NZ residential rental market news, March 15

What will be the impacts of interest deductibility? KO says they have no impact on house prices, and the campaign for better property management.

Too long; didn't read? Here're this week's TLDRs...

More sales, prices rise as activity builds in the property market

REINZ reported a significant rise in listings and stock levels in February 2024, enhancing buyer options. 
High listing numbers and elevated stock, along with shifts in median sale prices, have led to increased housing market activity. 
There was a notable increase in listings and stock levels year-on-year, resulting in a larger inventory of properties for sale. 
Median sale price growth in some regions is attracting more investors and first-home buyers. 
Gisborne experienced remarkable sales increases, suggesting strong buyer demand post-Cyclone Hale and Gabrielle. 
Property sales nationally in February rose by 81.8% compared to January 2024, with a 37.9% increase year-on-year. 
All regions except the West Coast saw increased activity, with sales counts in 14 of 16 regions up by more than 20% year-on-year. 
Inventory levels increased by 8.1% year-on-year. 
The national median sale price rose by 3.1% year-on-year, with Auckland's median price exceeding $1 million again. 
Listings surged nationally by 60.4% month-on-month and by 44.8% year-on-year, with significant increases in North Island regions. 
The median days to sell increased slightly month-on-month but saw a decrease year-on-year. 
Government policy changes, including adjustments to the bright-line test and interest deductibility for landlords, contributed to market buoyancy. 
Otago set a new regional HPI record, with significant HPI increases. 
The HPI for February 2024 showed a 1.1% monthly increase and a 3.2% increase year-on-year, though it remains below the 2021 market peak. 
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Housing recovery spreads to nearly 60% of NZ suburbs

58.7% of suburbs saw property values rise over the last three months, indicating a gradual market recovery. 
CoreLogic NZ's tool showed an increase in median estimated property values in 549 out of 935 suburbs. 
Only 152 suburbs experienced declines of 1% or more since December. 
103 suburbs recorded value gains of at least 2%, with seven seeing increases of 5% or more. 
Notable value gains were in suburbs with median values under $500k, including Blaketown, Cobden, Patea, and Wellington Central. 
Over the past year, 27 areas saw value increases of at least 5%, with significant growth in Auckland, Wellington, and Queenstown. 
Queenstown displayed market resilience, especially in Sunshine Bay with a 10.6% growth. 
In Auckland, 52% of suburbs saw value rises over the past year, with Herne Bay remaining the most expensive and Manukau and Auckland Central the most affordable. 
Hamilton and Tauranga are showing signs of rebound, with selected suburbs experiencing value increases. 
Wellington's recovery has been more apparent, with a majority of suburbs showing value gains since December. 
Christchurch and Dunedin have also recorded growth in property values in several suburbs. 
The property market recovery is spreading due to factors like stable mortgage rates, employment growth, high migration, and easing credit conditions. 
However, the recovery is not uniform across the country, and a modest upturn is expected for 2024 due to high mortgage rates and stretched affordability.  
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Rental yields took a breather at the end of 2023

The attractiveness of residential property as an investment has plateaued after 18 months of improvement. 
Interest.co.nz analyses theoretical rental yields quarterly for one, two, and three bedroom properties nationally and in major urban districts. 
Rental yield, a key indicator of rental market attractiveness, compares property's income potential to its purchase price. 
Increased attention has been on the rising costs of owning rental property, overshadowing the improvement in investment attractiveness due to falling property prices and rising rents. 
In Q1 2022, the national lower quartile price for three bedroom houses was $650,000 with a median rent of $589 a week, resulting in a 4.7% gross yield. 
By Q1 2023, the price dropped to $566,050 and median rent increased to $620 a week, raising the gross yield to 5.7%. 
Yields settled at 5.6% in Q2 2023, indicating a period of stability in the rental market despite the low attractiveness for income-focused investors due to increasing outgoings and uncertain capital gains. 
Multi-unit properties like two and one bedroom units saw higher returns, with yields on two bedroom units reaching 7.2% in Q3 2023 before falling to 6.8% in Q4 2023, and one bedroom units peaking at 10.4% in Q3 2023 then decreasing to 8.7% in Q4 2023. 
Yields vary significantly by location, with Auckland's three bedroom house yields rising from 3.5% in Q1 2022 to 4.4% in Q4 2023, highlighting the challenge of generating income in areas with high property prices relative to rents.
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BNZ: Housing market will remain flat Q1, Q2

