Hawke's Bay Property Investors' Association

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01-03-2018

Increasing costs for landlord is bad news for tenants

There appears to be a generally low opinion of people who provide rental properties for tenants to live in. Greedy, uncaring, speculative, super wealthy and tax advantaged appears to sum up the view of rental property providers in New Zealand.

People see it as an easy way to make super profits and yet only 7% of the population actually own rental properties. Why is that?

The answer is that it isn't easy to provide a rental home for people in New Zealand and unfortunately it's getting even harder.

You might think "who cares, they can afford it", but most can't. Rental property providers are generally average New Zealanders looking to provide for their retirement.  The majority of rental property providers, around 90%, only own one or possibly two rentals. They are not the multi-property owning multimillionaires people assume them to be.

These private rental property providers supply around 85% of the homes that tenants live in, but they are facing a large number of increased costs.

First rental property owners lost the ability to claim depreciation, which is a tax deduction available to all other businesses. LVR restrictions were introduced and then increased to require a 40% deposit when buying a rental property. Minimum standards were established and the cost of insurance, rates and maintenance increased. Now we have additional costs through the Healthy Homes Act, Ringfencing of tax losses and of course the potential for a Capital Gains Tax. On top of that we have had two quite outrageous High Court decisions regarding tenant liability for damage and unlawful tenancies.

Is it any wonder that some people are having to sell their rentals and many are now unable to buy  rentals that they otherwise would have? Some may cheer these fat cats being forced out, but is this going to help provide more rental properties or put a halt to rental price increases?

An average 2.1 people live in owner occupied housing in New Zealand, but there is an average 3.9 people per rental property. Every time a rental property is sold to an owner occupier, on average 1.8 tenants still need a home to rent.    

Below is a table showing the costs for providing the average New Zealand home as a rental. Even with a hefty deposit, the rental income does not cover the outgoings by around $6,000 a year.

Assuming a home owner bought this property to live in, even with a 20% deposit of $ 105,800 and not paying off any loan principle, the home ownership cost is still $3,823 per year higher than the cost of renting the same property.

The NZ Property Investors' Federation encourages rental property owners to provide good quality homes for tenants, but this comes at a cost which is reflected in the rental price. We supported minimum standard legislation as it improved the living standards of rentals but did so in a practical and cost effective manner.

While we don't know what the regulations for the newly passed Healthy Homes legislation will be, we hope that they will be well thought out, appropriate and cost effective. That means cost effective for tenants as they are the ones who will ultimately pay for these improvements.

As an example, the current insulation standards are only 5% more effective than the previous standards. However to top up the insulation to these new standards costs nearly the same as completely installing new insulation. Given a choice, would tenants choose to pay for this extra benefit?

Ring fencing tax losses has just been announced. This means that a rental property owner cannot use losses from a rental property against tax paid on other income (a practice that is available for other investments or businesses). Using the figures in the table below, this will add a little over $4,000 to the cost of providing the average rental property. It is already hard enough to provide a rental property to tenants now. This will make it extremely difficult.

This information is not intended to moan about the situation. The intent of this article is to show that if it keeps getting harder to provide rental property then there will be fewer rental properties available and the rental prices will continue to climb. We are already seeing it happen.

For those who think that rent controls are needed to combat rising rental prices, think again. This is a solution that doesn't address the problem. Rent control would actually exacerbate the problems that are currently causing rental prices to increase.

Rental property owners provide 85% of the homes for tenants. For this to continue, we need everyone to better understand how rental property works and have an honest and reasoned discussion on any proposed changes. At the end of the day, it is tenants who pay for these changes one way or another.

 

Rental Owner

Property Value

 

$ 529,000

Deposit / Investment

10.00%

$   52,900

Mortgage

 

$ 476,100

Mortgage Interest rate

 

5.86%

Weekly Rent

 

$        520

Rental yield

 

5.1%

Annual rent

 

$  27,040

   

Annual Expenses

   

Mortgage

Interest only

$  27,899

Insurance

 

$    1,000

Rates

 

$    2,400

Property Manager (incl gst)

8.5%

$    2,298

Other

 

$       500

Maintenance as % of rent

8.0%

$    2,163

2 week vacancy provision

 

$    1,040

Total expenses

 

$  37,301

   

Building depn claim (No longer available)

 

$           0

Chattels depn claim at

10.0%

$    2,116

Tax Refund/Payable

33.0%

-$    4,084

   

Landlords cost

 

-$    6,177

Homeowners cost above renting

 

$   3,823

     

 

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