It’s the day after the budget and already the doom and gloom merchants are talking about the great property crash due to depreciation being removed from property investment.
Obviously this is a great topic to focus on because there is a whole lot of misunderstanding, myths and untruths about the property investment market and it is easy to make bold statements like “the property market due to crash because of the budget”…. what a load of old bollocks.
Yes there will be some people who will struggle with keeping their investment property because the ability to claim depreciation put some money back into their pocket which allowed them to pay the mortgage. Without this injection of cash from the government these folks will not be able to maintain the mortgage and will need to sell. That’s a fact. However think about this…will the small numbers of people (and I mean relative to the overall property market) who must sell be enough to cause the Real Estate Market to tumble? I don’t think so.
Let’s look at why.
To begin with the rental market makes up approximately 34% of households in NZ with the other 66% of people owning their homes.
We also know that on average landlords have approximately 2 rental properties each, with some having many but a lot of people have dipped their toes into the water and own just 1 rental property.
So taking that little bit of info it means that statistically we can only have maximum of 17% of homeowners are landlords and the number will actually be less than that due to the great number of people who own more than 2 investment properties.
Ask yourself this question now, of the 17% of people who own the properties that people are renting, how many will now go out and sell their investment properties for less than what they paid for them?
That’s the big question….how many of you out there will sell your investment property for less than what you paid for it?
After all that’s the definition of the property market crashing, the value of the market based on what people are paying today vs what people will pay tomorrow.
Even if 100% of property investors rushed out and tried to sell their properties tomorrow the market would not crash….. not unless those investors had to sell…that’s the kicker, if the investors had to sell, i.e someone else made the decision as to what price the property was going to be sold for as the case if for mortgagee sales, then you would see the prices drop, however if 100% of the property investors went out tomorrow to sell I doubt any of them would be saying “you know what, we paid $300,000 for this property and now we are not going to get that extra $600 per annum back from the government so lets sell our property for less than what we paid for it”….can you see that happening. I didn’t think so.
What I think will happen is that some people will panic sell….. that’s not unusual, some people will do the smart thing and visit a financial adviser who can work out for them exactly what the difference will be in costs and then work out what the best strategy is with regard to holding on, putting rents up, selling now, selling later….those people will be few and far between, some people will sit and hold and put the rents up accordingly and just like in 1984 when the Aussie governement did this watch rents skyrocket because of the following.
- There is now no benefit having a new property over an old property when it comes to depreciation.
- With no demand for new properties the developers will not build.
- With no new properties coming on to the market the demand for rentals will increase.
- With increasing demand on rentals the Rent will go up quickly just like they did in Oz in 1984
- Property prices will increase as the yields increase and property that once was not good for investment becomes viable as a property investment.
- Developers come back into the market as the demand for new housing makes it profitable for them to build again.
Obviously this cycle will continue with ups and downs but over the long term I still see property being more expensive to buy in 2020 than it is today.
So it’s the day after the budget, don’t go out and sell your investment property unless you already were planning on selling.
Remember one thing, the reason why investors were allowed to claim deductions is because property investing is a business and as in any business it is the user who pays. In this case it is the tenant who is the user and it is the tenant who will ultimately pay.
The herald states that this budget will cost landlords $235 million next year, I think the more accurate statement would be the budget will cost Tenants $235 million next year.