BNZ's Chief Economist Mike Jones has revised his house price growth forecast for this year to a 5% increase, down from an earlier prediction of 7%. 
The housing market is expected to remain flat in the first half of the year, hindered by high mortgage rates and stretched affordability. 
The market is currently struggling with a high level of unsold inventory, the highest in seven years. 
An uptick in the market is anticipated in the second half of the year, driven by new home construction not meeting population needs and expected lower mortgage rates. 
The Reserve Bank's recent meeting supports the expectation of no further interest rate increases, with cuts anticipated later in the year. 
Proposed debt-to-income (DTI) restrictions are not expected to significantly affect the market. Meanwhile, an easing in loan-to-value ratio (LVR) restrictions and changes to investors' taxes are seen as mild supports for the market. 
BNZ is the fourth-largest home lender in New Zealand, with an exposure of $58.4 billion. 
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Putting a date on interest deductibility

Property investors in New Zealand will soon be able to claim a larger portion of their home loan interest as a tax deduction, with rates increasing to 80% from April 1 this year and 100% from April 1 next year. 
This move accelerates the reinstatement of interest deductibility promised by the National party, surpassing the timeline originally set by the previous Labour Government. 
Associate Finance Minister David Seymour argues that restoring interest deductibility will relieve rent pressure and simplify the tax code, helping both landlords and renters during the cost-of-living crisis. 
The changes aim to make residential properties more attractive to investors and increase the pool of rental properties, potentially easing rental market pressures. 
Despite these changes, CoreLogic's chief property economist suggests it won't significantly alter investor activity due to still low yields and high interest rates. 
The debate intensifies between political parties regarding the impact of these changes, with Labour criticising the potential benefit to a small number of large-scale landlords. 
Labour's criticism is based on 2021 bond data, which the National party argues is not accurate or substantiated with more recent data indicating the majority of entities with over 200 bonds are property management companies, not individual landlords. 
The lack of definitive data on the exact number of properties owned by landlords contributes to ongoing political disputes over the changes to interest deductibility rules. 
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Tony Alexander: Don’t expect landlords to lower their rents

Tony Alexander suggests landlords are unlikely to lower rents despite the recent tax changes allowing them to deduct 80% of their interest expenses from rent income starting April 1 this year and 100% a year later. 
Historical data indicates that the removal of interest expense deductions had minimal impact on rent increases, with average nationwide new rents rising 3.3% annually before the deduction removal and just over 4% since then. 
Rising operational costs, such as council rates (with potential increases of 15%-25% and more) and insurance costs (around a 30% increase this year), contribute to the financial pressures on property owners, including both homeowners and landlords. 
The combination of soaring council rates, insurance costs, and maintenance expenses means scope for landlords to cut rents is minimal, and rent increases are likely to continue. 
Some landlords may opt to manage their properties independently to save costs, but the trend towards professional management may increase due to their ability to secure larger rent rises. 
Alexander argues that without significant intensification and consenting reform, rents are expected to continue rising due to factors like rising construction costs, declining consent issuance for multi-unit developments, strong population growth, and rising construction standards. 
House prices are expected to increase once interest rates start falling. 
Recent surveys indicate a shift to a buyer’s market, with both a decline in first-home buyer activity and investor interest. 
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How much money can you make as a property investor?

