Is the Auckland Property Rental Market Slowing and what does that mean if your property is negatively geared?

At Hollie Joss Property Management we have seen over the past 4-6 weeks an increase in the amount of time it has taken to rent out our properties.

Over the past few years many properties have been listed for rent and have been snapped up on the first or second open home.  However in recent weeks we have seen our open homes increasing up to 15 on one particular property.

Tenant enquiries are down and the volume of tenants attending each of our open homes has dropped.

As a landlord what can you do about the change in the market to get your property rented quickly to the best tenants?

Our best advice is to employ a professional property manager who can appraise your property and advise you of the best asking price in the current market.  If your property is overpriced in this falling market it will stay vacant for weeks, you need to be one step ahead of falling rents.

You only have to search Trademe and look at the listing date to see that many properties were listed either in October or the beginning of November and they are now vacant.

The sales market is also taking a knock back, have a look through your local property press.  A month ago nearly every property was up for Auction but as these properties get passed in and owners are still keen to sell they are now appearing in the Property Press with “by negotiation” or “set sale date” or even worse “mortgage auction” I haven’t seen those words for quite a few years now.

The media and government are happy to tell you the property market will go through an adjustment but I suggest you don’t underestimate what could happen over the next few years.  If you have bought property recently I hope you haven’t over extended yourself buying negatively geared rental properties in the hope of getting capital gains.

I have never bought a negatively geared property, I don’t believe in them which being a property manager you may mock.  Unfortunately this has seen me leave the residential property market investments over the past few years but instead looked at commercial.  However I feel confident that my positively geared position will protect me in the upcoming adjustment we are about to experience in our property market.

The bottom line is you can own as many positively geared properties as you can get your hands on but as soon as you invest in negatively geared property you need to find cash each and every week until that break-even point and what if the market makes an adjustment and your rent goes down? That break-even point gets further away.  How many properties can you afford to top up when they are losing $200 or $400 per week? Probably not many without making a dent in your cash flow.  How many holidays are you going to miss out on over the next few years waiting for break-even?

What if you are self-employed or a business owner, with the property market making an adjustment usually the business sector has an adjustment too.  What if you income drops? Suddenly that $200 or $400 per week you could afford becomes unaffordable and what else will you have to cut back on? 

And remember each time you cut back on holidays or entertainment that’s someone else’s business that’s loosing revenue so they will have to cut back somewhere else and here is your merry go round.

We saw the crash in America with the Prime Lending and NZ learnt from that – don’t over extend yourself, so someone down there in the Beehive started making changes.

1st October 2013 – First time home buyers need 20% deposit – now at the time everyone was up in arms asking why the reserve bank would do something which appeared so mean locking our first time home buyers out of the market. 

1st October 2015 – Residential Investors need to find a 30% deposit

1st October 2016 – Owners Occupiers need to find 20% deposit and investor’s 40% deposit

Now many people are pretty put out by all these restrictions but maybe the Reserve Bank were trying to protect you from over extending yourself and knew all along an adjustment was coming, okay they started early in 2013 but predicting exactly when an adjustment is going to start is pretty hard, if we all knew that we would buy up large and sell before the drop.

Here are a couple of scenarios;

1.         You attended an auction 2 weeks ago you purchased a 2 bedroom unit in Nile Road Milford which had a reserve of $725,000.  You are going to rent it out and the appraisal is $500pw.  Your mortgage is fixed for 2 years at 4.5% on interest only which is $627.40 per week.  You are now paying a tenant $127.40 per week to live in your house; this is your 4th rental investment property and they are all negatively geared so you can claim some tax back.

2.         With today’s restrictions in place you would need a 40% deposit, now your mortgage is only $450,000 with repayments of $389.42pw and your tenant is now paying you $110.57 per week to live in your house.

What if the property market crashes? (sorry makes an adjustment) and you are self-employed and your income goes down or you are on PAYE and your boss makes you redundant?  What happens if rents go down to say $450pw?  What happens if interest rates have increased to 6% after your 2 year fixed is up for renewal?

If you are the purchase in example number 1 your mortgage payments are now $865.38 per week and you are now paying your tenant $415.38 per week to live in your house, remember this is your 4th house so you actually have to find $1661.53 per week to pay your tenants.

What if you can’t afford that – maybe you have to sell, but in the 2 years you have owned the property the market has made an adjustment and now the property you paid $725,000 for is now only worth $650,000, take off real estate fees of around $26,450 and you only get $623,550, your mortgage is $725,000 so you now owe the bank $101,450.00 – was that such a good investment after all?

If you are the purchaser in example number 2 you will be much better protected, your mortgage at 6% has now increased to $519pw and your rent has dropped to $450pw which means that you too are now paying your tenant to live in your house but its only $69.23 per week, which is probably affordable and you won’t need to sell.

Once the market turns and mortgage repayments far outweigh rents some property investors are pushed to get out of the market, this is what causes prices to drop as there are more sellers than buyers and our real estate market prices are based on a simple supply and demand factor.

Before I moved to NZ I worked for an estate agent in North London.  In October 1987 we had black Monday when the stock market crashed, this was quickly follows by a 10 year decline in property prices, something no one ever dreamed would happen, our property prices had been going up so fast estate agents had to put house prices up on a weekly basis.  We had no internet marketing back then and I don’t think auctions even existed in the residential property sector but what I do recall was taking down the window cards every Monday morning and re-typing them with new increased prices.  Ten after 1989 I would take them down every Monday morning and reduce the prices. 

I left the UK in 1998 to live in NZ and prices were still falling.  They have finally made a recovery but what I am trying to get across is that no one knows how long a boom is going to last and no one knows how long a bust is going to last, so if you are highly negatively geared my advice is to get out quick, sell today, take any price you can get for your property, you may think you are giving it away now but just wait until the prices drop. 


Written by Hollie Joss 7th December 2016

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