with the new LVR;s to bid up prices.

2. Global inflation and therefore interest are likely to move up.  Is inflation transitory or is it here for a while? 

3. New Zealand's mortgage market is generally funded from offshore markets, This debt is probably mispriced with regards to risk premium, so any shocks would send rates higher.  Remember what happened to wholesale rates after the GFC.  We don't know what the catalyst would be, but there are a number of potential Black Swans in a global context.

4. The housing shortage that is often touted as the reason for house inflation is being solved with significant intensification of most streets in our major cities. The shortfall is being solved.  Would I live in those shoe boxes no, but the are being lived in.

5. There are so many investors that are continually leveraging one property against the next.  If you don't believe this go on facebook and go to one of the online property seminars.  You will be inundated with seminars from other companies and facilitating the pyramid property game.  If this group needs to sell it could unravel fast.

6.Any Landlord who is highly leveraged cannot withstand a reasonable increase in interest rates combined with non deductibility of interest.  Cashflow is highly impacted.

7 If DTI's are introduced and these apply to Landlords then the game is over for using one properties equity increase to fund the next as the criteria has changed to income of which rental income makes up a small portion.  

8. Immigration is likely to be lower as we can see that the we still survived without some of the highest rates of immigration.  The social license for high immigration has gone. Businesses that rely on low cost labour will have to adapt.

So to me that landscape for being a landlord has darkened considerably.  If some are forced to sell then the drop could be ugly as its prices at the margins that affect perceptions.  FOMO could quickly turn to fear of loss.

For disclosure I am holding on the my rentals, but have seriously thought of moving into other asset classes for a while given the heightened risks.

"The good Orrd Giveth, the good Orrd hath not taken away".  In fact "The Good Orrd is my protector"

 

 

 

 

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The 165k fast track residencies announced yesterday will hopefully only apply to people already here and net immigration stays low. We need a couple of decades to catch our breath and build infrastructure.

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Why does everything have to be centered around investors all the time. Like the great toilet paper shortage of 2019, just bar them from owning more that three or four properties, or something more constructive like that....

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I agree with you, plus give notice on foreign owners that they need to sell within 5 years.

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"On the one hand, he is partially removing a tax advantage investors currently enjoy over owner-occupiers, particularly first home buyers, who often compete for properties in the same part of the market as investors."

There is NO tax advantage for investors over owner-occupiers.

Owning property confers a benefit.

For investors, that benefit is the rental income from the property.
For owner-occupiers that benefit is the shelter that the property provides.

Investors must pay income tax on the benefit they receive, but are (were) able to deduct the costs of gaining that benefit (rates, insurance and mortgage interest costs).

Owner Occupiers pay no tax on the occupation benefit they receive, so as a consequence cannot deduct those costs.
If the owner-occupier did not own that property they would need to live somewhere, and thus pay rent to be able to do that.
By owning, the get that occupation benefit as a tax-free benefit.

 

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