These figures have been revealed in papers prepared in December last year for Housing and Urban Development (HUD) Minister Megan Woods when Finance Minister Grant Robertson was considering how to rein in residential property investors.
The papers looked at extending the bright-line period, limiting interest-only mortgages, removing deductibility of mortgage interest and temporary rent control.
Extension of the bright-line test to 10 years and removal of mortgage interest deductibility were introduced by the Government in March.
Westpac acting chief economist Michael Gordon says the moves are the most meaningful intervention in the housing market in decades and will have the desired effect of curbing investor demand.
HUD’s papers show buyers owning multiple properties made up between 35-40% of property purchases over the past decade. By comparison, first home buyers bought 24% of properties last year.
Multiple property owners with between two and four properties, including their main home, make up more than half of these purchases, with fewer than 15% of buyers owning 10 properties or more.
About 20% of current private rentals have been bought in the past two years, while new borrowing by investors has trended up over the past five years.
An HUD analysis of rental bonds and residential sales suggests the median holding time for investors is about seven years. This is comparable to owner occupiers.
It says the greatest change in behaviour is likely to come from investors who are less able to absorb additional real cash costs, such as insurance, body corporate fees and maintenance
These investors are likely to have entered the market recently, and/or be in a tax loss position, and/or have a smaller number of properties.
The papers discuss removing the deductibility of mortgage interest and/or limiting interest-only mortgages and how they could affect recent investors in the following ways.
a. Denial of interest deduction: assuming a mortgage of $500,000, which is about 70% of the national median sale price, at an interest rate of 2.5% would have interest costs of $12,500 per annum. Denying all interest deductions would add a cost of $4,125 at a marginal tax rate of 33%.
b. Limiting interest only mortgages: assuming the same mortgage, moving from an interest only mortgage would add principal repayments of $11,200 per annum. By comparison the median rent for new bonds lodged over the last 12 months was $470 per week, or $24,440 per annum.
Increasing the rent to cover additional costs
It is unlikely investors will be able to fully pass on additional costs through increased rents, says the HUD paper. Stressed renters are already at the limit of what they pay and may respond through sharing housing costs and crowding.
A poll of economists shows widespread expectation that rents will rise because of the removal of investors’ ability to offset home loan interest payments against their rental income.
The economists interviewed by comparison site Finder expected rents to rise in response to the law changes. Statistics New Zealand data shows rents lifted 3% in the year to February.
However, HUD says rising rents can also lead to more well-off renters opting to buy, subject to being able to raise a deposit, or paying higher rent to secure properties. Both factors will limit the extent rents can be increased.
Investors may take their properties out of the rental market
The proportion of households renting has increased from 22.9% in 1991 to 31.9% in 2018, and just over 1.4 million people make up these households. Most of these households, about 83.5%, rent privately.
The proportion of households that rent varies across the country, with the highest proportions in Gisborne and Auckland, about 40% and the lowest in Tasman and Marlborough, about 24-28%.
Before Covid-19 in many holiday locations investors had strong incentives to shift properties to the short-term holiday accommodation market, such as Airbnb. The extent of the impact is unclear, but certainly contributed to an underlying shortage of rental accommodation in some locations, for example, Rotorua, Queenstown and Hastings.
Listings on short-term holiday accommodation platforms dropped last year and revenues remain low. While the risk of leakage to the holiday rental market is low at this point, this risk will increase once borders open.
HUD’s papers say the changes should also apply to short-term holiday accommodation, if they apply to rentals, to ensure landlords are not incentivised to take properties out of the rental market.
In practice, however, it may be difficult to amend the law to clearly distinguish between Airbnb-type properties and some other more traditional holiday accommodation, such as traditional B&Bs or motels.
Lowering maintenance costs
A further potential unintended consequence of increasing the costs to property investors is they reduce expenditure on maintaining their properties.
It is difficult to quantify this risk, and we note that this is more likely on the margins, and with landlords who are unaware, or unconcerned about compliance.
A baseline tracking compliance with the Healthy Homes standards found 93% of landlords had heard of the standards, and 77% had done some things to prepare their properties to meet the standards. About 40% displayed strong commitment to meet the standards. Eight percent were described as “difficult” or in “denial”.
Some landlords are currently considering selling one or more properties
Lower expected returns and higher costs will reduce investor demand for housing. This will reduce what investors are willing to pay for properties and lead to some divestment.
Investors who are unable to cover increased costs from other income sources are more likely to sell.
Would sales of investment properties increase numbers of first home buyers entering the market?
Only some current renters are in a position to become first home buyers. Based on the Housing Affordability Measure, HUD estimates up to 25% of renters could buy, subject to the ability to save a deposit, and with variations depending on location.
HUD expects those investors most likely to exit the market are those with high debt related to their investment properties, whether they are investors with one or multiple properties.
Analysis of property sales and current rental bonds suggests most homes bought by investors will be considered by first home buyers.
Apartments are the exception, with only 3% of first home buyers buying apartments since January 2019, while they make up about 10% of rentals.
First home buyers are also more likely to buy homes in the bottom half of the market compared to multiple property owners who tend to purchase across all price points. First home buyers are also more likely to buy stand-alone homes (80%) compared to investors (67% of rental properties).
Rent control to counter the risk that investors increase rents to recoup their costs
Treasury advice noted rent control measures could be drafted to offset or limit negative impacts of adjustments to tax policy changes on rent prices.
HUD’s papers say if the Government introduces a temporary rent control then this could incentivise more investors to sell.
But international evidence shows those retaining rental properties will try to find other ways to increase rental income and/or increase rents up as soon as the period of rent control ends.