Times have changed: Will property investors flood the market?

Sunday, 15 September 2024

Christchurch-based investor Phil McGoldrick believes landlords have been treated as the enemy over recent years - and that is a big problem.

“People forget the important role that serious investors play in the rental market. Instead there is a lot of anti-landlord sentiment in the marketplace, and that is misplaced.”

For example, when the Government reinstated interest deductibility for rental properties, there was a lot of moaning that landlords had been given a billion dollar handout, he says.

“But it has just reinstated a tax principle that has been in place for a long time, and which applies to all other businesses.

“Reinstating it reinforces that landlords are operating a business, and that business is looking after people who can’t or don’t own their own homes,” he says.

“Taking away interest deductibility was immoral, so reinstating it is hardly a gift. It is just getting back to where things have always been. I was really irked by that one.”

That’s why McGoldrick who, with his wife, has built up a portfolio of 12 properties over 20 years, thinks the time has come to get out of the residential rental market.

And he says he is not alone. He works in real estate as an auctioneer, and has his ears to the market in terms of sentiment.

There are many long-term landlords like him who have had enough and are selling up, he says.

“When interest deductibility was removed, the financial burden, along with the rising costs of everything from insurance to rates to maintenance …the antagonism was too much for many people.”

The previous Labour-led government removed the ability to deduct mortgage interest on rental properties from taxes, and extended the bright line test, which taxes profits from the sale of an investment property, to 10 years.

It also overhauled tenancy law, and introduced healthy homes standards for rental properties.

While its goal was to shift the balance of the market back to first home buyers, and make renting fairer for tenants, many landlords were opposed to the changes, and there was much talk of a war on landlords.

National and ACT campaigned on more investor-friendly policies, and since coming to power have reversed many of the previous government’s policies.

Interest deductibility is back, the bright line test has been reduced to two years, and tenancy law is being amended.

Housing Minister Chris Bishop has said the changes will make it easier for mum and dad landlords to be part of the rental market, and lead to an increased supply of rental properties and downward pressure on rents.

High interest rates have prevented many investors from returning to the market, but following the Reserve Bank’s cut to the official cash rate in mid August, real estate agents are reporting an increase in investor activity.

Economist Tony Alexander’s latest survey of agents had a net 25% saying they were seeing more investors in the market in August, up from a net 2% in July.

The latest Reserve Bank figures show mortgage lending to investors has increased significantly in recent months. They accounted for $1.36 billion, or about 20.5% of the $6.65b total in July, up from about 17.1% ($854 million) of the $4.99b total at the same time last year.

So is it the beginning of a flood of investors back on to the residential property market?

McGoldrick does not think so, as the environment has not improved much overall. But he still believes property investment is a good way to build up a nest egg for retirement.

He would not look at buying more residential rentals, but he is considering a shift to commercial property rather than just selling up, he says.

“If you buy a good commercial property, you might get a 5% return on it because operating expenses are paid by the tenants. There are very few residential rentals that would give you that these days. And they are easier to manage, too.”

Some of the other investors The Sunday Star Times spoke to highlight another reason a renewed frenzy of investor buying is unlikely - and that is age.

About 74% of investors are over 50, and 37.8% of them are over 65, according to NZ Property Investor magazine’s latest investor sentiment survey.

David Russ has been investing for over 20 years, and owns 20 properties, mostly in Foxton. He used to own 37, but has sold some, and is not looking to buy any more.

He has had a good run with property, and believes it is a great means to an end for people looking to accumulate a retirement asset.

But he is 77 now, and not looking for more work. “I still manage our properties, but I’m looking to exit that to take life a bit easier because the work is demanding.

“The properties are in a family trust, so we will hold on to them, and they will pass on to our children in time, and they can decide what to do with them.

“It is harder to be a landlord than it used to be, due to changes in regulation, the high costs involved with owning and maintaining rentals, and lower returns relative to the price of properties.”

He does not think the previous government appreciated the value of mum and dad investors sticking their neck out to provide rentals.

“They are an important part of the rental landscape, and that is not a bad thing. So to be castigated for being fat cats ripping the system off, that was just not fair.

“There has been a trickle down effect from that negative perception of landlords, and many tenants now think they have more rights than responsibilities. There are tenants who don’t see not paying their rent as a problem, for example.”

But the environment is becoming more stable for investors now, and the government’s policy changes are beneficial, Russ says.

“High interest rates and interest deductibility rules didn’t really affect me because I’m largely free-hold, but the changes will help the younger generation.

“People know where they are going, and they are looking for interest rates to drop more to help the viability of investing. I can’t see too much trouble ahead, and that’s good because we need private landlords to supply accommodation to people.”

