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Property investment: headlines no match for real-world experience

By David Kneebone on 2021-05-20

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It’s been an interesting month here at Lodge City Rentals, speaking with existing owner clients and those looking to enter the market as new investors. Yes, despite what the media would have you believe, there are some!

With many still thinking over what the Government’s changes mean for them, this month I discuss the valid reasons why investors are staying in and joining the Hamilton residential investment market.

Essentially, residential property can provide the returns you’re looking for, and there are plenty more factors at play than simply the bright-line test extension and removal of the tax deductibility of interest expenses.

 

What I’m seeing and hearing

The common refrain from existing investors is twofold. Firstly, capital gains over the past two to three years have far exceeded expectations, creating far more equity than budgeted for many. Additionally, interest rates are lower than expected, with rents and occupancy rates also surpassing what was anticipated.

So the increased capital gains, lower costs and higher incomes must be great news for property investors, right?

However, we’re all aware of the recent law changes (discussed in last month’s blog) initiated by the Government to purposely slow house price growth. Cancelling landlords’ ability to claim interest costs as a tax deduction has certainly created plenty of headlines, some more extreme than others. In fact, I was interested to see groups attempting to overturn the legislation, quickly shut down by the Government.

In contrast, most of the owner clients I have canvassed are enjoying interest rates at half or even less than half of what they were when they first invested. Some remember the days when rates were 20+ per cent!

So although losing the tax deductibility of interest expenses affects cashflow, the reduction in interest rates and increased rental income has more than compensated for many of us.

Extending the bright-line test from five to ten years has garnered less attention, which I suspect is because most people, including the vast majority of our clients, are in for the long haul anyway.

 

Why property investment is still a compelling choice

Another frequent question I get from owners these days is, “If I do sell my rental properties and cash in, where should I put my money?”

That’s certainly a good (yet tricky) question, however I am confident that investing in rental property, particularly in Hamilton, makes good sense. The tinkering with the rules has not changed the fundamentals driving property investment in our city:

 

  1. The Golden Triangle: Hamilton is at the centre of New Zealand’s major growth triangle with Auckland and Tauranga, with Statistics NZ population projection data released last month showing the dominance is set to continue.

  2. Property shortage: There has been a well-documented shortage of property around the country for some time, so the prospects of high occupancy remain strong.
  1. Post-Covid influx: With vaccines being rolled out here and abroad, and the Government already opening up more MIQ spots, it’s looking more positive for the tertiary education sector. As more international students allowed to return, this will create further demand for rental property.
  1. Interest rates and yields: Interest rates remain very low and even with higher borrowings cashflow is positive. In addition, net yields are still in excess of 3% (excluding capital growth), which is more than three times what the bank will pay you.

In my 23 years with Lodge City Rentals, and 15 years as an investor prior to that, I have witnessed many challenges as a property owner. These range from the stock market crash in 1987, the Asian financial crisis of 1997, and the September 11 attacks, to the Global Financial Crisis in 2008 and of course Covid-19. From these ‘speed bumps’, I’ve noticed a common theme; those of us who remained calm and didn’t sell have done very well.

 

Buying off plans an opportunity

Property investment is and always has been a long-term proposition, or as I like to say a ‘get rich slow scheme.’ Amid these changes we’re currently facing, I also see some great opportunities for existing owners and newcomers, focused on buying off the plans.

Hamiltonians have traditionally been a little reluctant to buy off the plans, but with established developers around the city building their reputations with quality builds, people are becoming more confident in investing off the plans.

The good news with this option is that interest rates are still tax deductible, the bright-line test remains at five years, and of course these properties all meet the requirements of the Healthy Homes legislation.

The big challenge here for Hamilton, and the rest of the country, is to increase the number of new builds to meet the demand.

If you would like to talk over property investment in Hamilton, and how property management can make the journey an easier one, feel free to reach out for a chat.

 

See you in June,

David Kneebone

Director, Lodge City Rentals

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