The return of interest rate deductibility for property investors has reignited discussions on the profitability of investing in property in New Zealand. 
The belief that property values double every 10 years is a common myth, underscoring the misconception of guaranteed profits in property investment. 
An example analysis of a three-bedroom property in New Plymouth shows the volatile nature of property investment returns over the last decade. 
Despite the property more than doubling in value by the end of 2023, annual returns varied significantly, with substantial gains in some years and losses in others. 
Key lessons from the analysis include: 
Property investment does not guarantee annual profits, as shown by fluctuating annual returns. 
The majority of returns come from house price appreciation, with rental income contributing a minimal portion. 
Long-term holding (7-10 years) is crucial for realising significant profits, as short-term investments are more prone to losses. 
Current high-interest rates pose challenges for investors, but those committed to long-term investment are more likely to succeed.  
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Has the Government opened the floodgates to property investors?

The New Zealand Government confirmed tax changes for property investors, allowing 80% interest deductibility from April 1 this year and 100% from April 1, 2025, with the current tax year set at 50%. 
These tax changes are unlikely to significantly impact the property investment market due to low rental yields and high mortgage rates, meaning new investment properties will still require additional income to cover costs. 
CoreLogic's Women and Property report shows a gender gap in rental property ownership, attributed possibly to the gender pay gap, with 26.3% of rental properties owned exclusively by men compared to 21.6% by women. 
First home buyers remain a significant portion of the property market, often using KiwiSaver for deposits and benefiting from low deposit lending, while the pull-back by mortgaged investors has provided opportunities. 
Rent increases have been strong, particularly in Auckland and Christchurch, driven by net migration inflows and a tightening rental stock, putting pressure on tenants. 
Net migration inflows may have peaked, though strong figures are still expected, continuing to drive demand for rental housing. 
Borrowers are increasingly opting to fix mortgage rates for shorter periods, with 46% of new loans in January fixed for up to one year, indicating a belief that current rates are at their peak. 
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Wellington City Council votes to increase housing density

Wellington city councillors have voted to increase housing density, reduce heritage protection, and expand housing near rail lines. 
The decisions reject many recommendations from an Independent Panel regarding the District Plan, which sets building rules for the city. 
Key changes include allowing buildings up to six storeys around the Johnsonville train line and reducing 'character areas' from 206 hectares to 85. 
Heritage protections were removed from several buildings, including the Gordon Wilson Flats and other notable structures like the Miramar Gas Tank and Emeny House. 
The council also decided to increase density along Newtown's Adelaide Road, against the panel's recommendation. 
These changes are now subject to approval by Resource Management Act Reform Minister Chris Bishop. 
Mayor Tory Whanau supports the changes to make Wellington more affordable and lower emissions, aiming to plan and build for the next generation. 
Councillors expressed strong opinions both in favour and against the decisions, with some seeing them as necessary for the city's future and others criticising the push for excessive densification and the disregard for heritage protections. 
The plan aims to prevent brain drain and provide housing for a diverse demographic, including working people, students, families, and retirees. 
Further considerations on parts of the proposed District Plan not related to housing will take place in 2024, with the Independent Hearing Panel to report back in early 2025. 
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Rates up average of 15% across the country

New Zealand homeowners are facing an average rates increase of 15%, necessitating an additional $8 per week due to surging infrastructure costs. 
A report by economist Brad Olsen, commissioned by Local Government New Zealand (LGNZ), highlights the financial pressures on 48 councils from rising building and interest costs. 
Infrastructure costs have soared, with bridge construction up 38%, sewage systems up 30%, and roads and water supply systems up 27% over the past three years. 
Councils are also contending with increased costs for maintaining assets and services, compounded by inflation, higher interest rates, and rising insurance and audit expenses. 
The average annual rates increase was 5.7% from 2002 to 2022, with a spike to 9.8% in 2023. 
LGNZ's Vice-President, Mayor Campbell Barry, emphasises the challenge councils face in balancing investment needs with keeping rate increases affordable. 
Councils have remained at 2% of GDP in terms of overall tax revenue for the last 50 years, despite increasing responsibilities. 
Additional spending pressures include infrastructure for high-growth areas, tourism growth, climate change adaptation, transitioning to a low carbon economy, and addressing biosecurity threats. 
LGNZ argues that the funding model for local government is unsustainable, with rates comprising more than half of council funding. 
Proposed solutions include a range of new funding mechanisms, such as accommodation levies, GST sharing on new builds, congestion charging, and tourist levies. 
A four-year term for local government is suggested to enhance productivity and partnership opportunities with the private sector. 
Some councils are proposing significant rates increases, with Buller District Council at 31.8%, Hamilton City Council at 19.9%, and other councils like Greater Wellington Regional Council, Wellington City Council, and Dunedin City Council proposing increases around 16% to nearly 20%. 
Homeowners across New Zealand are bracing for a costly year in terms of rates. 
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KO: We do not impact house prices 

