Property investors have been hit with a raft of changes recently. Amy Hamilton Chadwick explains, and asks the experts if the gloss has come off the market.
Kiwis love investing in property – it’s a comfortingly tangible place to put your money. Bricks and mortar have a reputation for being reliable and, historically, they have been: anyone who bought a rental before 2016 has almost certainly seen a significant rise in its value.
However, recent times have been rougher for property investors as public opinion and policy decisions have moved against them. So, is it still a good time to buy a rental property?
“For many people the answer will be no,” says Andrew King, executive officer of the New Zealand Property Investors’ Federation.
A raft of recent changes may tip the scales too far for rental property to stack up as a good investment.
New rules for health
Firstly, there are changes designed to raise the standard for rentals, including mandatory smoke alarms, insulation, and other yet-to- be-decided measures under the Healthy Homes Guarantee Bill (heat pumps are a likely addition to the list of must-haves). That’s a small extra cost, it can be factored in and good landlords are already complying.
Second, there’s the higher deposit requirement for investment property. It’s recently dropped from 40 per cent to 35 per cent, but on a NZ$300,000 house that’s still a hefty NZ$105,000. It’s still not an insurmountable barrier, but certainly a hurdle.
Recent publicity around damage to rentals, as well as the spectre of methamphetamine contamination, bring another layer of risk management to the rental equation. Add it all together, and the words ‘too-hard basket’ start springing to mind.
Tax change hits hard
Perhaps most off-putting of all is the introduction of ring-fencing – a tax change that means you will no longer be able to offset rental losses against your income.
Many Kiwi property investors use their rentals as a kind of forced savings scheme, paying in money each month to cover the mortgage and trusting that rising values will increase their wealth over time. Offsetting losses to reduce their taxable income is often the difference between a poor investment and one that makes sense.
“If you’re just getting into property investing you need to have at least a 35 per cent deposit and if the ring-fencing comes in, you’ll probably still make a loss and you can’t claim it any more,” says King.
He believes established property investors with ample equity will find it even easier to continue buying. The real impact will be on people around the 30 to 40 age group with not quite enough equity behind them yet, who might have previously looked at an investment property to provide for retirement.
“It might not stop them completely, but it will stop a lot from being able to do it.”
Big, bad landlords
Even for those who can afford it, being a property investor now also carries something of a social stigma. King says he recently met a man in his 30s who sold his Wellington rental property because he felt embarrassed and guilty about being a landlord.
“It absolutely puts people off when landlords are the bad guys.”
So, given all the bad press, why would anyone invest in property in 2018?
The appeal remains the same: unmatched leveraging ability, an inefficient market that lets you buy a bargain, control over your investment, and historically excellent returns. And of course, the bricks-and-mortar factor: you can touch your investment, repaint it, or move into it.
“Property is still a great way to grow your money over the long term,” says Liz Koh, director of Money Max. Koh, an authorised financial adviser, certified financial planner and chartered accountant, says all the recent changes make property investment less attractive, but it remains a quality long-term game – provided you understand the risks, returns, and cashflow.
Don’t get caught out
“The key issue is, if you’re looking at going into property, go in with your eyes open. Know what changes are coming up and absolutely know what the financial implications are for you as a property investor, so you don’t get caught out by a lack of cash flow. Cash flow is everything for a property investor.”
What makes the question more complicated is the delicate balance between supply and demand.
Although investing should be a simple economic equation, we’re only human – we’re influenced by emotions and trends when we think about where to put our money. If rental properties are unfashionable this year, that could present an opportunity to buy below value and wait for the pendulum to swing back in your direction.
Koh says she’s heard of alarmed investors who are completely exiting the market. “You might be able to get some good deals if people are panicking and selling up, provided the property stacks up.”
Drops in supply offer opportunities
As King puts it: “If enough people can’t buy or are put off, there will be a drop in supply. That means rents will go up and it will make sense again. If not many people stop buying, prices won’t go up. It’s tricky to know how it will go.”
The people who thrive in property investment are those who have a genuine passion for looking at houses, doing them up, and running the numbers.
If that’s your idea of a terrible weekend, you’d be best to steer clear. But if you’re one of those people who has a real love of houses and numbers, property continues to provide superb opportunities to dramatically grow your wealth over the long term.
First published 28 May, 2018.
Story by Amy Hamilton Chadwick
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.