Rental losses suggest goal in capital gains
Property investors’ incomes from rents are low enough to indicate that almost all are banking on some capital gains to make purchases pay off, economists say.
A newly released paper, prepared for Minister of Housing and Urban Development Megan Woods in December, said 37 per cent of property investors, or 107,530 taxpayers, reported an annual loss to Inland Revenue – meaning the rent received did not cover their costs. The average loss was $9000.
That is only a small decrease from the 116,000 rental property owners who declared a loss in the 2016-17 tax year, even though interest rates have fallen from an average two-year rate of 4.75 per cent to 2.58 per cent over that period.
The 63 per cent of property investors, or 182,219 taxpayers, reporting rental profits recorded an average annual profit of $14,000 before tax.
The median rent for new bonds lodged over the previous 12 months was $470 a week, or $24,440 a year.
Changes planned by the Government will mean their taxable incomes increase – but what they bank will drop.
Investors’ ability to reduce their taxable income by offsetting interest rate costs will be phased out over the next four years.
The paper calculated this would mean $4125 a year in extra tax for someone with a $500,000 loan at an interest rate of 2.5 per cent and a 33 per cent tax rate.
But it said proposed changes would affect property investors differently. They could increase rent to cover additional costs, take their property out of the rental market, reduce costs by lowering maintenance, or sell.
‘‘Property investors will weigh up their willingness and ability to pay for any increased upfront costs against the returns to the investment, including rents and untaxed capital gains. It is unlikely that investors will be able to fully pass on additional costs through increased rents.
‘‘Stressed renters are already at the limit of what they pay and may respond through sharing housing costs and crowding.
‘‘Rising rents can also lead to more well-off renters opting to buy, subject to being able to raise a deposit.’’
Few renters were in a position to buy, even if prices fell significantly, the paper said.
Economist Shamubeel Eaqub said he was not surprised that investor rental incomes were small.
‘‘It makes sense to have losses you can carry forward to future years and maximise your costs on that property,’’ he said.
‘‘Even though it’s ring-fenced, it’s still relatively tax-efficient to have as much gearing on rental properties as possible as opposed to your own home.’’
Infometrics economist Brad Olsen said it was a sign of investors expecting big capital gains. ‘‘You don’t make a loss unless you expect a gain at some point. You very rarely hear of people going into property investment saying, ‘I’m going to get so much money in rent.’
‘‘Rent will help cover the costs, and sometimes a little bit more, for some, but they’re holding to sell at some point ... not flipping, but long-term investing in an asset that will eventually return something positive.’’
He said the changes from the Government could alter some investors’ calculations if they decided capital gains were not likely to happen in the same way. If house price rises were smaller or less predictable, it could make some think again about whether an investment would work.
‘‘You don’t make a loss unless you expect a gain at some point.’’ Brad Olsen
Infometrics economist