Phillip Westwood is another veteran investor who is reconsidering what he does with some of his properties.

He has been investing for 55 years, and currently has just over 20 properties in different cities, which are a mix of residential and commercial.

The upcoming changes to tenancy law and changes to GST rules are encouraging him to shift some of the rentals he has on Airbnb back into the long-term rental market, he says.

“We will also be making some decisions about our portfolio holdings over summer. We’re getting older now, and we want to simplify the management of our properties.

“While I don’t think we’ll sell many of our properties as they are intended to support our retirement, we are not looking to buy any more residential rentals.”

Too often the numbers do not stack up, and he does not think there will be much in the way of capital gains in cities like Auckland, where he is based, over the next three to four years, he says.

“The current downturn is just part of the cycle. There were good times, and now there are tougher times, and it is no longer as easy as it was. It has been this way before, and it will be this way again.”

While the removal of interest deductibility did not impact him, he says it would impact younger investors and its reinstatement will benefit them.

Brian Main and his wife have been investing in residential and commercial property in Wellington for around 30 years, and within their holdings they have 16 tenancies.

The previous government’s policy changes did not have much impact on them as they had little debt, but they did affect their son who has three properties and much more borrowing, he says.

“Interest deductibility’s reinstatement is a return to the status quo, so it makes complete sense. It is disingenuous to talk about it as landlords getting some sort of tax break, or ripping others off.

“For example, we have a block of three retail shops with apartments above them. Now, commercial landlords have always been able to claim interest as a deductible expense.

“So we have been able to claim it on the shops but not the apartments. Which is ridiculous because the purpose of buying property is the same, whether commercial or residential.”

He thinks the looming tenancy law changes are a good thing, although he has never given anyone a 90-day “no cause” termination notice, and says about 99% of tenants are perfectly fine.

“With the 90 day notice gone, landlords have to be more careful who they select as a tenant. That makes it harder for some tenants who might be perceived of as risky for some reason to find a place to live.”

Despite the policy changes, Main says he and his wife are getting older now, so they are not looking to buy more properties.

In Wellington there has been a decrease in demand for rentals, and listings on Trade Me have sky-rocketed recently, with yields also much lower than they used to be, he says.

“When we first started investing you could get 10% to 12% returns on rental income. So the numbers are not as attractive these days, even with interest rates coming back a bit.”

The current recession, and the public sector cuts, is making the situation in Wellington pretty depressing, and it is affecting the housing market, he says.

“Investors, developers and business people are generally optimistic, as they wouldn’t do it otherwise, but I don’t come across many people who are very optimistic at the moment.”

But there are some investors who have a more upbeat view of the environment.

Sarah Wilson owns a number of residential properties in South Auckland, and recently finished her first development of five terraced houses, which she plans to hold and rent out.

She believes things are heading in the right direction for investors with the Government’s changes to investor tax policies, and interest rates starting to come down.

“I’m really pleased with those changes, as it has been so restrictive for landlords for some years.

“Lower interest rates and easier lending criteria makes it possible to purchase investment properties and makes the numbers work better in terms of development,” she says.

“As a country, we should want to encourage people to become landlords. Because fewer landlords mean less rental supply and that puts upwards pressure on rents.”

Wilson would like to buy another property, if she gets the chance, and says the biggest issue now is costs, including interest rates.

“But the increase in rents helps to deal with the higher costs of insurance, rates, compliance with the healthy homes standards, and of building.”

Nichole Lewis, who has eight properties in the portfolio she rebuilt after being bankrupted in 2008 and runs The Property Lifestyle, says the market hit the bottom of the cycle last year.

It is now struggling with the glut of properties that came on to it earlier this year, along with high interest rates and costs, she says.

“But it is cyclical, and as interest rates slowly start to come down it will turn. It’s just that investors need to adapt to the current conditions.”

She says the interest deductibility, bright line test, and tenancy law changes will give investors confidence and spur them on

“The issue is if they can get the lending they need from the bank, given lending criteria and also the advent of the Reserve Bank’s new debt-to-income ratios, which will slow some investors down.”

It is also hard to find a cash flow positive property, with investors needing at least a 20% deposit to get one, she says.

“So many investment properties are cash flow negative, and that puts investors off, especially given the rise in costs. When interest rates come down further, more will return as the holding costs will be less.”

Lewis says it is actually a good time for investors to buy property if they want to hold, or do a small development, or subdivision as it is good to get in at the bottom of the cycle.

“But they have to make sure the numbers add up, and investors looking at doing it for the first time should get advice and help with it.”