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Watch This Space

It’s going to take time for traditional property investors to come back to the market. They are gun shy and wary, writes Mark Withers, but time will tell.

By: Mark Withers

6 May 2024

The big question dogging property investors is whether the two-step restoration of interest deductibility and the restoration of the two-year bright-line from July 1 will be the kick-start the residential property market needs to bring investors back to housing as an investment.

My own view is that while this is a step in the right direction, it’s going to take time for traditional property investors to come back to the market. They are gun shy and wary. Their trust has been broken.

The blow struck by the previous government to use the tax system to try to drive down house prices has left investors wary. The core foundation of a fair tax system, one that allows the deduction of interest on debt that funds an income-earning asset, was stripped away.

If it could be done once so easily, could it be done again? Have interest rates peaked or could they go higher?

These are the sorts of sentiments clients are sharing and, so far, we are only seeing a trickle of new interest in property investment, not a flood.

Stark Reminder

Even with the restoration of deductibility of interest, the much hated, and grossly unfair residential loss ring fencing rules that prevent residential losses being offset against any income other than residential rent remain. These rules stand as a stark reminder that the tax system is not fair and can be manipulated to suit the political agenda of the day.

However, all that said, things are changing and rents are rising because landlords are retreating from the industry, causing more pressure on supply.

Positive initiatives like relaxation of restrictive lending criteria and the reinstatement of “no fault” evictions are initiatives that could encourage landlords to take down their “it’s too hard” signs and replace them with “let’s have another look”.

Long term, the fundamentals remain. There will continue to be strong demand for residential housing, and where population growth is happening so, too, will there be capital gains over time.

The basics should always be remembered, the maths around rental yields and interest rates is your source of truth. The maths do not lie.

Capital Growth

Buying good quality property in growth areas will generally show capital growth, it’s just simply supply and demand economics.

Tax laws and governments will change, but time in the market over the long term will generally yield the sort of outcomes we have learned to expect over the various up and down economic cycles.

It’s certainly a buyers’ market right now, and the best time to lock in a capital gain is on acquisition with a sharp offer at a time when others are still trying to make sense of all the change.

Whether you are new to investing or an old hand, perhaps it’s time to re-engage and see what gives.

The deal of the century crops up once a week, but to find it you have to look.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. PKF Withers Tsang & Co Phone 09 376 8860, www.pfkwt.co.nz