Will property become a less desirable asset?

The attractiveness of property as an investment is unlikely to die down despite the fact that landlords will soon be footing increased tax bills, according to CoreLogic NZ head of research Nick Goodall.

Goodall said that while the makeup of the buyer market might change, both first home buyers and investors will still see property as a strong asset, and given the ‘phased’ nature of the tax changes, investors will have some time to adjust.

“We may see a change in the mix of active buyers in the market with fewer heavily indebted investors, but the long-term attractiveness of the property market will remain,” Goodall commented.

“Property owners will still be able to leverage existing equity to purchase an asset and have someone else pay off the mortgage.”

“The fact that alternative assets such as term deposits aren’t paying much either is another reason to think people will stick with property, while many people will want to avoid triggering a large bright line liability too,” he explained.

“The ability of landlords to pass on the increased costs of owning a property to their tenants may be limited, but the phased nature of the interest deductibility changes should keep the additional tax bills for existing investors in hundreds to begin with.”

Goodall said that based on a mortgage of around $570,000 - a figure which is higher than the average size of approved mortgages - the increased tax bill in an investor’s second year would be less than $700.

He said that although this will increase over time, it will still give investors time to adjust, and will help keep rents relatively stable.

“The most exposed investors will be those who brought recently,” Goodall said. “$700 is not an insignificant cost to cover, but it is small in the scale of capital growth over the last year of almost $100,000. It is certainly a far cry from the full amount in year five, which will be closer to $5,000.”

“The crucial thing is that landlords will have time to adjust,” he added.

“The consistency in rental growth over the years, despite numerous changes increasing landlords costs, illustrates that rents are anchored by incomes. In other words, tenants can’t pay what they don’t earn.

“Rents will continue to increase, but we don’t think there will be a step change across the board due specifically to these changes.”

MBN

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