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The Perfect Storm Is Brewing

The tough rental scene in New Zealand is facing perfect storm conditions which won’t blow through overnight, warns Sue Harrison.

By: Sue Harrison

28 February 2023

Phenomenal rain in Auckland and other areas causing destructive flooding is life as we know it in a world facing pandemics, climate change, and other challenges such as earthquakes and eruptions.

Taking on investment properties has never been for the faint-hearted and the risk profile seems ever increasing. New Zealand has been facing a rental housing shortage for several years. This has led to increased competition for available homes, driving up rentals and making it increasingly difficult for many Kiwis to afford a place to live.

The Covid-19 pandemic has had a profound impact on the global economy and has resulted in a significant divergence in the rental market. The shift to remote work and economic slowdown have resulted in changes in demand for rental properties, leading to shifts in the supply and demand equation. Overseas and student arrivals are rebounding dramatically, pointing to ongoing increasing rental demand, especially in the cities. The rental market is tight, and rents have been rising because there is excess demand and insignificant supply.

CHANGE IN PM

A change in prime minister has brought some mothballing of a few unwarranted policies, with a nod to helping the cost of living. However, was it a mistake not to start with housing by making it worthwhile to own a rental property and provide quality housing?

Our government relies heavily on private landlords to supply the rental sector, but against some good advice has discouraged people to stay or join the market, which is severely exacerbating the “housing crisis”.

With mortgage servicing costs heightened due to higher interest rates, and tax deductibility being removed, the ratchets against investing in rental homes are high before other risks of other disasters. After all, we are investors not speculators. With overseas migration lifting due to government changes, the housing shortage can only increase. At the same time, we have a credit crunch where the share of lending to investors is low and investors face higher mortgage interest costs than owner-occupiers.

In addition tax deductions are almost completely removed as of this year, unlike any other business. It’s perfect storm conditions which won’t blow through overnight.

MORE INVESTMENT

The most effective way to alleviate rental pressures in the short-term is to encourage more investment in new and second-hand housing. Addressing the demand and supply dynamic will take some time, which means supply is likely to remain tight and the cost of renting will increase.

Forty per cent deposits, unless buying a new build, low gross rental yields, higher mortgage rates, not to mention tough serviceability tests, increased compliance costs, removal of interest deductibility and flattening rents, are key challenges for would-be investors.

According to CoreLogic data, the drop in market share has tended to be bigger for those with fewer properties – with what’s known as the “mum and dad investors” finding the going tougher than bigger landlords and leaving the rental market.

So Mr Hipkins, and the other political parties, please listen to the valid solutions for housing we are offering. The faster you return tax deductibility of mortgages, the sooner the pressure will come off good people providing much needed quality rental homes, which is what all members of our Property Investor Associations are. If you are not a member please join us and our lobbying today. To find your local group go to www.nzpif.org.nz.

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