For those of us in the property industry, it feels like every month brings new legislation that we need to get our head around. The latest is the Government’s new housing package, announced in late March, which is intended to boost housing supply and deliver a more sustainable housing market.
It has been hard to escape the media commentary on the different initiatives and their implications, discussing everything from rent controls and caps, to how much more tax revenue the Government could receive.
While it’s important for the media to explore all sides of the argument, we feel at times the facts, practicalities and reality can get lost. Here at Lodge City Rentals, we always aim to take a balanced approach and focus on how we apply the legislation, to best serve our property owner clients.
Of the different measures announced, the changes of most interest to landlords will be the extension of the bright-line test from five to ten years, and the removal of investors’ ability to offset interest expenses against rental income when calculating tax.
As part of this blog, I’ll discuss these two measures, as well as how we calculate rents, given this has been the subject of news scrutiny.
Our take on the latest housing measures
I’ve voiced this point in previous blogs when focusing on New Zealand’s hot property market; when it comes down to it, the issue is that the supply is not there to satisfy the demand. In that respect, I hope the announced $3.8 billion housing acceleration fund will start to increase housing supply and relieve pressure on the market.
The extension of the bright-line test, the rule that determines whether a person who sells a residential property must pay tax on capital gains made upon sale, is something I don’t see as too much of a problem.
In our investment seminar in December (which I wrapped up in that month’s blog), the fundamental message was that a balanced and diversified portfolio with a long-term outlook was the key to successful investment.
I always recommend owners have a long-term strategy for holding investment properties that spans at least 15 years, which therefore renders the bright-line test largely immaterial to most serious property investors.
Losing the ability to offset your income against the interest you incur on a mortgage is a tougher one. It came as a massive surprise to industry pundits (including me), with the Government seeing the current tax system as favouring debt-driven residential property investment over investments.
The impact of this measure will come down to owners’ personal financial circumstances. The more seasoned investor who has been in the game for some time may have little to no mortgage and is therefore unaffected. On the other hand, a recent investor that is more highly leveraged will feel this change more keenly.
Here is an example of the effect of this change; consider a property with a $200,000 mortgage at 3% interest.
This owner has enjoyed $6,000 in interest deductions from their income, meaning a reduction in tax of around $2,000 per annum, based on a marginal tax rate of 33%.
The changes in deductibility are being phased in over four years, so initially the effect will be $10 per week and ultimately it will be $40 per week. So it’s certainly a change that needs to be factored into an owner’s financial planning, but as mentioned the extent of the impact will be on a case-by-case basis.
Following the housing measures announcement, we thought it would be a good time to note how we calculate rents. Like any commodity in a market, the market rent moves, and we ensure our portfolio moves with it.
We always keep a close eye on the current market, and when calculating the market rent of a property we look at similar properties, performing a comparative market analysis using data from a range of reputable sources. Therefore, we are always working within the market range, ensuring properties are not under or over-rented, which doesn’t serve either the tenant nor the landlord.
Also, given the number of properties on our books (over 3,200), we have a lot of our own data, information and expertise to draw on when calculating rents.
I have surveyed several of our owner clients since the latest announcements. Most of our clients have indicated no real change to their investment plans. “It’s still better than money in the bank,” was a common refrain.
One interesting response has been owner clients looking to investigate purchasing new builds. Of course, the challenge is for the industry to provide more new builds which is what we all want.
If you have any questions about the rent calculation process, or want to discuss the latest legislative measures in more detail, don’t hesitate to reach out to Jason or I, or one of our friendly team – we’re here to help.