Blog: The Landlord says...

A little piece of news that hasn’t been widely reported this week should be of concern to property investors.

There was an article on landlords.co.nz reporting that rental prices on residential properties had fallen in the month of May. The piece, quoting Massey University research showed that rents had fallen from a high of $300 a week to $295.

It doesn’t sound like much, but it can make a difference. It will make a bigger difference if the trend continues.

The property market is a funny thing, but one of the trends we have seen before is that when house prices rise, rents stay flat or can even fall. Under this scenario, which is what we have had for many years, yields on rental properties look extremely poor.

However, when prices stop rising or fall, it is often the case that rents start to pick up.

This increase in rent provides a bit of a fillip for investors. It can be particularly useful in markets like the present to offset some of the high costs such as interest rates.

It’s still early days and unclear what is behind this fall in rents. One theory, which has a lot of credence, is the emergence of what I call the “accidental landlord.”

These are people who have a house on the market – maybe because they are heading overseas, or maybe because they have moved into a new home – and they can’t sell it for the price they expect.

Instead of accepting a lower price they put the house into what I call the “rental pool”.

Discussions with real estate agents and property managers show there is growing evidence that more and more rentals are in the market. This increased supply can pull down demand, especially if kids decided it’s too expensive to flat and move home (something else we hear is happening).

Should investors be worried about this rental fall? Not yet, but it is worth watching and seeing what is happening.

The other thing is that landlords should be proactive to see what they can do to keep tenants and even increase rents. Often small little things make the difference between having a tenanted property and a vacant one.

One thing all property investors and landlords should be aware of now is the long-winded re-write of the Residential Tenancies Act (RTA).

As, hopefully, all landlords know the RTA is the bible for how to manage your rentals and sets the rules around what tenants and landlords can do.

The RTA rewrite has been a torturous process. It started eight years ago and nearly got derailed last year when another competing bill was presented to Parliament – but then withdrawn.

The final bill is 67 pages long and tough reading.

What has been fascinating is that although this is the central book of instructions for landlords, very few have seen the bill which has been presented back from the select committee. And even organisations you would expect to have read it, such as the National Party housing spokesman, hadn’t done so when the NZ Property Investor magazine first contacted them.

One of the most contentious items in the bill is the issue of making tenants liable for only four weeks of rent for any damage.

Feedback so far is that this is far too low and that it is not something the officials discussed with the industry reference group which was consulted about the changes.

Another change is that rental property owners must appoint an agent if they are going to be out of the country for more than 21 days and also let the bond centre know who the agent is.

The key point is that this piece of legislation is now on the runway and getting ready to take off. All investors should be aware, or at least find out, what these changes mean for them.

Each month we have a week where all the real estate housing stats come out telling us how the market is going. The past six days have seen three releases; firstly Barfoot & Thompson’s numbers for the Auckland market, followed by QV’s, then lastly the Real Estate Institute’s.

It’s fascinating to see the reaction to the numbers. As a general rule of thumb they are portrayed in a dark light.

Generally B&T and REINZ always try to put a positive spin on their numbers, while QV is straight down the line.

I wanted to take a bit of a bigger picture look at the numbers, and my conclusion is yes, the rate of growth is slowing, but it ain’t all that bad.

Take QV’s numbers. On a nationwide basis house price growth for the 12-month period to May was 2.4%. This compares with an annual growth rate of 4.9% for the 12 months to April.

Clearly the rate of growth has slowed.

How does that compare with other asset classes like bonds or shares?

Well, figures on the Good Returns website show that in the same 12 month period, the NZX50 was down 15.76%, the Australian All Ords index was up 2.79% and the MSCI, which measures international shares, was down 9.3%.

So property, compared to a growth asset like shares, looks OK.

Against income assets the picture isn’t so good. The New Zealand government bond index was up 6.93%, while international bond indices were all up over 9%.

So overall the housing market still produced positive returns, but much less than previously. When you look into the numbers on a regional basis you see there are some wide variations. For instance some provincial centres, like Gisborne, New Plymouth and Palmerston North, went backwards and others showed good gains.

While there are stories in the media about individuals taking big hits on the sale of a property, these are one-off events.

If you look at how property has performed over the past five years, compared to other assets, then the picture isn’t as bad as it gets portrayed.

News today that the Reserve Bank has brought forward forecasts for cuts to the official cash rate is welcome.

A look at the market reaction to the announcement indicates we are likely to see lenders drop some rates, particularly those at the shorter end of the curve, quite aggressively. For instance don’t be surprised to see cuts of 40 basis points or more for one-year rates.

However, things aren’t 100% rosy. A reading of the bank’s monetary policy statement shows that the effective mortgage rate borrowers are paying is at historically high levels and won’t start coming down immediately.

The effective mortgage rate is the average rate being paid on outstanding mortgage debt. Mortgage borrowers are rolling over their existing mortgage debt onto higher interest rates than they were paying previously, thus pushing up the effective rate.

The RBNZ says the effective mortgage rate has increased by about 170 basis points from its lows in late 2003, and has reached its highest level since October 1998. It says around 30% of the existing mortgage debt on fixed rates will re-price over the next 12 months.

On the basis of currently available mortgage rates, many of those borrowers will face interest rates that are more than 100 basis points higher than they are currently paying.

Another issue to be aware of is that rate changes can move unexpectedly in directions you can’t predict. We have seen this in the past couple of weeks. Firstly banks first dropped quite aggressively their short-term fixed rates and left longer-term ones unchanged, then a matter of days later reversed the trend putting rates of terms of three years or more down and shorter-term rates up.

The third point is that the Reserve Bank put a number of conditions on cuts. These conditions were on things beyond its control (commodity prices, exchange rates etc). If they don’t pan out then the homeloan rates we see in the next few days may not have a lot of longevity.

The message here is that there is still a lot of volatility in financial markets and data releases with unexpected outcomes can make lenders quickly change rates.