Waiting has been the name of the game for property investors in 2018. Announcements of tax and regulatory reform have come thick and fast. But, to date, they have been confined to consultation.

Now, after a year in limbo, reform really is coming. The Government’s foreign buyers ban and letting fees ban recently came into force. The bright-line test was extended earlier in the year and now the Bill which will ring-fence rental tax losses has hit Parliament too.

And that’s just the start: the Tax Working Group issues its final report in February 2019 and the regulations containing the Healthy Homes standards must be in place by July 2019. While the Government’s tenancy law reforms won’t come into force until 2020, their final form will become known this year.

This all means 2019 is set to be a year of significant change for investors – although the market itself is not expected to deviate much from its current steady path. So what will this mean for investors in practice? We talked to a range of key property players to get their insights on what lies ahead.

Aussie Slump A Warning

First up, there’s the question of whether New Zealand’s market will follow in the footsteps of the Australian market. Sydney prices have fallen by 9.5% on last year while Melbourne’s are down by 5.8% and speculation remains rife that the same could happen here, particularly in Auckland.

Bagrie Economics managing director Cameron Bagrie says the short answer is that it could happen, but there are some critical differences between the markets. One is Auckland’s ongoing, acute housing supply shortage.

“Another is that we are already seeing banks here getting tighter on lending. Also, household debt level in Australia is much higher than in New Zealand. So there are some counter-balancing factors for Auckland which make a price collapse less likely.”

New Zealand is also still seeing decent population growth so housing demand continues to be high.

But ANZ chief economist Sharon Zollner says that Australia should stand as a clear warning to us. “We have been more conservative with our lending. But if there is a recession and unemployment rises there could be a bunch of people left with massive debt they can’t pay back.”

Expect The Unspectacular

Rather than slumping, New Zealand’s market is expected to plod along in a steady but unspectacular fashion. There was a strong consensus on this among our interviewees, with all saying the market has peaked.

Bagrie predicts that Auckland and Christchurch will underperform in 2019. There will be a ripple effect from the slowdown in Auckland to other more expensive markets like Queenstown, Tauranga and Hamilton, he says. “Some regional markets might have a bit of life left. But they will run out of puff over 2019.”

If the market is simply subdued it’s a hell of a good story, in his view. “There’s potential for new Government policies to dampen the market and some affordability issues. If we can absorb these things and the market keeps ticking along in a stable fashion, it’s a decent outcome.”

After seeing good growth in 2018, regional markets – like Whangarei, Manuwatu/Whanganui, Dunedin and Invercargill – are slowing now, according to most data. But it’s not time to write them off just yet.

REINZ chief executive Bindi Norwell expects the regions will continue to increase in price. “There is some growth and catch-up still going on there. That’s because demand remains significant in the regions.”

NZPIF president Sharon Cullwick agrees, pointing to Hawke’s Bay as another example. “It is booming and there are still opportunities. There are simply more people looking for houses than there are houses. That’s not going to change. Supply is just too tight.”

Overall, she thinks 2019 will see a slower and flatter market nationwide. “For investors, that’s not necessarily a bad thing. If they think counter-cyclical, this point in the cycle can be a good time to get into the market.”

‘If we can absorb these things and the market keeps ticking along in a stable fashion, it’s a decent outcome’ CAMERON BAGRIE

Prominent Auckland investor David Whitburn is another who has a positive outlook, although he does point out price growth is dependent on the area and the type of property. He thinks Wellington will continue to do well with growth of up to 5%.

“I also think there will be a pick-up in Auckland prices with growth of up to 3%, helped by lower interest rates, more relaxed LVR limits and an improving economy. Also, many suburbs are seeing lots of activity and development which creates the need for more supply and means they will outperform on prices.”

Tax Revolution Looms

With little dramatic market change expected, it’s the area of regulatory reform which is poised to cause structural shifts for investors.

Prime among the reforms is tax, with the Government determined to address what it sees as unfair tax advantages for property investors. It is widely expected that the Tax Working Group will recommend some type of capital gains tax (CGT) on investment properties.

Whitburn says this would result in a major change of behaviour for many investors. “Many will no longer tolerate low rents and yields in anticipation of a future capital gain. A CGT would put pressure on investors to focus on cash flow, which makes for higher rents.”

“Introduction of a CGT would also reduce the supply of rentals because people will sell up theirs before it is due to come in in 2021. Lots of older investors who have figured capital gains from property into their retirement will sell up to make sure they get them.”

