Huge amount of income to service investment property

Property investors in the Bay of Plenty need more than $40,000 on top of the average income to avoid mortgage stress.

Wednesday, June 07th 2023

Canstar has done straightforward calculations for TMMO on the cost of repaying an investment property mortgage on an average income and without falling into mortgage stress.

Figures show the Bay of Plenty is the toughest place to service debt. Investors there need $44,527 extra on top of the average income while in Auckland it is $41,368. Across the country as a whole, investors need an extra $22,788 to keep up with mortgage payments.

However, Canstar New Zealand general manager Jose George says all investors’ situations are different.

“Most will likely have main homes, which will probably be mortgaged too.” The figures don’t reflect the removal of mortgage payment deductibility for tax and outgoings. 

“Investors’ property-owning arrangements – and the costs of maintaining more than one property – is personal and unable to be reflected with ‘averages’,” says George.

With that caveat in place, he says some trends and themes are emerging in Canstar’s recent research around incomes, property prices and mortgage stress.

“What we can say is that it’s a really tough time for property investors. Property prices are still high relative to incomes, interest rates are at record highs, and inflation is driving up basic costs like groceries.

“Across most of the country, investors need to earn more than the average household income to afford a property, service the debt and stay out of mortgage stress, which is generally defined as paying more than 30% of income into mortgage repayments.”

There are exceptions to this rule – most notably in Southland, where the average house price is low enough to allow average-earning investors a decent buffer against mortgage stress.

The analysis Canstar produced considers gross household income, as outgoings can vary hugely across households. The cost of outgoings makes a huge difference to the affordability of property, and the ability to service debt.

“Our research does show, however, that being in mortgage stress is likely common,” George says. “This is worrying. Mortgage stress is the point at which households struggle to pay bills, and general wellbeing - including mental health - can suffer.”

George says Canstar encourages investors to check their outgoings and see if easy savings can be made. “It seems the peak of the current housing cycle has been reached and as a result banks may be more willing to negotiate or discuss financial arrangements including discounted rates.”

Is investing more difficult now?

There are just so many moving parts in the property investment market, it’s impossible to say if investing is harder now, George says.

“Houses certainly used to be cheaper, but interest rates used to be much higher.

“There have been other changes, including an easing of LVR requirements but - on the flipside - the introduction of the bright line test and reduction of tax benefits.

“We are in a tough time, but it will ease off. Inflation will cool and interest rates drop within the next 18 months or so.”

One bright spot is LVR restrictions have just eased, but it might not make it easier for first-time investors, as house prices start to edge back up.

“Knowing when to make an investment is a fine balance so an investor does not put themselves under financial stress,” he says. 

The one figure to take notice of

George says taking notice of one figure when buying an investment property depends on what the investor is looking for.

If it is a passive income, consider the yield. If it is a short-term capital gain it’ll likely be the price. If it is for long-term gain, it might be more around forecasts for the area.

“Taking all of this into account, perhaps the most important figure is the 35% deposit or equity contribution,” he says. 

“This is likely to be a significant sum for anyone’s budget. And before buying, a first time investor should consider if putting such a massive sum of money into property is the best for them and their lifestyle. Mortgage serviceability is a major, ongoing concern,” George says.

“After the recent boom in house prices, it seems likely property prices will stabilise and the investment may not be the ‘quick buck’ property it has been in the past.

“However, if a new investor is able to afford it and is willing to invest for the long term, it could well be a smart move.”


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