Window to sell closing for investors who can't afford to keep properties
Wednesday, 11 January 2023
Many property investors are playing the wait and see game for the next election before deciding whether to sell their properties, property investor and coach Michael Burge says.
A Labour victory would change the mentality of many from trying to keep the properties they had, to realising they had to sell, Burge said.
This was particularly true for those who took on big debts or were running properties at a loss and gambling on capital gains, because their ability to deduct mortgage interest payments from rental earnings was pivotal to their ability to afford to keep their rentals.
“If National gets in, and they repeal the interest deductibility rules, I think that’s a massive lifesaver for the majority, probably, of investors,” Burge said.
**READ MORE:
* 'A correction not a crash': Property investors eyeing market
* Controversial landlord tax changes become law
* More landlords face making a loss on rentals as interest rates rise, Deloitte says
**
“If Labour get back in, I think the mentality will change to ‘holy shit, this is real now, the mortgage interest deductibility is here to stay – and we still have high interest rates’.
“People are often very reactive, and not very proactive, unfortunately, and I think most people will be sitting waiting to see what happens with the election, as to what to do with their properties.”
Burge, who owns 17 properties, said if the tide went out, a lot of property investors would be discovered to be swimming naked, and carrying big liabilities they could not afford to service.
For those who had to sell the time to sell was now.
Anyone in that position and thinking they had to sell, “you’re probably better doing it sooner rather than later”.
“The Reserve Bank has basically said we’re putting the OCR up again in February, which generally means interest rates will go up, which means lending will get harder, and properties will get harder to get lending for, so prices will come down,” he said.
Burge said the election would be an inflection point for the property investment sector.
If Labour remained in power, Burge expected there would be a sell off.
By that time, investors would also have experienced the loss of their ability to deduct 25% of their rental earnings from mortgage interest payments, and the larger tax bill that came with it.
Burge has run the numbers on his properties, and even with the phase-out of mortgage interest deductibility, he would be OK.
That was partly because some properties would continue to receive interest deductibility because they were rented to social housing providers, and partly because all of his properties made enough rent to cover mortgage repayments and run at a surplus.
While stressing he was not a financial adviser, Burge said investors should be running their own numbers, focusing on how much money their rentals made or lost if interest rates rose and remained high, and how the phase-out of mortgage interest deductibility might add to their tax bill.
This was particularly important if their properties were negatively geared – where expenses and home loan payments were greater than rental income.
If a property is going to go negative, Burge said the owner had to decide if the losses were at a level they were comfortable covering.
Some in the industry had not yet woken up to the new reality.
Burge said he was shocked to listen to some commentators, financial advisers, and podcasters who recommended property purchases that would lose the investor hundreds per week.
“I couldn’t believe it.
“I hear of people buying new builds which are hundreds of dollars a week cash flow negative from day one, and that’s with interest deductibility,” he said.
“I think that’s insanity. I think that’s a recipe for people not being able to hold the properties.
“Anything within $50 to $100 a week cash flow negative with the loss of mortgage interest deductibility, so after all the tax being taken out, if you can find something like that it might probably be OK.”
“But someone needs to be aware that’s what they’re buying into with the chance of things getting worse.”
Burge said he typically invested in smaller and more regional areas, looking for cheaper properties he could add value to through renovation.
He said the downturn began with the largest centres like Auckland and Wellington, but was now hitting his market as well.
“You’re seeing stuff sit for ages, and stuff being listed at prices that we probably haven’t seen for two years – maybe six or so months into Covid.
“Some of it’s not quite back to pre-Covid levels, but some of it’s getting pretty close,” he said.