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Crockers Market Research July 2017
Investors Thoughts on Labour Party's Rental Tax Reform
In May 2017, the Labour Party announced that if elected, they would phase out negative gearing over 5 years, by allowing tax deductions from investment property losses to be deducted only from housing income, not all income as is currently the rule. The intent of this law change would be to reduce property speculation and so make housing more affordable. The additional tax revenue would be used to fund insulation and heating grants.
Impact on Residential Rental Portfolio Intentions
The majority of investors (68%) surveyed in the Crockers Property Investment Index (CPII) survey in association with IPSOS stated that they would make no changes to their property portfolios as a result of this proposed policy change. However, 15% of investors stated that they would divest, suggesting that such a policy could have small but significant effects on the New Zealand property market.
Impact on Residential Property Prices
42% of investors feel that the proposed policy change will have no effect on property prices. However, more than one third (34%) of investors believe that property prices will decline, three times more than the proportion who feel that prices could rise as a result.
Impact on Rental Property Rent
Nearly two-thirds (68%) of investors stated that they will increase rents to some extent if this policy was implemented, with 47% of investors planning to increase rents by more than 3%. On the other hand, 25% of investors wouldn’t plan to increase rents.
Using an Insulation or Heating Grant for Residential Properties
More than half of investors (56%) stated that they are not interested in using the proposed insulation or heating grant as they believe their properties are already up to an adequate standard. While 28% of investors said they are somewhat or very interested in the proposed grants.
Housing Affordability Income Levels vs Rental and Sales Prices (Auckland vs NZ)
A simple ratio of weekly rental prices to weekly household income shows how rental affordability has changed over time. The larger the number, the greater the proportion of weekly income that is spent on rent. Similarly, we can look at ratio of median sales prices to annual household income to understand the affordability of purchasing property. The larger the number, the more unaffordable the properties are.
Across New Zealand the proportion of income spent on rent has remained relatively stable over the last 6 years, this trend is also consistent in Auckland. The Auckland rental premium, reflecting Auckland’s role as the commercial centre of New Zealand and as a popular destination for domestic and overseas migrants, is evident in these results.
In terms of affordability for purchasing properties, we see that across New Zealand it has decreased slightly over time. In Auckland, affordability decreased substantially between 2011-2015, anecdotally consistent with the Auckland housing market boom. However, housing affordability has remained relatively stable between 2015-2016.
The below chart shows how income, rental prices and sales prices have changed over time. Growth in Auckland Sales prices is far greater than the growth in income, which is in term resulting in reduced affordability. The rate of growth over the past year has softened (compared to 2014-2015) but still remains substantially higher than growth in incomes. Although 2017 income data is not yet available, it’s unlikely that income will see a significant increase in line with the increase in house prices, which will contribute to further decreases in Auckland’s affordability for purchasing property.
The different rates in how rents and sales prices have increased show how rental returns have diminished on average, emphasising the need for good quality rental property investment and management decisions.
Crockers Property Investment Index
This month we see expected returns flattening, leading to a reduction in planned investment property expansion. The Auckland Rental Property Investment Index has stabilised following four consecutive months of improvement. This reflects an increase in the proportion of investors planning to make no changes to their property investments, coupled with a decrease in those planning to ‘increase’ or ‘decease’ their investments.
The Auckland Rental Property Performance Index has fallen this month to its lowest point since Jul ’14. This is a result of a considerable decrease in the proportion of investors who believe their investments will perform better over the next 12 months coupled with an increase in those who believe their investments will perform ‘worse’ and ‘the same’ over the same period.
Auckland Sales & Rental Update
Auckland Median Prices and Sales Numbers
The median sales price eased in May from $850,000 to $835,000, but remains 4% higher than at the same time last year. At current projections we may see within the next month or two the first year-on-year fall in median sales prices. Meanwhile, sales volume has increased from 1,836 to 2,399, but remains 25% lower than May 2016.
Auckland Rental Prices
Bucking the trend in house prices, over the past month we have seen average Auckland rents for a 2-bedroom residential property increase slightly from $477 to $481. Meanwhile, 2-bedroom rents across New Zealand have remained stable over the same period at $390 per week, resulting in the Auckland 2-bedroom premium to increase slightly from 22% to 23% in May.
Rents for 3-bedroom properties in Auckland also increased slightly this month from $614 to $620, while 3-bedroom rents across New Zealand have softened from $460 to $450, resulting in the 3-bedroom premium to increase from 34% to 38%.