Right kids, break’s over. 2018 here we come.
January is usually the time we self-reflect, set goals, and think about how to make impactful changes to our lives. Being an investor and landlord is part
of that life, so why not take some time to recalibrate and consider how to invest more successfully in 2018?
A good starting point has to be getting a lay of the land by getting your head around the kitchen table issues that will inevitably shape the way your
portfolio performs this year. The shifting market combined with the new(ish) government give rise to the very real possibility that you will
have to tweak, if not overhaul, the way you have been conducting your property business. Here are some potential investment stressors we will
be keeping an eye on this year:
On tax and finance:
Bright-line test – It is expected that the BLT will be extended from the current two years to five. The
BLT is a resolute reinforcement of the intention test that sits behind our income tax regime. In a nutshell, it sets a hard a fast time rule for the
IRD to make a prima facie determination as to whether a property is transacted with the intention to profit from its capital gain (and ergo, taxable).
A BLT extension would suggest a more stable rental market with little detrimental effect on long-term buy-and-hold investors albeit making it somewhat
more inflexible for landlords in certain circumstances.
Ringfencing tax losses – The government is taking steps towards reducing the tax deductibility of rental
properties by ensuring that losses cannot be set off against other income. This is likely impact, even deter, new investors. It will also slow
down the rate of rental acquisition which will put pressure on existing landlords to increase rents.
Capital gains tax – A Tax Working Group led by the former Finance Minister Michael Cullen has been set
up with a specific brief that is likely to lead to the recommendation of a capital gains tax. However, if that is the case, it is more likely
than not that any adopted recommendations will be come into effect until after the next election. As with other transaction-based tax, a CGT
will have little impact on long-term buy-and-hold investors.
On residential tenancy:
Health Homes Guarantee Act 2017 – Late November last year, Parliament passed the HHGA which mandates more
robust standards for rental properties. Think of it as Minimum Standards 2.0. Since its passage, there has been a lot of information, as well
as misinformation, floating around in the industry that is causing landlords a great deal of anxiety. What we know so far is that overarching purpose
of the HHGA is for rental properties to either be properly insulated or contain a heat source that makes a home warm and dry. Specific details will
not be set for another 18 months, and final compliance date will be in 2024. The government has also signalled that grants will be available to moderate
the effect the new law will have on the rental market. While it will most certainly bring the cost of rental ownership up to landlords, we see
the HHGA as being a vehicle for longer term tenancies and better returns.
Rent control – While not being too terribly overt (at least not yet anyway), the government has been whispering
the possibility of putting in a rental price ceiling of sorts. Rent control is incompatible with not just the HHGB but also Labour’s promise
of restoring the hope of homeownership in New Zealand. It is worth noting that no rent-controlled cities has ever improved renters’ living conditions nor helped people into home-ownership.
While it doesn’t appear to be a policy priority, it is worth being aware of the effect rent control can have on your portfolio.
Tenancy Compiance and Investigation Team – The TCIT has been in operation for some time investigating tenancy
complaints and auditing landlords. We expect the TCIT to continue to show it teeth especially in at-risk areas where it considers tenants to be the
most vulnerable. So far there hasn’t been any indication that the TCIT exists for any reason other to ensure proper and practicable compliance in the
residential tenancies space. Overall this should have the effect of removing slumlords and malpractices from the market, restore public trust in landlords,
and create a more cooperative and transparent relationship between landlords and tenants. What it means for landlords day-do-day is that we will have
to all pull our socks up and treat our rentals like a business rather than a buy-and-forget investment.
Lessor termination rights – The government has signalled its intention to end no cause terminations and
remove 42-days notices (so that all landlord-initiated terminations have to be notified 90 days out). That said, there hasn’t been further announcements
nor much movement in this space yet.
On housing supplies:
Banning foreign speculation – A quick straw poll indicates that APIA investors are feeling largely positive
about the government’s undertaking to ban foreign buyers from purchasing existing houses. We see this as having a moderating effect on house prices
which could alleviate the pressure felt by some investors as well as homebuyers.
Kiwibuild – Undoubtedly one of Labour’s hallmark housing policy, Kiwibuild is an ambitious programme that
aims to deliver 100,000 affordable homes for first home buyers in the next 10 years. While these properties will not directly impact the investor
market (seeing that they will only be sold to first home buyers with specific conditions to hand back any capital gain made if the property is to be
sold within 5 years), an overall increase in housing stock will lower the barrier of entry for new investors.
While some of these issues may cause some initial alarm or even anxiety, we don’t see them as the start to the end of landlording. Instead, these
changes are timely reminders for landlords to become more disciplined and make thoughtful changes to the way you invest in rental properties.
Are there any other issues on your watchlist? Share them below!