Residential rental properties falling out of favour as investment option
LAST Monday, the ODT reported under the headline ‘‘Market edges closer to a buyer’s’’ that prospective home buyers in an ASB survey were feeling more confident about this being the right time to buy.
That was generally based on a view of softer market conditions and stable/reducing mortgage interest rate expectations.
We all know markets are complex things, none more so than the residential property market in New Zealand, and no single factor is the whole answer to the question of what is driving certain behaviours by participants and average prices.
Although armed with a very old degree in economics, I do not profess to have any special insights at a statistical data level, but do have some anecdotallybased thoughts about part of what is happening in the marketplace right now.
As a starting point, I am hearing consistently that ma and pa residential property investors (landlords) are leaving the rental market in droves.
This insight is sourced directly and indirectly. The reasons are varied, but are often a combination of: changes to tax settings — such as future ringfencing of tax losses, the brightline test treating them as speculators if they hold property for less than five years, and the removal of depreciation benefits some years ago.
There are prospective changes to the Residential Tenancies Act which are perceived as swinging the balance of rights too far towards the tenants and recent decisions in the tenancy tribunal which again seem to be punishing landlords beyond what is considered reasonable.
There are increased LVR requirements changing the equity/debt mix; and requirements about property standards which will inevitably release poor rental stock into the ownermarket.
Landlords have a fear of damage and inability to recover such from tenants without a fight and quickly; interpersonal challenges with tenants; the spectre of capital gains tax; and so on.
This ‘‘list’’ is not about the right or wrong of any one item in isolation, but rather the cumulative impact of perceptions and reactions to a range of matters.
Current residential landlords are seemingly reaching an overall view that the risk/return calculation is out of balance, so some are choosing to proactively exit.
What happens when a subset of a marketplace disengages like this?
Supply of property previously used in the rental market comes on stream at a time when those with residential portfolios who would otherwise be gearing up to build their portfolio remove themselves from the demand side.
Prices inevitably soften.
We can celebrate this in the short term in the context of the housing crisis but, ultimately, this, combined with less new rental stock being built for the same reasons, means that as the population grows, fewer rental properties are available/ affordable for the most vulnerable in society.
This may be compounded by the fact that the average rental occupancy — the number of people living in each rental house — is higher than for privately owned houses, so it is not a straight swap of X people previously renting to X people now owning the same house. For example, a firsthome buyer couple may be displacing a family of six previously renting.
That means rents go up and queues at open homes for rentals grow, as I am reliably informed is happening right now in Dunedin.
There are no easy answers here, but I do feel the uncoordinated, multipronged changes to the circumstances of residential landlords have been so swift and perceived as so onesided that many are feeling shellshocked and are acting accordingly.
I predict those investors with larger portfolios and significant equity bases, being the minority, will hang in there and do very nicely as rents increase to properly reflect both the diminishing supply and the ‘‘new’’ risk of residential property ownership, ironically negatively affecting the very constituency that many of the above measures were designed to assist.
And then house prices will likely rise as a new equilibrium is achieved.
A