Rental returns will decline, especially the cash element, says Mike Warrington (Photo/PYMCA/Avalon/UIG via Getty Images)

Are landlords being priced out of the property market?

Financial adviser Mike Warrington is warning his clients that investment properties are no longer the great little earners they once were. What does this mean for renters?

Rental property investment is progressively being defined by our regulators as a commercial activity and as a result, will be impacted more heavily by future costs.

In due course, I suspect that both short and long-term rentals will be caught in the definition of being a commercial activity.

Councils are eagerly trying to discover which properties are being regularly let out via Airbnb or Bookabach-type portals, so they can apply higher commercial rates or bed taxes to boost their revenue.

At face value, this money-grab may seem greedy or harsh, but in reality, the increased levels of tourism – which drive the additional income to property owners – are delivering more wear and tear on regional services and therefore need expansion and maintenance.

I would prefer to see an element of user-pays employed in raising revenue from surging tourist activity, rather than a hike in my residential rates for no change in service level.

But I’ve strayed off my point: residential property investors are sitting in the ever-increasing glare of the regulatory spotlight and I don’t think it’s going to let up, so rental returns will decline, especially the cash element.

Beyond the council reaching into the pockets of investment property owners, Housing Minister Phil Twyford has announced an intention to increase the minimum health standards that must exist if a property is rented out (he reports that 600,000 properties in the rental pool don’t meet a satisfactory standard).

For the record, I don’t understand why the National Party would speak out against Warrant of Fitness standards for rental properties. Opposition housing spokesperson Judith Collins’ flippant response predicted that a WOF for rental properties would lead to more people sleeping in cars, without recognising the unintended humour in her statement (at least cars are required to have a WOF).

Landlords will, as they always do, call out that they’ll simply increase rents to cope with the additional imposts put upon them. Phil Twyford must respond by actually delivering a greater number of affordable homes or excesses to Housing New Zealand stocks, and suppress any unreasonable rental increases.

Lastly, if the government seeks even more influence it could press the Reserve Bank harder than it did previously and insist that central bank regulations require all banks to define property ownership by purpose – residential, holiday house, or commercial investment, i.e. rental – and then demand greater bank equity when lending against such rental properties.

Greater equity demands over the banking framework will result in higher interest costs to borrowers for rental properties.

We can’t be far from the point where a property investor must achieve capital gains to make progress because cash returns in the examples that I see are modest to poor (after expenses).

Ultimately, I am highlighting that regulatory risk will always exist for all investment types, it’s just that today it is rental properties that sit in the spotlight.

Mike Warrington is an Authorised Financial Adviser with Chris Lee & Partners based on the Kapiti Coast.

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