As temperatures drop across New Zealand we are reminded of the cool change coming for a category of investment that has been a long-time favorite of Kiwis. From 1 July residential landlords will be required to comply with new rules regarding underfloor and ceiling insulation or face penalties up to $4,000. While on its own this might sound like a minor requirement for responsible landlords, it adds to a number of headwinds that may discourage residential investment and makes us wonder whether this popular form of investment may be losing its shine.
In May 2015 the Reserve Bank of New Zealand announced new limits on how much bank lending can be made to residential property investors in the Auckland Council area with deposits less than 30% of the property’s value. Prior to this many investors were able to getting funding with deposits of 20%. From October 2016 the Reserve Bank tightened things further when it lifted the deposit requirement to 40% and applied it nationwide. In January 2018 they relaxed the rule to 35% and in January 2019 it was relaxed again to 30%. These recent changes still leave investment property buyers needing to put in about 50% more of their own equity than they did prior to 2015.
Another headwind is a new tax rule that “ring-fences” losses from residential property investment and it applies from the 2019/20 tax year. This means that landlords are no longer able to offset excess deductions against other income (such as salary and wages). Coupled with the higher deposit requirement it becomes harder to create tax losses and use them to generate a tax refund by applying them against other income.
On the other hand, these costs could result in higher rents and see the ultimate burden fall on tenants. Economics students will tell you that its not always clear who will bear the consequences of a cost increase. If demand is strong then residential landlords might find that they can recover increased costs easily through higher rents. If there is a lot of supply around then landlords may have to take these costs on the chin.
It seems that almost everyone in New Zealand has a view on residential property but if it has a role in your portfolio make sure you stay up to date on the regulation, tax and finance changes that affect its appeal as an investment.