Rental market turning on landlords

The slump in the housing market is making it difficult for landlords to find good tenants.

As many buyers are not getting the sales results they want they have taken their homes off the market and put them into the rental pool.

They have become “accidental landlords” and are contributing to a rental glut that is tipping the market in favour of renters.

For example, in Wellington central over a matter of weeks the rental market has gone from a shortage of homes to now an oversupply and not enough tenants.

The city is awash with rentals as people put their properties into the pool rather than sell at lower prices than they expect. Listings have increased 50% from this time last year and are hovering at about 700-800 for sale.

A couple of months ago it was closer to 1,000 listings compared to 400 at Christmas and by taking their houses off the market they have caused a glut of rentals with no corresponding glut of tenants.

A sizeable number of rentals are sitting empty, although landlords have dropped rents. Solid, well maintained properties that have in the past been attractive to tenants have sat empty for three months.

Property management companies say tenants in good rentals are staying put and there are just not enough other good tenants around.

It is an extremely tough market, particularly for landlords who have mortgages and increasing costs associated with being an investor to pay.” 

Independent economist Tony Alexander says this has implications for rent. In his latest survey with property management company Crockers, it found more landlords were finding it hard to get good tenants than found it easy – the weakest result ever found by the survey since it started a year ago.

“The rent implications are one of the early things which will soon start feeding into a scaling back of inflation forecasts in coming months and solidify a view of mortgage rates for most fixed terms being at or near their cyclical peaks,” says Alexander.

He says the market is not quite there yet. “People are fixating on the level of the cost of living annual change now – not where it is headed. Their views and their emotions are backward looking, not forward.”

CoreLogic research head Nick Goodall says the flow of properties back into the rental market is a predictable occurrence, although it had happened faster than he was expecting. “Landlords could face challenges as they faced inflation and lower rental income.

“Landlords should be doing their finances, and working out whether they could afford to hold on to their rentals if rents fell, especially as they will progressively lose the ability to deduct interest payments from rental earnings for tax purposes over the next few years.

Goodall is not expecting short-term capital growth to come back any time soon, so it’s definitely going to make it a much tighter financial position for landlords

Investors sniffing around

Meanwhile, Alexander says at the margin some investors are showing increased interest in buying properties again.

He says one source of evidence for this comes from his monthly survey of real estate agents alongside REINZ.

“The gross percent of agents saying that investors looking to buy because they hope to get a bargain has risen to a two-year high of 45% from 40% in June and 34% at the start of the year.” He says, though, this is not the same thing as saying these investors expect prices to rise.

Alexander says there is definitely not a widespread trend of investors coming out of the woodwork.

“There are signs that some are willing to buy in the next few months while the market is firmly in their favour if the political polls suggest a good chance of National winning next year.”

National has said it will fully restore deductibility of interest expenses and take the brightline test back to two years.

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