Opinion: Residential Property Investors Can Relax Post-Budget

Posted on Friday, June 18th, 2010 at 12:29 pm in

Residential Property Investors Can Relax Post-Budget

  • Ak/NZ rents to rise 10-20% over next two years
  • Property investors will chase areas and housing types with good capital gain prospects
  • Market turnover to increase over next 12 months

Markets hate uncertainty and New Zealand’s residential property market all but stalled for three months leading up to this year’s budget. Activity will now crank back into action as investors have surety about how tax changes will impact on hard working Kiwis. Turnover in the property market is set to be higher in the next year, which is excellent news for both sellers and buyers, including first-time buyers.

Contrary to fears, the budget turned out to be slightly positive for residential property investors who now will be breathing a sigh of relief up and down the country. The government decided to shy away from imposing a capital gains tax or land tax or the ring fencing of losses. Critically investors are still able to claim chattels as a depreciation expense, which comprises a large chunk of the depreciation property owners could claim.

Yes, the May budget axed depreciation on both residential and commercial buildings deemed to have a useful life longer than 50 years as a tax-deductible expense from April next year. But that change is likely to be more than offset for most investors by the reduction in company and income tax rates. A large portion of depreciation on residential is on chattels which remains.

The point about the loss of depreciation claims that may have been overlooked is that any deductions have to be repaid on an investment property when it’s sold if the value of the building has increased since purchase. And what we know about property investment, cataclysmic global financial meltdowns notwithstanding, is that price appreciation is more normal than not.

Astute investors will go back to doing what they do best, investing for capital growth over the long term. What may change as a result of the budget is investors will likely shift their focus from looking solely for price gains from a property investment and instead search for quality properties that will give them steady and increasing yields over time in a good location built with reliable materials.

(For the uninitiated, yield is the income you receive from an investment rather that its capital appreciation. For a rental property, the yield is calculated by dividing the gross annual rental income by the property’s purchase price or GV.)

The good news is that residential investors will find that yields are only going to increase over the medium- to long-term. My pick would be for average rents in New Zealand to go up by between 10 and 20% over the next two years. Sadly, home affordability is increasingly out of reach for many Kiwis, which will mean more renters than buyers. And fewer investment properties will be sold, leaving a shortage of rental supply.

The upshot of all of this is that Mum and Dad (or retail) investors will continue to find property a pretty sound place to put their money, especially compared with the volatility of other investment classes.