Thoughts on post-election property investment

25 Aug 2023 David Kneebone

Market Updates

Many of our owner-clients at Lodge City Rentals have asked me my views on the pending election, specifically how the outcome may affect the Hamilton residential property market.

I’ve never talked politics in my 25 years with Lodge, and I don’t intend to start now! My observations on the current property market, and what may happen in the future, are purely that – observations.

Looking at the here and now

The rhetoric over the past 5-6 years has been that the current Labour government has ‘waged war’ on residential property investors, particularly through the extension of the Brightline Test, Healthy Homes legislation, tenancy law changes, mortgage interest deductibility, and immigration settings.

For some of these changes, it hasn’t been all bad news. The National government introduced the Brightline Test, where profits on investment properties sold within two years were subject to tax, and Labour extended it to 10 years. My mantra has always been ‘buy now, never sell,’ so holding on to your property for 10 years should be a minimum.

Certain sectors of the media slammed the Healthy Homes legislation, and while the costs have been relatively significant for some homeowners, the result is we now have a portfolio at Lodge of warm, dry, secure homes. Warm, dry tenants tend to stay longer and don’t mind paying a little more rent – a win-win I believe.

There was much debate that the government had also skewed the balance of power too far in the tenants’ direction, with the abolishing of no cause terminations, limiting rent increases, and many other changes. My observation from this is that it is actually tenants who are losing out, not investors. It is more difficult now to evict a problematic tenant, and consequently, our property managers are even less likely to allow tenants without impeccable credentials to rent from us. The days of giving a tenant a chance to prove themselves in tenancy are long gone.

In my opinion, the change in mortgage interest deductibility was the biggest of all the ‘shots fired’ at landlords and has the potential to have the most effect. When the policy was first announced, interest rates were at 2.29%, and there was complacency among many owners I talked to at the time. Now, with interest rates seeming to peak at around 7.25%, this is going to have its biggest effect on those who have moderate to significant mortgage finance.

Immigration-wise, after closing the border tight during Covid, we have gone from being one of the most closed countries in the world to flinging our doors wide open. This has resulted in a 65,400 net gain from immigration in the year ending 31 March 2023, with Hamilton traditionally receiving a good number of these migrants, all needing a place to rent and then buy, as they trickle south from landing in Auckland.

The Hamilton market and where it could head

Our portfolio is currently 99.6% full, as strong as the market has been in my 25 years with Lodge and 15 years prior to that as an investor. There are many reasons to remain optimistic, particularly with Hamilton rents increasing by 6.9%.

Hamilton continues to grow, and we are seeing record numbers of tenancies and enquiries from people new to Hamilton – 31-33%. It’s positive all-round for Hamilton, and likely will continue that way with minimal change from whoever wins the election, save for one key element I think will add a major boost to the market – reversing the new interest deductibility rules.

What will the opposition do differently, and will it make a difference?

National and Act have pledged to reverse the new interest deductibility rules. National would also return the Brightline Test to two years, while Act would get rid of it entirely and will reintroduce the ability for landlords to give no-cause notices to end a tenancy.

The reversal of interest deductibility would have a significant effect on the investment market, particularly given interest hikes in the past few years. Don’t get me wrong, I understand the premise in theory – allowing deductibility on new builds will ostensibly create demand for new builds and therefore increase supply. But when building prices are going through the roof and materials are short, things can go awry.

As for reducing the Brightline Test back to two years, I don’t see it as overly significant especially when I advocate not selling at all, and tenancy laws I do not believe have been overly advantageous to tenants, despite repeated claims otherwise.

Healthy Homes has also not been a deterrent to investors, despite what you may have heard from opposition parties. The Lodge City Rentals team has achieved a monumental result in getting more than 3000 homes inspected and compliant, and I would now see our warm, dry, secure homes as the standard for all rentals.

Some general property thoughts

The property market is a clock – it peaks, declines, bottoms out, then starts to creep back up toward a rising market, until it reaches a peak again. Slowdowns, slumps, recoveries and booms can vary in duration from anything as long as years, to weeks. Unfortunately, we can usually only see the activity in a rear-view mirror - hindsight is a wonderful thing.

What we do know is the Hamilton market is the strongest it has ever been, with unprecedented occupancy rates. And without looking too far forward, it is relatively fair to say we are heading towards the upside of the property cycle.

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