More regulations
It's just been regulation after regulation... Although we're not expecting many new government policies to discourage property investors, we have been surprised before.
The floor on serviceability interest rates
Typically, before granting loans, banks stress-test potential borrowers ability to repay their debt if interest rates rise to a certain level. In NZ, banks currently set their own test rates. The Reserve Bank of New Zealand is considering placing a floor on the test rate (possibly 7-8%) to introduce a minimum buffer that all borrowers must meet. This measure is being considered due to potential risks to the economy's financial stability caused by heightened debt levels and high property prices and could be introduced by mid-2022.
Debt-to-income limits
The second measure that the RBNZ considers is the implementation of debt-to-income (DTI) limits. They are believed to be more effective than floors in supporting sustainable house prices. DTI limits are calculated as a simple ratio of borrowers debt vs income. The cap of 6 or 7 is being currently discussed. Although the document is still out for consideration, some banks have already started implementing DTI limits. Reserve Bank has indicated they won't introduce DTIs until the last quarter of 2022.
Phase 3 of the RTA changes
The last phase of the Residential Tenancies Amendment Act 2020 should come into force in mid-2022. These changes cover tenancy terminations due to family violence and assault against a landlord.
Rent controls or rental indexation
Although Associate Housing Minister confirmed they have been collecting more information on new measures that can be used to help struggling renters and nothing was "off the table", rent controls were ruled out by Jacinda Ardern earlier this week.
More opportunities
With so many changes in the residential property space, other investments may become more appealing in 2022.
Commercial opportunities
The commercial property market is full of opportunities. Given the enormity of changes in the residential area, some investors are considering adding a commercial property to their portfolio. And there are many upsides to this :
The wide range of investments and price points
"Commerical" doesn't necessarily mean an office space. You can invest as much or as little as you want by buying anything from a car park space to a farm or a vineyard.Interest deductibility rules don't apply
Full deductibility of interest is available for commercial properties as they remain unaffected by the recent tax rule changes.No bright-line
Commercial properties are not subject to bright-line at all.Tax losses on commercial property are not ringfenced
Business premises, commercial property or farmland are exempt from the Ringfencing rules. So unlike residential investments, investors can offset tax losses from commercial properties against other income.Depreciation on commercial buildings
Tax depreciation of buildings was initially removed in May 2010 with effect from the 2012 tax year. However, due to the financial impacts of COVID-19, the Government re-introduced tax depreciation on (non-residential) commercial and industrial buildings from the 2020/21 tax year. The tax depreciation rate is 1.5% straight line or 2% diminishing value.
New builds and planning changes
Both off the plan properties and large existing homes are still attractive options for investors looking to buy new or develop.
Alongside the tax changes which incentivised new builds, there had been [several other changes]((https://www.myrent.co.nz/are-new-builds-worth-the-hype) last year which made them a more attractive proposition to investors. These included changes to loan-to-value ratios with a lesser deposit required for new homes and immediate compliance with HHS due to a higher building standard.
Should you consider a rent increase?
New interest deductibility rules, the cost of healthy homes compliance, rising interest rates and the cost of repairs also going up have made it more costly to be a landlord.
Many investors will learn the effects of new tax charges when preparing their tax returns. Not being able to claim a full deduction to offset these interest repayments against rental income, some landlords may choose to pass on the extra costs onto renters through rent increases in areas with high tenant demand.
With landlords limited to one rent rise every 12 months, jumps in rent tend to be more substantial than before. In 2021 the rent went up by 9% on average.
Negotiating a rent increase with a tenant can be an uncomfortable discussion to have. Of course, no tenant will be happy paying more. But if the rules and guidelines are followed, and the increase is fair, there shouldn't be any problems.
No doubt there'll be plenty more twists and turns for the housing market in 2022, a lot that could change still, and that's not even including possible further COVID disruptions. So we're holding our breath and waiting to see what's in store.
The information contained in this article is exclusively for promotional purposes. It does not in any way constitute legal advice and should not be relied upon as the basis for any legal action or contractual dealings. The information is not and does not attempt to be, a comprehensive account of the relevant law in New Zealand. If you require legal advice, you should seek independent legal counsel. myRent.co.nz does not accept any liability that may arise from the use of this information.