Yet some commentators have doubts over whether a CGT will even go ahead. Whitburn is among them. He doesn’t think a CGT being adopted is a slam dunk no matter what the Tax Working Group recommends. That’s because NZ First, and its voters, have not been keen on such a tax in the past.

Unintended Reform Consequences

Tenancy law reform and the Healthy Homes minimum standards are intended to make life better for tenants. But investors say these reforms will have unintended consequences.

Mortgage Supply Company director David Windler says rents will go up and affect the people the changes are meant to be helping. “Although that will lead to yields starting to improve now due to a combination of rents going up and prices coming back a bit.”

While rents can only be raised so far as they are intertwined with income, Cullwick says they will have to rise further. “There are costs to holding properties, let alone getting them up to the new standards. That means rent increases are unavoidable.”

‘There are costs to holding properties, let alone getting them up to the new standards. That means rent increases are unavoidable’ SHARON CULLWICK

Another outcome of the reforms will be much tougher tenant selection processes, she continues. “So, for example, a tenant with bad credit is going to find it very hard to get a rental property. More houses will sit empty for longer before the landlord puts anyone into them. That’s because if you get a bad tenant it will be just too hard to remove them from your property if there’s a problem.”

Norwell is not against trying to make renting life better for tenants, especially given the increase in the numbers of people renting long term. But it shouldn’t be punitive for investors, she says.

“We don’t want investors to leave the market en masse. We need private rental suppliers. Hopefully, the Government is listening in the consultations and will aim for genuine balance.”

Credit Access Is Key

Regulatory reform may act as a dampener on the market, but there are some counter-balancing factors at play. Interest rates remain at historic lows, while the Reserve Bank recently eased the LVRs further.

Windler says interest rates are likely to stay around the same low range, but that the specials have ended and there will potentially be small increases from here on in. “Combined with the LVRs easing this is good for investors. But bank servicing calculations are impacting on people’s potential to borrow. And that’s something that could impact on prices.”

The fact that banks are focusing on serviceability and tightening up on their lending, due to global issues and greater capital requirements, was a common theme from our interviewees. This, they said, would have a greater impact on investors in the year ahead than either the relaxed LVRs or low interest rates.

Additionally, Bagrie says he sees growing upward pressure on borrowing rates. “The Reserve Bank may have the OCR on hold till 2020 but, regardless of what it does, there will be pressure in the banking industry for interest rates to move up going forward.”

Exodus Is Not on The Horizon

There’s a widely accepted idea that the combination of a flat market, the tax and tenancy law reforms, and an anti-investor climate will prompt a mass exodus of investors from the market. But our commentators don’t believe that will happen, although they have no doubt many investors will decide to get out – particularly if all the regulatory changes start to hit in round the same time.

Veteran investor Lisa Dudson says that for some, particularly smaller investors, it will just become too hard. “Newer investors who have just gotten into the market and were banking on big capital gains may sell up. Some other investors may sell and others may decide that the commercial market is a better option for them.”

In Cullwick’s view, it is likely to be older investors who decide to exit the market in a bid to put their money somewhere which is less hassle. “But I also don’t think the reforms will put people off investing in property if they are ready to do it, rather they will put off those who are more cautious anyway.”

While investor exodus is off the cards, a change in investor type is not. Bagrie says a particular type of investor will exit the market, but another type will start to enter it.

“The ones who exit will be the more speculative types who depend on capital gain to make the numbers stack up. The ones who enter will be cash flow focused investors who are prepared to offer long term leases and place more emphasis on providing quality. And that means big structural changes across the market.”

Strategic Changes Necessary

Investors who decide to persevere in property will have to change their focus and their strategy as the name of the game will, increasingly, be cash flow as opposed to capital gains.

Whitburn says investors need to be aware that having a portfolio full of low yielding properties is not going to be the smartest strategy going forwards in the hunt for capital appreciation. “If geared too heavily they will produce tax losses which get quarantined or ring-fenced for future income years when the properties are profitable.”

Instead property investments will become all about yield and cash flow, Windler says. “Look to keep a really close eye out for property that you can add value to by subdividing or building. If you are looking at your portfolio now look at what you’ve got and ask what happens if rates go up to 6%. And look at adding value to what you have already got.”

The fundamentals haven’t changed, he adds. “Lazy investors have done quite well recently with the market but, if all these changes come through, the professional investors will be the ones who survive.”