Perspective on electoral ripple effect-what lies ahead for the property market.
Having worked in the Property Management Industry for a number of years, I often get asked in conversations in a social setting or by many of our esteemed investors and landlords at The Rent Shop, have frequently asked about my perspective on the upcoming election, particularly regarding its potential impact on the residential property market. Historically, I have refrained from discussing political matters within the realm of business, and I maintain this stance today. Instead, I offer you my considered observations on the current property market and potential future developments.
Presently, the discourse over the past six years has revolved around the perception that the incumbent Labour government has taken measures that significantly impact residential property investors. These measures encompass the extension of the Brightline Test, the introduction of Healthy Homes legislation, alterations in tenancy laws, changes in mortgage interest deductibility, and adjustments in immigration policies.
Amidst these changes, there have been both positive and negative outcomes. Notably, the Brightline Test, initially introduced by the National government, subjecting profits from investment property sales within two years to taxation, was extended to ten years by the Labour government. My longstanding advice to investors has been to "buy now ,never sell," making a ten-year property hold a minimum commitment.
There has been a lot of criticism regarding the Healthy Homes legislation, citing significant costs for homeowners, it is undeniable that we have achieved a result of having warmer, drier, and more secure homes. These improved living conditions have led to longer tenant occupancy and a willingness to pay slightly higher rents, representing a favourable outcome for all parties involved.
Conversely, there has been debate regarding a perceived shift in the balance of power toward tenants, with the abolition of no-cause terminations and limits on rent increases. My observation is that tenants may actually be the ones facing challenges, as it has become more arduous to evict problematic tenants. Consequently, our property managers exercise greater caution when selecting tenants, favouring those with impeccable credentials. The era of giving tenants a chance to prove themselves during a tenancy appears to be a relic of the past.
In my assessment, the change in mortgage interest deductibility has the potential to be the most impactful measure. Initially announced when interest rates were at 2.7%, it was met with complacency by many property owners. However, with interest rates now reaching around 7.9%, the effect will be most pronounced among those with moderate to substantial mortgage finance.
Immigration-wise, the relaxation of border restrictions in response to the COVID-19 pandemic has transformed New Zealand from one of the most closed countries to one with a net gain of 65,000 plus immigrants in the year ending March 31, 2023. Auckland, as traditionally the primary destination for migrants, is witnessing increased demand for rental and purchase properties.
Despite these challenges and changes, there are ample reasons for optimism, particularly with regard to rising rents. Nationwide growth continues unabated, as evidenced by record numbers of tenancies and enquiries. Irrespective of the election outcome, it is likely that this trend will persist, with one significant exception that I believe could bolster the market: the potential reversal of the new interest deductibility rules.
What differentiates the opposition's approach, and what potential impact might it have? Both the National and Act parties have committed to reversing the new interest deductibility rules. National also proposes to return the Brightline Test to two years, while Act advocates for its complete elimination and the reintroduction of landlords' ability to issue no-cause termination notices.
The reversal of interest deductibility would carry considerable implications for the investment market, particularly given recent interest rate hikes. While the theory behind allowing deductibility on newbuilds to stimulate demand and increase supply is sound, practical challenges arise when building costs soar and materials become scarce.
Regarding the reduction of the Brightline Test to two years, I perceive it as less significant, given my longstanding advocacy for not selling properties. Furthermore, Healthy Homes legislation has not deterred investors as anticipated. Our TRS team has achieved a commendable milestone, with more than 80% of our properties inspected and compliant. I now view our warm, dry, and secure homes as the benchmark for all rental properties.
In conclusion, the property market functions cyclically, experiencing peaks, declines, bottoms, and recoveries, with varying durations and magnitudes. At times, our view is limited to the rear-view mirror, and hindsight is a valuable perspective. Nevertheless, we can ascertain that the market remains robust, characterised by unprecedented occupancy rates. Looking ahead, it is reasonable to anticipate a positive trajectory in the property cycle.
As a property owner and investor , you want to place your investment in the hands of a property manager you can trust, that would look after your property as if they are their own? Then please call our office at The Rent Shop and speak to one of our Business Development on 09555-9100