Kāinga Ora asserts there is "no robust evidence" its activities impact house prices in surrounding areas, despite concerns from Rotorua residents and a local councillor. 
Rotorua is expected to see a major increase in social housing, with 500 homes planned for 2024/25, sparking fears the city may become the "social housing capital of New Zealand". 
Kāinga Ora's activities aim to catch Rotorua up with the national average of public housing, as the city currently has a lower proportion (2.5%) of its housing publicly owned compared to the national average (4%). 
Local councillors and residents have expressed concerns about the impact of Kāinga Ora properties on neighbourhoods, citing "terrible, sad and upsetting stories". 
Kāinga Ora has responded to complaints about tenant behaviour in Rotorua, resolving most issues through communication and meetings, and has not forced any evictions in the past two years. 
The agency plans to invest $240 million in Rotorua in the 2024/25 year, focusing on using local contractors and suppliers. 
The perception among Rotorua residents is that the city's development is dominated by social housing, contributing to concerns about its identity and future. 
Rotorua's socio-economic positioning and higher unemployment drive the need for public housing, with the city housing a higher percentage of the national housing register and beneficiaries compared to its population size. 
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TA: In hindsight... 

New Zealanders traditionally prefer fixed mortgage rates, usually for two years, affecting the RBNZ’s ability to quickly subdue inflation. 
During mid-2020 to mid-2021, a five-year fixed mortgage rate was available at 2.99%, considered exceptionally low by historical standards. 
The majority of New Zealanders did not opt for this long-term fixed rate, which would have insulated them from rate increases due to monetary policy tightening. 
The RBNZ has to wait longer to see the impact of policy changes due to the prevalence of fixed-rate mortgages, contrasting with Australia where most people are on floating rates. 
If more people had locked in at 2.99%, the impact of rising interest rates on inflation fighting would be significantly diminished, relying more on a stronger NZ dollar and potentially higher fiscal measures like increased taxes. 
High fixed mortgage rates limit RBNZ's use of monetary policy, potentially leading to alternative measures such as stricter loan availability rules or increased taxes, which could have adverse effects on the economy. 
NZ's tendency to prefer short-term fixed rates, despite causing delays in monetary policy effects, may have inadvertently benefited the economy by avoiding severe disruptions that a mass shift to long-term fixed rates at 2.99% could have caused. 
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REINZ announces renewed campaign for better property management

REINZ is renewing its 'Call for Change' in the property management sector to support the Residential Property Managers Bill, aiming for its passage into law. 
The industry seeks public and professional support using the hashtag #betterpropertymanagement, especially as the Bill approaches a crucial reading on 29 May 2024. 
Nearly one-third of households rent, with half of these properties managed by property managers, impacting over 1.4 million people. 
Despite managing substantial assets, the property management industry remains unregulated, posing risks to property owners and tenants. 
REINZ has advocated for regulation since 2019, providing the government with a roadmap for industry standards. 
The Residential Property Managers Bill aims to ensure protection, compliance, and maintain industry standards, addressing the lack of current regulation. 
REINZ emphasised the need for effective regulation in a submission to the Social Services and Community Committee on 19 February. 
Key issues highlighted include the complexity of the Residential Tenancies Act for private landlords, the lack of formal checks on client funds, and variance in service quality. 
REINZ urges decisive government action to avoid negative impacts on property management standards, disputing costs, and tenant well-being. 
The public is encouraged to share stories and support for the Bill using #betterpropertymanagement, aiming to improve the property management landscape for all. 
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