• Government takes a sledgehammer to property investors which could have a detrimental effect on the Property Management industry

  • Rent increases inevitable as social housing waitlist could balloon further

I never thought I would think this, but I do miss Winston Peters. Yes, he did create this Government back in 2017 but if he was still there, do you believe that the Housing Policy announced by the Government last Tuesday would look anything like it currently does?

There is actually a lot of good in the announcement such as investments in infrastructure and giving support to Kainga Ora (formerly HNZ). I even fully support extending the Bright Line Test (BLT) to 10 years even though the supposed ‘most honest and transparent Government’ has gone back on an election promise. Extending the BLT ensures that people invest in property long term rather than looking to flip in a few years for a substantial profit. This will give greater security to tenants knowing that any rental property they move into is unlikely to sell if the BLT applies and the landlord will be taxed on the profit of the sale.

However, one change that was announced has taken everybody by surprise and will likely have major consequences on our industry as well as renters, landlords and potentially the wider economy. The announcement that interest payments on mortgages for residential investment properties can no longer be offset against rental income changes the face and potentially the viability of residential property investment. The change will apply to any new investment purchases and will gradually be phased out over the next five years.

What has become apparent to me is that many people within our industry were unaware of regard to the consequences of this policy. Up until now, I could offset interest payments on my investment mortgage against my rental income. What this means is that if I am renting out a property at $500 a week, I would have an annual rental income of $26,000. If I am paying $15,000 of interest on a mortgage, I am offsetting this against the rental income meaning I am paying tax on $11,000 rather than the $26,000. This means the tax bill, at 33% goes from $3,630 to $8,580. The benefits of owning a rental property have taken a massive hit.

This is the social housing waitlist as of December 2020. Source; Ministry of Social Development

The inevitable thing that many landlords will do is increase the rents and increase them significantly as, based on the example I have just provided, this will be an additional cost to the landlord of nearly $100 a week. And this is why I believe we will see rent controls kick in. Landlords will try and aggressively push rents to levels that will be beyond sustainable for many renters and the Government will be forced to act. More money on rent means less disposable income for the economy. Also, the ballooning social housing waitlist which has increased by a whopping 548% since December 2015 will increase even further and the people that Labour promised to help the most will be hurt even more.

“In many cases, rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.” – Assar Lindbeck; Sweedish professor of economics 26th January 1930 – 28th August 2020

What does this mean to the Property Management industry?

The added costs will not only have an impact on rents, but it will also likely have a significant impact on the Property Management industry. It will mean that some landlords who have used a Property Manager or were thinking of using a Property Manager may decide to try and self-manage as they look to try and cut costs. If and when a landlord tries to do this, the cost of a Property Manager could be an expense that they will try to recover by managing the property themselves. This could be good news for new platforms and hybrid Property Management models such as MyRent and Kitt which was highlighted at the recent Regenerate 2021 conference in Queenstown as these may become more attractive models than the traditional Property Management model.

It also means that smaller Property Management companies may struggle to survive as new leads will dry up. Churn rates have traditionally sat anywhere between 15 and 25% meaning if I have a rent roll of 500, I will lose approximately 100 a year through sales, owners moving back in or for other reasons. These losses will straight away become more difficult to replace as there will be fewer people buying investment properties leading to a reduction in the pool of potential clients.

For small boutique companies, this could be terminal unless they find ways to adapted and innovate.

New builds and Build to Rent is the way to adapt.

The changes mean that traditional models of Property Management will have to evolve and the bigger players who are aligned with developers and have a strong fiscal balance sheet could probably do worse than look at options around partnering with developers for new building projects as well as focusing on the concept of Build to Rent. Concepts such as this look likely to be exempt from the BLT as well as the ‘Discrimination Tax’. This will become more appealing to people still looking at investing in property. We highlighted the concept of Build to Rent back in 2019 and this concept appears to be gaining legs.

Developments such as this at Hobsonville Point in Auckland will become the source of new property investment

Build to Rent is a concept where investors buy shares in a Build to Rent complex and get a return on these shares through the rental returns. The properties are purpose-built rental accommodation meaning that tenants have security as well as flexibility knowing that they can give notice when they decide to move on. The developments are better managed as Property Managers do not have to shop around for quotes to appease amateur landlords who scrimp on maintenance and rents will be fixed increasing in line with inflation. Naturally, tenancies such as this will be far more appealing to renters than renting from a private landlord.

Is the Government being fair and will the changes make an impact?

Let’s look at the first part of the question. The language that has been used by the Government and in particular Finance Minister Grant Robertson has been rather discriminatory towards property investors. Firstly, he does not seem to acknowledge that many landlords are people, like myself, who bought an investment property in a way of saving for retirement. If we had capital gains, it was simply a bonus. However, according to Mr Robertson, I, along with every other landlord are not investors but speculators. Personally, I find this quite repulsive as he attempts to pass the blame for skyrocketing house prices on innocent individuals who are simply trying to save for retirement. He is implying that I am only investing in property due to the fact that I want to see significant capital gain and I will flip the property once I have realised those gains. There is a big difference between someone who speculates in property compared to a long-term investor which is what I consider myself to be.

Next, Mr Robertson says that we have been exploiting a tax loophole. Again, I find this particularly offensive and inaccurate in its assessment. Is Mr Robertson implying that I as well as the thousands of investors around the country are deliberately using residential property investment as a tax avoidance scheme? Absolute rubbish.

As it has well been documented in the media of late, this is not a loophole. A loophole is an ambiguity or inadequacy in law or a rule that allows people to exploit or avoid their responsibilities. I certainly do not feel that I am exploiting any law by owning a rental property and the practice of offsetting interest against income is a standard worldwide business practice. If Real iQ takes out a loan to buy a car or a commercial office, the interest can be offset against the income. What is the difference in owning a rental property?

It is a tax based on discrimination. It discriminates against the thousands of investors who are simply trying to put money aside to fund their retirement. The language that Robertson uses implies that investors are really speculators, driving up rents and exploiting tax loopholes.

Is it fair? Absolutely not. New Zealanders have been encouraged to save for their retirements and the fact that there was no warning, and they went to such an extreme length suggests that they are simply looking for a scapegoat rather than looking in the mirror at their own inadequacies and clinging on to ideology rather than reality.

Labour commit political Hare Kari but why are National silent?

When I first read the announcement on Tuesday, my first thought was shock around the discrimination tax and my next thought was ‘Labour have just given National the next election’. This is political suicide which will negatively affect so many landlords as well as tenants with rising rents. Surely not even National can screw this up.

However, the silence from National is deafening. Instead, they have been focused on trying to get the Speaker of the House, Trevor Mallard, sacked for wrongly accusing a Parliament staffer of rape. Mallard’s behaviour has been appalling and he should be gone, but they seem to have missed the boat in attacking the Government on the discrimination tax.

What National needs to do is settle on who is going to lead the party and then start challenging Labour on policy rather than the behaviour of individuals within the party. Should it be Collins at the helm? I’m not sure, my own personal choice would be Nicola Willis, National’s Housing spokesperson. She is articulate, highly intelligent and is still only 40 so she will connect with younger voters. She is the right person to challenge Ardern who, for probably the first time in her political career, has come under so much scrutiny.

As I have argued for a long time now, Labour’s main election promise back in 2017 was to fix the housing crisis and make life better for renters. Their announcement at 9.00 am on Tuesday the 23rd of March is certainly going to make an impact. Only time will tell if it works. I have my doubts.