Home Inspection News – Issue 51

Interest Rates

All eyes are on interest / mortgage rates at the moment. The reserve bank left the OCR (official cash rate) at 0.25% on 14th July but indicated future increases but did not give a date. The ASB was the first to move increasing their mortgage rates.

1 year fixed moving from 2.19% to 2.55%, an increase of 0.36%. This does not sound like a lot but on a mortgage of $500,000 that is an extra $150 / month mortgage payment. The worry is we can expect 3-4 increases of this size in the next 12-24 months.

The Housing Market

Meanwhile house prices have continued to rise but at a slower pace. Record median selling prices were achieved in 6 region:

Auckland $1,150,000 up 25.0% in last 12 months
Waikato $736,000 up 19.7% in last 12 months
Taranaki $580,000 up 41.5% in last 12 months
Marlborough $705,000 up 56.0% in last 12 months
Southland $420,000 up 23.2% in last 12 months
Manawatu / Whanganui $580,000 up 35.6% in last 12 months

Across the whole of New Zealand prices were up 28.7% year on year and 0.3% since last month. The number of sales were up 6.2% year on year and 4.9% since last month. The days to sell was 31 days which is 15 days less than June last year.

Every one of the 16 regions in the country has had house prices rise in the last 12 months. Despite the building industry working at full capacity the housing shortage is getting worse. NZ now has the second lowest number of houses available for sale ever.

The government not allowing overseas skilled construction industry workers to enter NZ is one major cause. No wonder there is a shortage of houses let alone affordable house. Despite interest rate rises (which will slow demand) prices are still likely to rise perhaps 5 – 10% in the next 12 months.

Should I sell my Rental?

Which landlord 1 year ago thought their rental property would (despite Covid 19) increase in value by such a massive amount? This was while rents were also increasing due to shortage of rentals. It was a great time to be a landlord and if you had invested in a rental property to sell for your retirement years is now a good time to sell?

The economic landscape for landlords in New Zealand is changing rapidly. In March 2021 the current government introduced a 10 year time period  (except for new builds) of ownership of  rental property – the so called Bright – Line Test. This is a capital gains tax.

Also introduced this year was the removal of the right (reducing over a 3 year time period until 0 deductible) to deduct interest (mortgage) payments as a tax deduction. Every other industry or business in NZ is allowed interest payment tax deductions. Now we can certainly predict mortgage interest rates (not tax deductible now remember) are going to go up – perhaps to around double what they were at their low point of 2.19%.

From 1st July this year all landlords (except government own houses) have to comply with the healthy homes regulations – heating, ventilation, insulation, moisture, ingress and drainage and draft exclusion. Then there is the change to the Residential Tenancies Act which the government introduced this year which certainly weakens the landlords rights in law.

So with all these changes / challenges should I sell?

The correct answer is NO unless you have to or think you may have to or simple want to cash up and spend your hard earned investment.

Why is the answer NO? Because….

  1. Despite all the above changes property is still the best possible investment.
  2. If you keep your rental for over 10 years there is no capital gain tax to pay.
  3. Capital gains will continue with property – probably 5 – 10 % this year and keep in mind the average price increase in NZ for the past 50 years has been 9.7%.
  4. You will have a rental income and this is likely to keep increasing for some years to come until the housing shortage is fixed.
  5. The government is incapable of providing the rental houses needed so landlords provide a valuable social service.
  6. If you think of selling to invest in something else then in what? Shares or managed funds = high risk (try asking a bank to lend you money to invest in shares or managed funds)! Put the money in the bank? Even with increases in term deposit rates the return after tax and inflation (its coming soon) your investment will go backwards.

To help you to decide why not do what the wise Benjamin Franklin (USA past president) always did when making a decision of importance. He wrote down the reasons for and against. I have added a few (not all) reasons for and against.

                                                                             SELL?

   
REASONS FOR REASONS AGAINST
HARD MANAGING A RENTAL GET A PROPERTY MANAGER
I CAN INVEST ELSEWHERE NOT AS GOOD A RETURN ON INVESTMENT
THE MARKET IS STRONG NOW THE MARKET WILL PROBABLY BE STRONG
I MAY NOT BE ABLE TO MEET FOR SOME YEARS TO COME
RISING INTEREST RATES CAN I FIX FOR 5 YRS AND AFFORD THOSE
  PAYMENTS
  IF I KEEP FOR 10 YRS I KEEP THE HARD
  EARNED CAPITAL GAINS
etc. add your own reasons and then decide