"The government is trying to dissuade people from becoming landlords on a philosophical basis," VP says
Peter Lewis, vice president of the New Zealand Property Investors’ Federation, has warned that residential landlords are up against opposing forces in 2023.
One is the big jump in costs, including higher interest rates, higher council rates, higher insurances, and rises in the tax liability landlords are being required to pay.
There is also the decline in the number of people who traditionally rent, such as international students, immigrants, and short-term workers from overseas.
Lewis said that while rents were either static or slightly dropping in 2022 due to this, what happens in 2023 depends on whether those groups return to the rental market, which could push rents up, OneRoof reported.
“Obviously, that provides a group who are willing and prepared to pay a bit more in which case, we will see increases in rents coming through – provided that happens,” Lewis said.
Another difficulty landlords face has been a drop in suitable applicants for rental properties, he said.
With people under more financial pressure, credit checks may find areas where they have got into trouble, such as unpaid bills.
Not only do landlords struggle in being able to remove tenants, some have also become more risk-averse, Lewis said.
“Like any business, if your demand declines that puts pressure on your margins and how much you can charge for the services you are selling – we’re selling an accommodation service,” Lewis said.
It’s also becoming problematic, he said, how market and bank restrictions are making it harder for new players to enter the rental provider industry.
“Some years ago, if you owned a property in which you had equity you could use that as a security to borrow 100% and buy a rental income property effectively with no cash deposit,” Lewis said. “But, of course, banks are now not doing that. They’re demanding, I think it’s something like a 40% deposit before you can buy a rental property which is a big hurdle obviously for a lot of people to come up with.”
That, combined with surging interest rates and the scrapping of the interest on mortgages as a tax-deductible expense, has made it less desirable to become a landlord, OneRoof reported.
Lewis said landlords are the only businesses that are excluded from the ability to deduct the interest of a loan from pre-tax profit. He said taxes exist for only two reasons: to raise money to fund services, and to “punish” or deter people from doing something, like smoking or drinking.
“One can only assume the government is trying to dissuade people from becoming landlords on a philosophical basis,” he said.
According to Lewis, the tax system means if a landlord’s costs go up $100 a week, putting the rent up $100 does not cover the landlord’s costs, so the rent should be lifted higher.
“The rent increase is in itself taxable so really, you’ve got to put the rent up by $150 a week because a third of that increase is going to go in your extra tax,” he said. “There are not many rentals where you put up the rent by $150 a week and still find a willing and reliable tenant.”
A change of government could see some “anti-landlord” measures introduced over the past two years reversed, Lewis said, adding that he knows investors who have “had enough,” OneRoof reported.
Helen O’Sullivan, CEO for property management company Crockers, said the level of activity in the Auckland rental market had steadily increased over the last few months.
O’Sullivan said new arrivals from offshore are starting to return, including international students.
“We are seeing a good supply of quality new stock entering the rental pool and fewer rentals leaving the market as the sales market slows,” she said.
That trend would likely continue and while not likely to reach pre-COVID levels, the company was expecting to be busier early 2023, compared to the same period in 2021 and 2022.
O’Sullivan said Crockers has not seen any trend of landlords exiting the sector but said more are opting to use a professional manager rather than attempt to navigate the complexities of self-management. She expects landlords to adopt a “steady as she goes” stance in 2023 with regards to ownership.
“Hold and maintain existing stock, keep one eye open for bargains and/or gems, but not actively look to acquire until interest rates change their trajectory,” she said.
When asked if rents were likely to increase along with rising interest rates, O’Sullivan said their property managers don’t see much correlation between interest rates and rent hikes, as she pointed out that many landlords don’t have a mortgage.
“Rents didn’t fall as interest rates fell so we wouldn’t expect them to do the reverse,” she said.
O’Sullivan said rents are set with regard to market conditions and the amenity of the property.
“We find the market is very price sensitive – as little as $20 per week can make the difference between a property renting quickly and sitting vacant for a long time,” she told OneRoof.
What do you think about the challenges landlords face in 2023? We’d love to hear from you in the comments below.
