“Often the best landlords are the mum and dads, but unfortunately many are now exiting the market as it has become too tough.”
He says the pressures on rental stock have only grown, not helped by the Auckland floods and Cyclone Gabrielle earlier this year. Then there’s more regulation and a loss of tax deductibility on landlords’ mortgage interest costs.
“Housing supply is coming on stream, but the demand is huge, particularly when considering strong inbound migration, people living longer, and more families banding together under one roof to minimise cost,” says Kearins.
Today, the Reserve Bank could make it tougher for landlords by lifting the OCR to its stated ceiling to 5.75%. Most economists are predicting it will go higher by the end of the year.
Open letter
One mortgage boss kicking against any rise in the OCR is Squirrel boss David Cunningham, who says there is still a world of pain to come for Kiwi homeowners – that includes investors.
In an open letter to Reserve Bank governor Adrian Orr, Cunningham says: “I believe it is now time for you to watch, worry and wait rather than throwing more fire-power at the inflationary dragon. A dragon that (many signs would suggest) is already on death’s door.
“Governor Orr: Don’t kill the economy, and inflict even more pain on top of what’s already coming for Kiwi households, just to slay the dragon that little bit faster.
“In my opinion, forging ahead with any more OCR hikes at this point would be lunacy. “And I don’t think the RBNZ is run by lunatics.”
“To illustrate the point, in April 2021 the two-year fixed mortgage rate was 2.6%. Today it’s about 6.6%. On a $500,000 home loan, that’s another $384 per week to find, which adds up to about $20,000 per year.
“Without a pay rise of almost $30,000 a year (pre-tax) that money’s only coming from one place: reducing household spending elsewhere.
“Economics 101 says that if demand goes down as a result of us all spending less, the downturn will ripple through the labour market and wage growth, and ultimately dampen inflation.
“The Reserve Bank needs to allow time for these transition mechanisms to do what they will inevitably do,” says Cunningham.
Main point of debate
“There’s no prizes for kicking someone when they’re down. There’s a pretty unanimous sense across the financial markets right now that there will be another hike today.
“The main point of debate seems to be whether you’ll go a little easier on us at 0.25%, or push harder with 0.50% - although, increasingly, markets are pricing the latter as a possibility.
“Ultimately, if that is the path you take, you’ll have the markets’ backing. For the most part anyway. Many are saying that lifting the OCR is exactly what you, and the Reserve Bank, need to do right now. ‘A stitch in time saves nine’ and all that.
But I beg to differ.
No matter how I look at it, my sense is that raising the OCR further is the last thing the Reserve Bank should do right now.
Earlier this month, the Reserve Bank published a survey of Kiwi business leaders and professional forecasters about expectations for inflation will be in the future. The survey shows expectations one year from now have fallen by 0.8% compared to the December 2022 quarter. While average expectations around inflation two years from now fell by 0.5% to 2.79% – it is a figure that’s within your target 1-3% range.
“While some might argue there’s cause for concern because wholesale interest rates have shifted upwards over the past week – in my opinion that shift is inconsistent with underlying economic factors.
“In fact, I’d suggest the rises are being driven by financial markets participants. After all, who benefits most from financial market volatility, if not the financial market traders?
“What would I do? I’d hold the OCR at 5.25%, but make it clear that this rate is unlikely to be lowered during 2023. That will ensure the tightening monetary conditions for households are delivered, and see wholesale interest rates revert to the level they were after the April OCR review.
“Patience is what’s needed here – and I know the Reserve Bank has it in spades.”
More landlords needed
Kearins says there is pain for the thousands in emergency housing including motels and the more than 20,000 people on the public housing waiting list. “The social need is massive, and we see it every day in Palmerston North,” he says.
In March MBIE’s Tenancy Services Rental Bond Data shows median rents nationwide are up $175 per week since 2017 – reaching $575.
Kearins says the housing market needs more landlords, not fewer, but sadly many have chosen to invest elsewhere, such as commercial property syndications, or keep their money in the bank given rising term deposit returns.
“A final nail in the coffin for many mum and dad landlords has been the loss of tax deductibility on interest costs.” That is now being incrementally phased out. Currently at 50%, it moves to 25% on 1 April 2024, and then to zero on 1 April 2025.
“With the cost of living crisis in full swing, it’s a tough time for tenants, and with all the red-tape and expense, it’s tough for landlords,” says Kearins.
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