Rental purchase may not make sense even after $165k discount, investor says

Tuesday, 14 March 2023

Investor and property coach Steve Goodey says the market has shifted so much, even a property going for $405,000 near Wellington might not be worth purchasing

QV’s estimated value on the three-bedroom home is $570,000.

The sellers have agreed to sell it for $405,000.

But even with that sizeable discount, investor Steve Goodey still has not decided if it is worth going ahead with the purchase.

He said the $165,000 discount to the Hutt property would have been a deal too good to miss two years ago, but with rising interest rates and the phase-out of mortgage interest deductibility, it is unclear if it is still a property worth buying.

“I’m doing some cashflow numbers on that obviously as an investor, and I know I can rent that out for $700 a week, but that doesn’t make it cashflow positive,” he said.

Goodey, who is also a property coach, said the situation shows how much the market had changed.

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The property was intended to be for Goodey’s son, and would be his first investment property. But the pair still had not made their final decision over whether to go unconditional.

Goodey believed the home was worth more than $405,000, but with his son likely to be left with a mortgage of roughly $320,000 and an interest rate around 6.5%, it was likely to remain negatively geared, costing more to own than it would generate in income.

“Let’s be fair - the entire market doesn’t really care about property investors, they’re pretty lethal about it – we are the enemy, but If I’m thinking that way and these are the kind of discounts I can find, all other property investors are sitting on their hands too and staying out of this market.”

He said most investors still had not grasped what a game-changer Labour's decision to remove mortgage interest deductibility would prove to be.

Deloitte has previously done an analysis, which found the policy would result in more rentals becoming loss-making.

Mortgage interest deductibility refers to the ability of investors to deduct mortgage interest payments from rental earnings for tax purposes, which Labour removed in response to skyrocketing house prices.

Property investor and coach Steve Goodey says a lot of focus will be on the property market during the next election.

Goodey likened the current situation to when the Auckland Unitary Plan was brought in for Auckland, and it took a while for property investors to recognise how it would boost land values.

“It took them a couple of years to react to that. Non-deductibility has gone the other way, it’s been a massive negative and no ones really realised how much it has taken off the value of every investment property in the country.

“It’s certainly made new builds the way to go.

“At the moment it’s not looking so great, and that’s why I can see these values dropping so quickly, because it’s started to become very apparent to investors how much the lack of deductibility will cost them.”

Goodey believed it was 50-50 on whether Labour or National would come out victorious at the next election.

National has promised to return the tax advantage of mortgage interest deductibility to investors, meaning many investors were waiting to see what happened.

The change is being phased out over four years for those who already own rental properties.

But investors buying existing property now lose their entire ability to deduct mortgage interest immediately, unless they are buying a new-build.

During the pandemic era, when the market became overheated due to rock-bottom interest rates and the relaxation of loan-to-value ratio restrictions, Goodey said price gains overshot the market.

“What we were doing was, as Kiwis buying property, we were paying numbers that were unrealistic with the expectation that the value would catch up,” Goodey said.

“So of course we’re doing the opposite now, we are now buying properties with the expectation they will be worth less in a few months’ time, so we are trying to get bigger discounts to account for that.

“We will overshoot on the way down too.”

Goodey was in the room for a property auction last week when a home with a view of Matiu/Somes Island near Wellington sold for $650,000 below RV.

He said he and two other seasoned investors all chose not to raise their hands as bidding on the two-bedroom Point Howard home hit $350,000, because they had all done the hard numbers, and knew they did not add up.

“People’s buying decisions are so based on sentiment, and sentiment is dead until the end of October because no one knows what is going to happen with the election.

“Never has the property market been held ransom by an election so much as this year.”